The Art of the Economy:
Stability, Growth and Philosophy
by Wolfgang Kasper talks to Heinz W. Ardnt
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Professor Heinz W. Arndt was born in 1915 in Breslau, Germany. Eighteen years laterÑas he once put itÑÔHitler gave me the opportunity . . . of an Oxford educationÕ (Arndt: 1985: 106). After academic positions at LSE, Chatham House and Manchester, he took up a chair in economics at Sydney University in 1946.

In 1951, he moved to the Ôvillage of CanberraÕ, which he saw grow into a major city. From 1963, at the Australian University, he built up AustraliaÕs, if not the worldÕs, premier research programme on the Indonesian economy. He became internationally known as one of AustraliaÕs most astute academic economists and did much to promote closer educational and economic ties with East Asia. His formal retirement has hardly slowed down his research, reflecting about economic analysis and policy, or his copious writing.

From communism to democratic socialism to liberalism

Wolfgang Kasper: Professor Arndt, could we begin by discussingÑfrom your perspective of an active life of 85 yearsÑthe great ideological contest of the 20th century between collective-socialist and individual-libertarian world views? You told me once that in your youth you were a communist. And for a long time you were active in the Australian Fabian Society and the Australian Labor Party (ALP). Yet since 1979 you have served on the Advisory Board of AustraliaÕs most outspoken libertarian think tank!

Heinz W. Arndt: Yes, as a student in Oxford during the Spanish Civil War and in the worsening economic depression, I was briefly converted to communism. In the 1930s, many of us turned further and further to the left. Later, when I was interned during the war, I met many communist refugees; their extreme views quickly changed me from a fellow traveller into a democratic socialist.

When I came to Australia in 1946, I was amazed to discover that the ALP had no social theory and no philosophy. The ALP was no more than a pragmatic political organisation of the trade unions. So, together with two colleagues at Sydney University, I founded the Fabian Society of New South Wales. We encouraged the foundation of branches in other capital cities (Arndt 1985: 18). A meeting in Melbourne of all branch secretaries was attended by Jim Cairns1 and Don Dunstan2, among others. In Sydney, where I was the research director, we published pamphlets, and were the first to support Prime Minister ChifleyÕs decision to nationalise the banks. Chifley greatly welcomed this support and bought 40,000 copies. The profit from that sale covered all subsequent losses.

WK: So when did you part ways with socialism? And why?

HWA: During the 1950s, I gradually changed my views, as I explained in an autobiographical essay in Quadrant (Arndt 1969). Socialism was the God that Failed, as the title of a book edited by Richard Crossman put it.

By the 1960s, I had given up any beliefs in the main planks of the socialist platform: nationalisation of industry, central planning and direct controls. I am still somewhat ambivalent about this because, as an economist, I see the destructive impact of socialism on efficiency, but emotionally I am also attached to equality.

WK: The critical issue with equality of course is: are you for equal outcomes or equality before the law and equal opportunities?

HWA: People should have equal access to opportunities. This does not guarantee equal outcomes. But there is also a case for government intervention to help unfortunate fellow citizens.

WK: Even if that detracts from efficiency and growth?

HWA: Yes, on all these policy issues, one has to strike a balance. It will not do to pursue just one policy objective.

WK: When I first met you in Europe in 1969, you certainly did not strike me as a socialist! Were you still emotionally attached to socialism when Whitlam was elected?

HWA: No. I have the singular distinction of having been opposed to every government I lived under, except for two years under Chifley and the last few years under Howard.

I resigned from the Labor Party the week after Whitlam came to power because I was so strongly opposed to his one China policy. I favoured two Chinas, and I still do!

Two strands of Whitlamism seemed particularly objectionable: economic nationalism and environmentalism. Nationalist resources policies and foreign investment controls were manifestations of a collectivist line that I could not accept. Neither did I believe in the left-wing mythology of multinational corporations as exploitative ogres or the right-wing views about the inevitability of conflict between AustraliaÕs national interests and the interests of foreign companies. And environmentalism offered the New Class a welcome new outlet for a radical idealism.

WhitlamÕs economic policies only confirmed my conclusions. Excessive spending and aggressive redistribution policies triggered inflation, drove up unemployment and inflated the government. Each social reform measure was held to meet a ÔneedÕ; each wage increase could be justified by ÔrelativitiesÕ. Ignoring the overall cost of this implied the suspension of economic rationality. The widely held view was that government intervention was needed to correct Ômarket failureÕ and that government had to protect the weak, including farmers and industries. The result of this is big government, widespread government failures, excessive bureaucratic regulation of business and the lives of citizens, and a Ôpolitical marketÕ which dispenses protection, subsidies and welfare expenditures in response to organised lobbying (Arndt 1985: 92-96).

Behind all this is an almost universal belief in the right of every section of the community to demand government action for its own benefit coupled with stiffening resistance to taxation to foot the bill. Even Gunnar Myrdahl, one of the founding fathers of the Swedish welfare state, complained that the Swedish people, once proud of their probity and rectitude, had been turned into Ôa nation of cheats and fraudsÕ.

I became a convinced free trader, with rather libertarian views and took a keen interest in the writings of the economic liberals and libertarians. Of course, this did not lead me to laissez faire, but rather to a comprehensive reassessment of the benefits and costs of government action. It was therefore natural to take an interest in the enterprise of a young school teacher, Greg Lindsay, who established, from nothing, a think tank to promote the cause of economic freedomÑThe Centre for Independent Studies (Arndt 1985: 97).

On stabilisation policy and the Keynesian heritage

WK: You made your name as an economist in the 1940s with your book The Economic Lessons of the Nineteen-Thirties (Arndt 1944) in which you digested and presented the message of Keynesian economics. From the viewpoint of 2000, many of our fellow economists, myself included, have rejected KeynesÕ ideas and policy concepts. What if anything has in your opinion remained of the ÔKeynesian RevolutionÕ?

HWA: What has remained is demand management. I still believe that KeynesÕ refutation of SayÕs LawÑthat supply creates its own demandÑwas important. Serious imbalance between savings and investments in a modern national economy leads to underemployment or inflation. Of course, we learnt in the period of stagflation in the 1970s that fiscal and monetary policy could not restore full employment because of greatly increased wage and price rigidities. You need both Keynes and Milton Friedman if you want to run a reasonably stable economy.

WK: More recently, national economies have become much more open, with massive international capital flows. Globalisation has undermined the power of the unions. Has growing internationalisation not also contributed to the demise of KeynesÕ idea that governments should assume responsibility for the stability of economic activity and employment?

HWA: I do not think so. Capital mobility has of course increased greatly. But flexible exchange rates have restored the capability of national governments to pursue independent monetary and fiscal policies, though the extent of their independence is not clear.

The present international monetary order imposes a very imperfect discipline on national authorities. It is arguable that the rigid discipline of the gold standard was a preferable taskmaster. I am ambivalent about this but, at the moment, flexible exchange rates are the fashion. Maybe, in ten years time, people will again favour something like an adjustable peg.

WK: But you would still argue that the pursuit of macroeconomic stability is a valid objective of national policy?

HWA: Yes. But one can use only monetary policy to deal with minor fluctuations. Fiscal policy is too clumsy and unwieldy an instrument.

WK: I wonder whether central bankers can have sufficient foreknowledge to effectively stabilise aggregate demand.

HWA: Should central bankers just sit there and do nothing? They simply have to try their best! Leaving it all to markets can be quite dangerous, as the Asian crisis showed.

On the Asian crisis

WK: Is there a lesson from the Asian crisis late last century?

HWA: Definitely! The lesson is that you must not stick to a fixed exchange rate for too long. You have to watch the external account. When, as in Thailand in 1997 because of loss of confidence, two thirds of the nationÕs official foreign exchange reserves flow out, the result is catastrophic. The Corden-Pitchford thesis that the current account does not matter has been resoundingly disproved by the Asian crisis.

WK: I agree, levels of foreign indebtedness do matter. Was the Asian crisis a one-off accident, or has something fundamental changed?

HWA: It has induced a profound political change. In Indonesia, indeed throughout Southeast Asia, governments have found out how firm and how adjustable they have to be in the face of changing external circumstances. The Indonesian government was too rigid and authoritarian, the Thai government too unstable!

Indonesia and Australia

WK: This brings me to a central part of your professional career. Over nearly 40 years, you have spent much of your energy on analysing and promoting knowledge about the Indonesian economy.

HWA: When I became Professor of Economics in the Research School of Pacific Studies of the Australian University, my assigned task was to study AustraliaÕs neighbouring economies (Arndt 1985: 52-55). The biggest and in 1963Ñin the turmoil of the late Sukarno yearsÑthe least accessible economy was Indonesia. Nevertheless, I built up good contacts with many economists and policy makers. The venture flourished after Indonesia embarked on a more open and rational development policy under Suharto. We started the Bulletin of Indonesian Economic Studies and turned it into one of the worldÕs 30 most cited economic journals.

WK: You were a keen and close observer of the entire Suharto era.

HWA: And I am now very unhappy to observe how the Suharto era is misrepresented in the Australian media.

WK: What is the legacy of SuhartoÕs New Order?

HWA: The legacy is the rise of a solid educated Indonesian middle class. For almost 30 years, the real national product increased by an average 6% a year, real incomes tripled in a generation. Admittedly, many members of the new middle class were urban Chinese, but economic growth also lifted most farmers out of traditional mass poverty. Their rise in living standards lifted their demand for manufactures and services.

This stimulated industrialisation and commerce. Many political scientists admired SukarnoÕs nationalist policies and foreign adventurism. But his regime was an economic failure and inflicted enormous damage on the Indonesian economy and pain on ordinary Indonesians.

Suharto decided at once to give economic development top priority and to let professional economists shape and manage the policies. The professionalism of the ÔBerkeley MafiaÕ ensured that policy benefited the people, including many of the poor (Arndt, 1985, 52-66). The term ÔBerkeley MafiaÕ was originally a term of abuse for these US-trained economists and reformers.

WK: When I first visited Java, I was certainly struck by widespread poverty and underdevelopment. Yet by the 1990s, villagers had access to medical care and safe food, they could travel to the nearest market town, and their children had higher aspirations.

HWA: There was enormous progress. There was rapid urbanisation, and the predicted food crisis failed to eventuate. Agricultural modernisation brought self-sufficiency in food. All this has now been temporarily overshadowed by the economic crisis. But I have no doubt that in ten years the foundations laid in the Suharto decades will turn Indonesia into a much more developed nation. What has been achieved since 1965 could never have been done under Sukarno. It is now forgotten what a serious threat his policies were to ordinary people. It has also been forgotten what a threat communism was at that time. There were armed communist takeover threats in Vietnam, the Philippines and Malaysia. A communist takeover in Indonesia would have had shattering consequences for Indonesians and for Australia.

WK: For me Suharto is a tragic figure. He came from a traditional Javanese background where loyalty and obedience were virtues, yet he helped create new realities where loyalty became korrupsi.

HWA: Korrupsi . . . In all those years, I did not get the impression that Suharto was trying to enrich himself. But he certainly was under a lot of pressure from his children. He was too willing to indulge his children and cronies.

While economic management, business and the professions were in the hands of the middle class, power was in the hands of the military led by President Suharto. As in all autocracies, a cancerous link between power and business was corruption. It got progressively worse under Suharto. Everyone was aware of the situation. But while the economy continued to prosper, it was tolerated as a serious but not fatal blemish. The crisis of 1997 corroded and ultimately exploded the precarious conjuncture.

By 1993, the economist-technocrats had been sidelined. The real troublemaker was Habibie, an engineer with no understanding of economics. He pushed interventionist industry policies that were harmful and bound to fail.

WK:Ê . . . and a politician who started to play the religious Islamic card . . .

HWA: Perhaps.

WK: If we look to the future and beyond the East Timor episode, what will Australia be able to offer to Indonesia, and what can Indonesia offer to us?

HWA: Trade has never loomed as large as the political relationship. But there is no reason why mutual trade should not grow significantly, once the political problems are sorted out. We can export many high-tech services and manufactures. And Australians can benefit by importing many of the labour-intensive products made in Indonesia.

Politically, it is an obvious fact that Indonesia is by far our biggest neighbour. We need again to develop a decent political relationship, even a defence relationship. It is of course not easy just now. At the moment, the whole relationship has been highjacked by the East Timor lobby. Australian media reporting, especially on the ABCÊ and SBS, is greatly distorted.

Let us not forget that those who declared East Timor independence were modelling themselves on the Marxist-Leninist independence movements in Angola and Mozambique. Fretilin grabbed power with NATO weapons handed to them by communist authorities in Portugal. That one of their guerilla leaders, Ramos Horta, should have been given the Peace Nobel Prize is utterly grotesque! Bishop Belo deserves it. He should have been given it together with Ali Alatas (the long-time Indonesian minister of foreign affairs under Suharto). This view is, of course, politically altogether incorrect!

In the long term, Australians and Indonesians will have to cooperate. Indonesia is now bound for genuine democratic government. It remains to be seen whether a democratic society will ensure necessary economic reforms and progress, supported by IndonesiaÕs maturing and outward-looking middle class.

WK: Does the political transformation include a change in dwifungsi, the traditional dual role of the military as a defence force and an organisation directly involved in politics, economic development andÊ governance?

HWA: There has been good progress in placing the Indonesian military under democratic political control. Once that is achieved, Australia can again develop good defence relations with a reformed Indonesian military. After all, Australia and Indonesia have many shared long-term interests.

WK: Heinz, I thank you for this interview.

References

H.W. Arndt. 1944, The Economic Lessons of the Nineteen-Thirties, Oxford University Press, Oxford.

ÑÑÑ. 1969, ÔThree Times 18, An Essay in Political AutobiographyÕ, Quadrant, May-June.

ÑÑÑ. 1985, A Course through Life: Memoirs of an Australian Economist, National Centre for Development Studies, Australian National University, Canberra.

ÑÑÑ. 1987, Asian Diaries, Chopmen Publishers, Singapore.

Wolfgang Kasper is Senior Fellow at The Centre for Independent Studies. Illustrations by Heinz W Arndt from his 1987 book Asian Diaries.

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