Does the market economy need government?
A historical case study of Governor Lachlan Macquarie.
Australia as it exists today stands on a long line of institutions passed down generation to generation. While indigenous economies successfully operated long before English colonisation, Governor Lachlan Macquarie was instrumental in shaping the NSW Colony and subsequent developments in Australia’s colonial economic history.
Macquarie’s legacy shows us that institutions are integral to forming and mediating the preconditions of freedom.
From 1810 to 1821, Macquarie governed the penal settlement after the NSW Corp’s Rum Rebellion deposed Governor William Bligh. Scottish by birth, Macquarie’s governance style was characterised by the emancipatory ideals of the Scottish enlightenment, and Macquarie introduced a wide variety of reforms to this end.
Macquarie was not without opposition to his rule — an emerging aristocracy actively opposed his policies for social and economic liberalisation and emancipation. This aristocracy, known as the exclusivists, disputed the economic benefits of Macquarie’s emancipatory methodology, arguing in favour of an aristocratic colony that relied heavily on convict labour. They envisioned a colony closely resembling its mother country — a landed and overtly class-conflict ridden England.
We must bring discourse on economic policy back into contact with its two natural complements — politics and philosophy.
While Macquarie’s term was over 200 years ago, this part of history can teach us valuable lessons about how government can provide the essential infrastructure and framework that a market economy needs to function. Moreover, Macquarie’s legacy shows us that these foundational institutions are integral to forming and mediating the preconditions of freedom — a point often overlooked by contemporaries who uncritically strive for freedom. These institutions are a part of a society’s spontaneous order and not always some alien entity imposed on society.
Please note that this article does not attempt to justify the wrongs of Australia’s colonial past — wrought with genocide, dispossession, and injustice — nor is it an apology for Macquarie’s personal involvement in such atrocities. Rather, it is an academic exercise in finding lessons for modern political-economic management from a historical case study. The author acknowledges that while Macquarie was emancipatory and egalitarian compared to his contemporaries, unfortunately (like so many early liberals) this attitude was limited to white, male, Europeans.
Pardons, Ploughs, and Productivity
Macquarie’s emancipatory governance style effectively transitioned the command economy to a capitalist free market. Although the Colony began as a penal settlement, which required a command economy, Macquarie’s efficient dissemination and emancipation of convict labour led to an emerging competitive market economy.
Although NSW still used convict labour under Macquarie’s rule, his meritocratic system allowed convicts to emancipate themselves, giving them the opportunity to be granted tickets-of-leave, conditional pardons, or absolute pardons. This incentivised them to become ‘honest, sober, and industrious inhabitants’. Indeed, as R.F. Holder states in his comprehensive history of the Bank of NSW, Macquarie commenced a “…pioneering period in which the gaol had given way to a thrusting, experimental capitalist and politically conscious society.”
Pardons
Tickets-of-leave, which allowed convicts to be employed by free-settlers while still being technically incarcerated, had two economic ramifications: it opened the private sector up to more labour which expanded production; while also training convicts for future economic activity as emancipated citizens. In other words, it acted as a human capital investment.
Compared to his predecessor Governor Bligh — who issued only two pardons throughout his governance — Macquarie issued 366 pardons, 1365 conditional pardons, and 2319 tickets-of-leave from 1810 to 1820. This effectively meant that 2319 convicts were being primed for future integration into the workforce, while the 366 pardons and 1365 conditional pardons increased the number of employed or employing producers. Because these pardons allowed convicts to more readily become emancipated — thus enabling them to become producers — aggregate supply rose, increasing the Colony’s output. Furthermore, this freeing up of labour also enabled aggregate demand to rise because if the emancipists weren’t to become suppliers themselves, they would likely become workers (and thus consumers) in the rapidly expanding economy.
Philosophy and governance style can have a tangible impact on economic development.
While at first glance these tickets-of-leave seem similar to slavery, the convicts enjoyed legal rights that granted redress if unduly punished by their employers. This further reflected Macquarie’s political egalitarian ideals, which were instrumental in establishing sound labour relations.
Moreover, Macquarie himself appointed emancipists into roles suiting their skills before imprisonment. Surprisingly, many of the convicts’ occupations prior to imprisonment matched the skills needed for a colony in its foundational years. A small percentage of the convicts were even highly skilled professionals or university graduates before being convicted for political or social protest. Without such meritocracy, these individuals’ skills (or those who had such potential) would be wasted under a rigid convict labour system.
These policies reflected the developments of Scottish Enlightenment ideals, notably espoused by Adam Smith and David Hume, in political economy. This philosophy was introduced to Macquarie by Sir James Mackintosh during their service in Bombay, India.
Ploughs
While Macquarie’s emancipatory policies were motivated by his humanism, he also had a sound economic mind for his time. Macquarie argued that “creating a competition with the richer settlers and large stockholders” was good economic policy. In what is common sense to modern economists, but was controversial at the time, Macquarie pioneered policy which sought to create competition, i.e. increase supply, to drive down prices.
Macquarie’s term highlights how essential good public policy is to the success of a market economy.
If Macquarie had utilised convict labour in a restrictive manner (only employing their skills as a convict and limiting the possibility for emancipation), then the labour inputs would have presented diminishing returns. This is because agriculture — the main industry supporting the Colony — was, as it is today, a capital-intensive industry: many independent pastoralists were needed rather than a few suppliers with large workforces. Therefore, Macquarie’s emancipation (as he rightly predicted) increased the number of suppliers to the market, boosting aggregate supply. His massive expansion of agriculture created a surplus that could now be profitably exported.
Productivity
Macquarie’s contemporaries fiercely opposed his refinements, fearing competition would wipe out the economic rents they enjoyed in their oligopoly market. They argued that Macquarie’s policies would bring “clamorous and distressing competition” and that only the free settlers who would “maintain a large body of domestic Servants and labourers” could lower the prices — not Macquarie.
Yet, Macquarie’s competition-enhancing policies saw a marked lowering of prices and corresponding economic success. For example, in the animal food market, prices dropped by 44.44% from 1810 to 1821. In the same period, the total number of horned cattle, sheep, hogs, horses, and acres of land cleared for crop farming increased 727.35%, 1020.82%, 255.26%, 302.47%, and 323.73%, respectively.
While there was a distinct economic depression between 1812 and 1815, such an enormous increase in agricultural output, and decrease in prices, clearly indicates an overall increase in the Colony’s aggregate supply by 1821. The long-term economic benefits of Macquarie’s policies, which were borne from his emancipatory philosophy, are clear.
The Role of Institutions
Governor Macquarie established and developed two important institutions — the Bank of New South Wales, and the colonial education system — which were key to developing the emerging market economy.
The Bank of New South Wales
Established in 1817, the Bank signified a turning point in the Colony’s quickly commercialising economy. The approach that Macquarie took to establish the Bank was a reflection of his overall governance style. His 1816 invitation to “…magistrates, principal merchants, and gentlemen of Sydney…” to discuss the Bank’s future establishment highlights Macquarie’s upholding of democratic ideals. By inviting a diverse group of stakeholders, Macquarie’s methodology was to establish the Bank by initiating a discourse — an unusually democratic approach.
Macquarie’s legacy shows us that institutions are integral to forming and mediating the preconditions of freedom.
Furthermore, these merchants — who would continue as a part of the Bank’s future directorates — seemed to desire an institution that would further Macquarie’s liberal social development. Indeed, these merchants’ economic ends were intrinsically tied up with the liberal development of the Colony’s social conscience, which Macquarie began to foster.
While Macquarie was not immediately successful in instilling his philosophy into the Bank’s structure, which actively excluded a large swathe of citizens, it was only after his term ended that his egalitarian vision became institutionally entrenched. Reflective of the Bank’s exclusivity was Rule 7, which stipulated that a director had to be a subscriber to the Bank, had to reside in Sydney or within two miles of it, and had to be an unconditionally free person. While this would have had some practical merit, the residing rule effectively excluded those agriculturalists who were becoming increasingly constituted by emancipists.
Market economies do not spring into being from abstract ideals about liberty and property, as right-libertarians seemingly suppose.
Unsurprisingly, Macquarie objected to this ruling, but as the Bank’s customers grew more representative of the broader Colony, its rules increasingly began to reflect the Colony’s liberal and egalitarian attitudes after Macquarie’s departure. The Bank directorate board’s later revisions of the first rules concluded that they favoured wealthier shareholders while neglecting smaller shareholders. The statistical spread of the Bank’s mortgages indicates that the emancipists were a growing economic class: 41.18% to emancipists, and 35.29% to free-settlers. Thus, it was Macquarie’s economic reforms that enabled a growing emancipist class, which then resulted in social developments that furthered their interests.
Education
Not only did Macquarie actively invest in the existing human capital of the convicts, he also invested heavily in education for future generations. Establishing a private and public schooling system, Macquarie diverted one-fifth of the Colony’s revenue to education. This formed another key institution needed for the emerging market economy and signifies the Colony’s transition away from a penal settlement.
In conjunction with this, Macquarie built 265 public works, including roads, hospitals, and new townships. This was instrumental in establishing an increasingly mobile workforce, securing trade between towns, and accelerating the Colony’s economic growth. While at the time, he was criticised by his superiors, hindsight shows that this large public expenditure was needed for a market economy to commence.
A Summary
Macquarie’s economic reforms initiated a positive feedback loop between social attitudes, economic, and political development, which led to three major economic benefits.
To adequately respond to today’s economic issues, we must learn lessons from history.
Firstly, his emancipatory philosophy established a meritocratic economic system that allowed convicts to develop their human capital, while also providing them the opportunity to become fully emancipated citizens. This helped the Colony transition away from a cumbersome command economy to a more competitive and efficient free market economy, which relied heavily on agriculture. Secondly, this economic development — fuelled by his emancipatory philosophy — had social and cultural implications that can be identified in the institutions established under Macquarie. The most important of these institutions were the Bank of New South Wales, and schooling. While the social developments were not immediately felt by Macquarie, it became a distinctive part of the Colony after his departure. Thirdly, Macquarie’s’ public investment in infrastructure enabled the private sector to flourish, providing the essential scaffolding needed for a market to efficiently operate.
Lessons from History
Macquarie’s term highlights how essential good public policy is to the success of a market economy. Moreover, it demonstrates the tangible impact that philosophy and governance style can have on economic development.
Market economies do not spring into being from abstract ideals about liberty and property, as right-libertarians seemingly suppose. Rather, they rely on the careful cultivation of a fertile socio-economic environment, protected by institutions, and nurtured by governments responding to the issues of the day.
This important truth is evident everywhere in economic history, but is completely overlooked in most contemporary economic debates, which are dominated by specialist economists. To adequately respond to today’s economic issues, we must learn lessons from history.
With this in mind, the loss of UQ’s economic history course, and the increasing specialisation of undergraduate economics degrees around Australia, is disappointing. In the words of Keynes:
“the master-economist must possess a rare combination of gifts…
He must be mathematician, historian, statesman, philosopher…
He must study the present in the light of the past for the purposes of the future.
No part of man’s nature or his institutions must lie currently outside his regard.”
As our brief exploration of the colonial economic history of NSW shows, to truly understand economics, we must bring discourse on economic policy back into contact with its two natural complements — politics and philosophy.
Economics is too important to be left to economists alone.
William Splatt is a fourth-year PPE student at UQ, and the host of the UQ Politics, Philosophy & Economics Society’s podcast ‘Pillar Talk’.
Will was a student in the last economic history course taught at UQ, in 2020, where he originally wrote this article as an essay.
Thanks to Thomas Howroyd, Joseph Christensen, and Tom Watson for editing this piece.
