We’ll bang on about it for one last time today. If you’ve had enough already then I suggest you give today’s Money Morning a miss. Join Shae again tomorrow for Money Weekend, or we’ll see you again on Monday where we’ll bang on about something else.

To our way of thinking, there’s no difference between pay equalisation and minimum wage legislation. Both create artificial wage markets which aren’t sustainable over time.

So today we’ll take another bash at the ultimate job killer, the minimum wage. The argument always put forward is that without a minimum wage, wages would be pushed to zero and workers would work in slave-like conditions.

This argument is false and is made without any evidence. Because there is no evidence.

Providing you have a free society where people are not compelled to work against their will then it’s not possible for wages to fall to zero.

Contrary to conventional wisdom, it’s actually only in economies where there is an interfering and coercive government (by nature all governments are coercive of course) that real wages are forced lower and slave-like conditions exist.

And unlike the claims made by the zero-wagists, there is plenty of evidence to support our argument. Just look at any tin-pot dictatorship, or even at any western democracy for that fact.

Government’s favourite way of doing this is through inflation. We won’t get sidetracked, but take this revelation from the Herald Sun:

“Australians have to work almost three times harder to pay off the average family home than they did 50 years ago… homebuyers on the average income now have to work for 19,374 hours to buy the average Australian house with the average mortgage… In 1960, it took homebuyers just 7500 hours to pay off the average mortgage.”

Take into account other increases in the cost of living and the devaluation of your money, it’s no wonder the quality of life hasn’t improved.

Anyway, it’s important to remember that wages is just another term for the price of labour. You sell your labour to an employer for a price (wage) that you’re willing to accept. And the employer will pay for your labour (a wage) at a price which he or she believes is acceptable and profitable.

As we’ve mentioned before, the impost of a minimum wage distorts this pricing action and leads to employers finding alternative ways of employing people.

Either they will look for new technology that can replace the work of individuals, or they will send work offshore where the price of labour may be cheaper. Or they may even use legal or illegal imported labour where different working conditions may apply.

The point to remember on the use of cheaper imported or exported labour is that the claim about cheap labour from overseas ’stealing’ the jobs of Australians isn’t true. In reality it’s market manipulation by governments, bureaucrats and trade unions which is responsible for unemployment.

In most cases jobs aren’t actually being taken from Australians at all. Because either the job in Australia doesn’t exist at the price the employer is willing to pay and the employee is able to accept, or it’s no longer profitable for the work to be done here due – in part – to minimum wages and other labour restrictions. Therefore the job would disappear anyway.

If it wasn’t profitable for the employer to offer the job at the minimum wage level, and the job couldn’t be sourced from overseas labour then the employer wouldn’t create the job anywhere – it wouldn’t exist.

Even in the case where an employee loses a job in Australia, and a new job is created overseas to carry out the same tasks, the job isn’t being ’stolen’, but rather it’s due to the inability of the employer to source the job locally at a profitable price of labour.

If it wasn’t profitable for the company to keep employing an Australian at the higher rate, and they couldn’t source the work cheaper overseas then eventually the Australian would lose their job anyway.

Businesses go bust all the time for that very reason.

Let me illustrate it to show you what I mean…

Let’s say a job is only profitable for an employer if he or she can pay someone $8 an hour. However, the minimum wage law insists that the minimum pay is $10 an hour.

Therefore the employer will not create a job to pay someone $10 an hour when he or she knows they will make a loss. In this case no job can be created and therefore there is no job for an Australian at a rate of $10 an hour.

But then let’s assume that the employer finds a job market overseas that will allow him or her to pay workers $7.50 an hour. And assume it costs 50 cents an hour for the completed work to be imported back to Australia, the employer is able to make a profit on the production of the product.

Therefore, due to the lower rate of pay in the overseas employment market, a job has been created at a total cost of $8 an hour.

But remember, this isn’t a job that has been ’stolen’ from an Australian worker, because at $8 an hour the job doesn’t exist in Australia.

And as we note, even if it’s an existing industry, if the minimum wage rate was unprofitable for the employer, the job would have disappeared in Australia anyway even if it wasn’t replaced by an overseas worker.

In other words, it’s the artificial setting of wage rates that causes job losses not overseas workers who are prepared to accept a lower wage.

But let’s put it another way. Let’s forget about minimum wage levels. Let’s look at higher pay scales where you’ll see that the same principle applies…

If we consider there’s someone applying for a job as a hat salesperson that pays $100,000 a year. But this person has no qualifications or experience as a hat salesperson. However, the employer takes a shine to them.

The employer likes the fact that the applicant has previous sales experience and believes that the ins and outs of the millinery trade can be easily taught.

However, the $100,000 wage was aimed at someone with hat sales experience, so the employer offers to pay the unqualified applicant a wage of $80,000.

What does the applicant do? They would prefer a wage of $100,000, but in the opinion of the employer the applicant is not worth that amount. The applicant is only worth around $80,000.

The applicant has two choices, he or she can either decline the job offer and hold out for a higher paying job elsewhere, or they can accept the lower pay. In this instance the applicant accepts the lower pay and a job is created.

But now consider what would happen if the government imposed a minimum wage level of $100,000 for all hat salespeople. Naturally, those in the industry would be delighted, “It’s a bumper pay day” they would yell.

As we pointed out yesterday, it would be a bumper pay day for some, but not for all. In the instance of our applicant above, it would not be a bumper pay day. Because as much as the employer may like the applicant, he or she would only employ them if they could pay the applicant $80,000.

But under the law they could not. And worse still, even if the applicant is prepared to accept a lower wage the law decrees they cannot accept it.

In this instance no job is created.

Now, I’m sure you’d agree that an artificial minimum wage for a middle class job would be terrible for many in the middle class. It would make their job prospects much tougher and would either force then into trying to apply for higher paid jobs for which they may not be qualified, or it could force them to take work in a lower paid job which they did not really want or were not suited for.

Or it may mean they are left without a job.

If you accept the logic that an artificial minimum wage would be terrible for the middle classes, then logically you have to accept that current minimum wage laws are equally bad for those on low pay.

If we return to our point above about wages being another term for the price of labour, then you’ll see that wages would not go to zero if there wasn’t a minimum wage. To claim it would happen is brazen misinformation.

In fact, if you accept the arguments above, then a minimum wage may not have any impact on the wage rates of existing jobs at all. In the case where jobs are not currently in existence due to minimum wage laws, new jobs would be created onshore rather than overseas, and it would be up to employees to decide whether they accept the wages offered.

If the wages offered are too low then employers will not attract a workforce. Especially if there are competitors in the new industry as competing firms would increase wages to a level that would attract workers.

Naturally, if workers are still not prepared to work at a level which the employer deems to be profitable then there will be no job creation. The point is that the market and individuals will have decided that, not an arbitrary decision from a jumped-up bureaucrat.

However, in some instances the abolition of the minimum wage could lead to lower wages. Yet, it should be remembered that those higher wages were only available to those lucky enough to benefit from an artificially set wage – this is how trade unions work.

For instance, if an employer has a total wage budget of $500,000 per year and the minimum wage is $100,000 each, then he or she can only employ five people.

Yet, if there is no minimum wage the employer can either maintain the current staff on their wages, or if he or she believes there would be an increase in productivity and profits with six employees then there would be an incentive for the employer to drop salaries to $83,333 each.

Or offer varying salaries above or below the old minimum wage based on performance.

In that case the employees would need to decide whether they are willing to accept this or not. And if not, find alternative employment.

The point is, the example above is merely the opposite to what happens when you have trade unions and governments manipulating wages policies.

Increases in wages that are determined by governments will necessarily lead to losses in jobs. There’s no avoiding it. It applies whether you’re looking at manipulating the high end of the job market, the middle, or the low end.

The reverse is that the abolition of artificial wage levels such as the minimum wage creates jobs. That’s real jobs, not the type of job the government creates by paying people to install insulation and then paying a bunch of other people to rip it out again!

Cheers.
Kris.

After much digging around, and getting past pictures and celebrity hanger’s on quotes, I’ve dug up some much needed to know financial information for you this week.

Centrebet, an online gambling service in Australia, will now be offering the chance to ‘bet’ on where the ASX 200 ends the month. So just in case you can’t get enough of betting on boxing, the dogs, the horses, elections or even interest rate decisions, you can now take a punt on the stock market.

But, it appears that the Eurozone countries don’t like the idea of gambling on the markets. And want to take matters into their own hands.

The European Commission are seeking to establish something similar to the International Monetary Fund, potentially becoming the European Monetary Fund (EMF). Details are still being developed, however the idea is the EMF will co-ordinate with the European Central Bank on fiscal policy for Eurozone countries.

The commission says it wants to act as a preventative as well as a corrective measure, to prevent catastrophic levels of public debt by Eurozone members. Basically, the proposed EMF will ’step in’ and bailout countries, like Greece, and assist in managing sovereign debt.

You can’t help but feel that this would become a back up money pit for poorly managed countries.

Putting sovereign debt aside, Tony Abbott the Opposition Leader, wants to give women 26 weeks paid maternity leave. This makes Prime Minister’s Kevin Rudd’s plan embarrassing in comparison.

The best – or worst – part of Mr. Abbott’s plan, is that he would match the salary of the women taking leave, up to $150,000 for an annual salary, instead of Mr. Rudd’s plan of the minimum wage for 18 weeks.

Abbott’s plan is expensive, and large companies would be expected to foot the bill. Only companies with a taxable income of over $5 million per year would be charge a levy of 1.7%. Currently, Rudd’s plan would see no extra taxes or penalties introduced.

This proposal reeks of a publicity stunt in a desperate bid to get female voters on board, without taking into account the financial implications.

Think about it, if companies are going to be slugged with yet another tax, they’ll try to pass this increase onto the consumer, or more likely it will cost jobs. This means you’re paying for someone on a high salary to stay home for six months.

And not only are you’re daily costs going to increase, but the cost of housing is going up, again.

The Reserve Bank of Australia (RBA) has warned of higher house prices. This ‘warning’ comes after a drop of 7.9% home lending for February, potential further interest rate rises and the First Home Owners Grant begin wound back.

Normally those three ingredients the RBA has suggested would be a recipe to ease housing prices.

But thanks to easier access to unlock the ‘equity’ in your home, and the government easing restrictions on international buyers of Australian property, there’s no foreseeable end to the artificial demand for Australian housing.

It’s almost like the government finally worked out that our banks trillion dollar exposure to the Aussie market would be disastrous if it all fell over. Could they be using foreign investment as a way of propping up housing prices?

To end the week, there’s nothing like a stimulus package to keep things running along.

Australia has experienced what could almost be called an artificial job boom of the recent months. The rapid growth in jobs has been attributed to stimulus spending rather than real economy growth.

This is odd, as the RBA have been using the labour market to justify the increases of interest rate rises.

“…the benefit of fiscal stimulus has shifted to construction and away from the direct boost to consumer spending.”

That’s according to Mr. Meer, a chief economist at Deutsche Bank.

And this shift away from consumer spending jobs, mainly the retail sector, has seen more females out of work than males.

On to today’s wrap-up…

The S&P/ASX 200 ended the day 5 points down to 4,814.20. The labour data released yesterday, showing unemployment rose to 5.3%, however this was in line with what economists were expecting.

The real news that drove the Aussie market into the red was China’s inflation figures.
Investors are still concerned that China’s economy is overheating after key figures were released. The consumer price index (CPI) in China was up 2.7%.

It’s no secret that Australia’s survival of the ‘GFC’ has been as a result of China consuming our resources. A slowing down in China will affect the Australian market.

The Dow Jones Industrial Average gained 44 points overnight, closing to 10,611.84. Banking stocks lead the way, boosted by the news that the proposed banking regulations won’t be as strict as initially thought. But the details have not been released yet.

The US, are still looking for signs that the economic turmoil is easing. Data released yesterday showed the trade deficit narrowed in January and that jobless claims were lower than expected.

Over in the UK, the FTSE was down 23 points to 5,617.26. Both the miners and banking stocks dragged the index into the red for the day.

Richard Hunter, head of UK Equities at Hargreaves Lansdown said yesterday “We seem to have run out of breath at this stage,” when asked about the current UK financial markets.

“We’re now inching towards the Easter break and we’re probably six to eight weeks away from the next quarterly reporting season. In the absence of any major news, we could well see the market drifting for a little while yet.” Mr. Hunter said.

The Nikkei was higher by 101 points (0.96%), ending the session at 10,664.95.

The price of spot gold in Australian dollars is trading at $1,212.01 while in US Dollars it is trading at $1,109.49. The price of silver in Aussie dollars is $18.73 and in US Dollars it is $17.15.

The Aussie dollar versus the US dollar was up a few pips overnight to USD$0.9154, and slightly higher against the Japanese Yen JPY82.85

The price of Crude Oil overnight did very little. If China tightens monetary policy further, this could see the price of oil drop. China is currently the world’s second largest energy consumer. Read more here.

Crude Oil was higher overnight, up by 0.28% to close at USD$82.32

For the biggest movers on the market yesterday click here…

That’s the end of another week. Have a great weekend.

Shae.

But, we’ll stick to our guns and leave any p——y or h—–g comments until next week.

Anyway, our comments on pay equalisation seem to have set off something of a discussion both on the Money Morning website and in emails we’ve received to the Money Morning mailbag.

It’s an interesting topic so I thought it worth our while having another look at it based on some of the comments we’ve received.

A few interesting comments include this from ‘Zengirl’ that was left on the Money Morning website:

“It’s overwhelmingly disappointing that the attitudes of men toward equality are no different in the 21st century than they were in the last few. Using the concept of ‘competitive advantage’ to justify inequality is outrageous and simply cannot be supported in any way. Indeed, if your argument had any weight, then indigenous people (who are paid far less than any of us) would be the most competitive in the labour market!”

And also this from RB:

“IF women have a ‘competitive advantage in the workforce’ by being paid less, why do we not see women as heads of most of the board rooms, businesses and corporations throughout the country?”

Plus this one from CB:

“You have to be employed at a decent wage, so that your employment actually bestows you a decent spending power for it to be much good to yourself, your dependents, and even the overall health of the economy.”

And this comment from Nick:

“None of my staff’s pay is rated on anything else but job description and ability. Only a fool would jeopardise his company or business just to save a couple of dollars. Good people are the foundations of any business. I have found that people who are loyal to their employer are also loyal to their families, and visa versa. And if an employer is incapable of recognising that, they will suffer in the long run.”

Finally there was this gem:

“Charming re the low pay for women… women do 90% of the work on the planet and own 2% of the assets Big Daddy… disgusting especially when 99% of men are less intelligent than I am. get knotted Kris”

The first point to make, before we go any further, is that there will always be a degree of generalisation with this issue. The numbers from the pressure groups who favour pay equalisation trumpet the ‘fact’ that women are paid on average 17% less than men.

Is equal pay fair?

The call by them and others is that pay should be equal regardless of whether you’re male or female.

‘Equality’ is interesting because it suggests that all people should be paid at an equal rate. Therefore it suggests if Person A produces 200 widgets a day they should be paid the same as Person B who produces 201 widgets per day.

Is that fair? Probably. It’s close enough not to worry about anyway. But what if one is producing 300 and the other only 150? Is it fair they are paid the same? Now, this example isn’t specific to gender pay rates, but what it does is provide a case for employees to be paid different wages.

Once you agree that one method of determining different rates of pay is valid then you have to accept that there may be other ways of determining different rates of pay – not just based on the amount of widgets produced.

Then there are other comments that suggest there already is pay equality. That bosses would be mad if they paid female employees less than male employees.

We’ve no doubt that’s true. If there is no need or incentive for an employer to pay one group of employees differently from any other then the employer will pay the same or similar rate to all.

It will be a decision the employer has made based on experience and the market.

Furthermore, there’s the argument that female employees don’t “accept” lower pay, that rather it’s forced upon them.

We’d argue that everyone who takes a job “accepts” the level of pay. If they did not “accept” it they would not take the job. People only work if it’s in their interests to do so. They may not like the pay, but if it’s more beneficial for them to work than not to work, then they will work.

Finally, a quick note on the excellent comment from Zengirl, “if your argument had any weight, then indigenous people (who are paid far less than any of us) would be the most competitive in the labour market!”

‘Do-gooders’ cause more harm than good

Isn’t this an argument against arbitrary wage policies? If it’s true than indigenous Australians are discriminated against, then doesn’t it make their position much harder if they are unable to compete in the labour market?

If a minimum wage is set at $10 an hour a discriminating, racist or unenlightened employer may choose to employ a white person as that is their preference. But if there is no minimum wage, perhaps a discriminating, racist or unenlightened employer would be prepared to pay only $8 an hour to an indigenous Australian.

Perhaps the discriminating, racist or unenlightened employer would soon figure out that the indigenous Australian is just as – perhaps more so – capable than the white Australian and therefore increase the wage to $10 an hour.

However, at a mandated $10 per hour the indigenous Australian doesn’t have a chance, because the discriminating, racist or unenlightened employer has a prejudiced view that the indigenous Australian is less productive and is therefore only worth $8 per hour.

We’ve used the terms discriminating, racist or unenlightened employer, but we’re just using an extreme example. The fact is there’s obviously a barrier to employing indigenous Australians because even non-discriminating, non-racist, enlightened employers may be reluctant to do so.

Because if there wasn’t a barrier then indigenous unemployment rates would be the same as for all other groups. Our bet is that government interference is at the core of it – in fact, we’ll guarantee it.

There are plenty of other arguments and opinions as well. Feel free to leave your feedback when this article is posted to the Money Morning website later today.

But for now we’ll make this comment. Wage rates are determined by the market. In some cases it’s a free market, and in other cases it’s a manipulated market – eg. Award rates, trade union interference, government interference, etc…

No bumper pay day

But in all cases wages are determined based on what an employer can afford to pay. Artificially raising a wage rate doesn’t provide an across the board bumper pay day to everyone.

Instead it will provide a bumper pay day to some but create a pay cut or loss of pay to others.

Let’s take a look at a timely story that appeared in the Herald Sun: “Julia Gillard supports pay equity bid.”

According to the story:

“The Australian Services Union will launch a test case with Fair Work Australia today regarding the lower pay of community sector workers. They are the people who work in women’s refuges, family support centres, drug and alcohol rehabilitation and migrant resources. The union will argue that lower wages in the feminised community sector should be brought into line with pay rates in a similar, male-dominated industry.”

The article doesn’t specify which “similar, male-dominated industry” they want to align the wage rate with, so we’ll just have to make a whole bunch of generalisations. As I’ve mentioned it’s one of the things you have to do with this subject, so we’ll do that right now…

Our guess is that women’s refuges, family support centres, drug and alcohol rehabilitation and migrant resources jobs are either funded by government, quasi-government or charity-based organisations.

We’ll also make another sweeping statement to say that most of these services are either provided for free to the end user, or they may ask for a ‘donation’ from the end user to use the services. We’re prepared to be corrected if we’re wrong.

So, the question we have is how will the new higher wage rates be paid for?

According to the Herald Sun, “Australian Council of Trade Unions (ACTU) president Sharan Burrow admitted the push for a $100 a week pay rise for 200,000 community sector workers was not small.”

For the record, our Canon LS-100TS calculator tells us that’s an extra $20 million that these women’s refuges, family support centres, drug and alcohol rehabilitation and migrant resources organisations will need to come up with.

If we’re right and these organisations mainly rely on charitable donations and taxpayer funds then it means an extra $20 million will need to be raised just in order for them to provide the same level of service as they currently do.

Failure to do so will mean these groups will either need to reduce the number of staff or reduce the services they provide.

Naturally the argument will be, “Aha! If these are government funded then it’s easy, the government can just increase taxes to pay for it, it’s the socially right thing to do.”

Well, you know our opinion on taxation so we won’t delve into that again today. But let’s say the government does increase taxes to pay for it – after all, it’s just $1 per person per year, that’s not too much for anyone to cope with is it?

[Ed note: Our trusty calculator deceived us. Of course the full calculation is $100 x 200,000 = $20 million, times 52 weeks, equals $1.04 billion. That’s a cost of about $50 per Australian per year].

The problem is this. It’s our old favourite scenario of considering what is not seen.

What do I mean by that? If these government funded organisations do receive the extra money to pay for increased wages and they have done so due to higher government taxation, then it means less dollars in the pockets of individuals.

And perhaps it means that with fewer dollars in the pockets of individuals, there is less money for those individuals to donate to charities. With government subsidisation of one set of welfare organisations it potentially means other welfare organisations – those that rely on volunteers – could see a drop in donations.

Especially if taxpayers start to consider that a portion of their taxes is going to charities. Evidence in the early years of the National Lottery in the UK was that people donated less to charity as they were aware that a portion of the cost of their lottery ticket went to charities – that may have changed.

In other words, women’s refuges, family support centres, drug and alcohol rehabilitation and migrant resources gain, whereas donation-only or volunteer-only organisations potentially lose due to lower donations.

But that’s not the only potential problem. There’s the issue of the type of person drawn to these jobs.

Unskilled workers lose again

Let’s say for arguments sake that current employees in these organisations earn $30,000 per year (just to repeat, we’re just using this as an example). And let’s also say that this particular wage attracts a certain type of person, a person that has the desire to earn $30,000 per year and is skilled or qualified to do so.

So, what happens when the wage is increased by $100 per week to $35,200 per year? And let’s assume that the government stumps up all the extra cash so there are absolutely zero job losses.

Any guesses about what is likely to happen?

Well, one obvious impact is that the job will now attract all people who would like to earn up to $35,200 per year. We can take it one step further by saying – again using a generalisation – that those who expect to earn or who can command a wage of $35,200 may have more skills than those who were doing the same job but who were prepared to accept $30,000.

The consequence is that if the new legal minimum wage in this sector is $35,200 rather than $30,000 for what is in effect the same job, employers will be more inclined to employ someone with a higher skill set so that they are getting more ‘value for money.’

In other words, why would an employer pay someone $35,200 when they are only worth $30,000? They wouldn’t, not if they can attract someone with more skills who is potentially more productive for the same wage of $35,200.

Therefore, even though there may be a zero net impact on jobs, the effect is that the lower skilled workers are being priced out of the market by those with more skills. Simply because a mandate from the government decrees that $30,000 is too low a wage.

The employee that is only worth $30,000 to the employer is now unable to get a job in that industry and instead will have to seek work elsewhere. And that’s even though the potential employee may be perfectly qualified to do the job.

Of course, it implies the cost for the pay rise is fully underwritten by the government. In reality it won’t be. So not only will those with lower skills be pushed out of this type of employment, but there will also be fewer job opportunities for those with the skills as organisations will be forced to reduce staff levels.

Remember, pay equalisation doesn’t mean equality of pay for all. It means equality of pay for some at the expense of others.

Cheers.
Kris.

Economists were predicting an increase of 2%. Already, market ‘experts’ are suggesting that the 7.9% drop in housing finance will prevent the Reserve Bank of Australia (RBA) increasing interest rates in April.

Overnight in America, the US had a choppy trading session as well. The Dow Jones Industrial Average closed up 2 points to 10,567.33. The major banks in the US were all higher for the day.

Paul Atkinson, deputy head of US Equities at Aberdeen Asset Management suggested “There’s probably a little bit of altitude sickness at these levels”, referring to the current rally of the US market. He added “Normally you’d think if a market’s moved this much, aren’t we due for some sort of correction?”

In the UK, the FTSE was higher by 38 points, finishing at 5,640.57. A strong opening in the US, higher commodity prices and China’s positive trade data woke the Footsie up from its afternoon slumber.

The Nikkei closed down 3 points to 10,563.92.

The price of spot gold in Australian dollars is trading at $1,211.76 while in US Dollars it is trading at $1,108.57. The price of silver in Aussie dollars is $18.60 and in US Dollars it is $17.02.

The Aussie dollar versus the US dollar is USD$0.9154, against the Japanese Yen JPY82.84

Crude Oil closed at USD$81.95

For the biggest movers on the market yesterday click here…

That’s all I have for you today. See you tomorrow.

Shae.

“Consider a man and a woman each with a productivity of $10 per hour, and suppose, because of discrimination or whatever, that the man is paid $10 per hour and the woman is paid $8 per hour. It is as if the woman had a little sign on her forehead saying, ‘Hire me and earn an extra $2 an hour.’ This makes her a desirable employee even for a sexist boss. But when an equal-pay law stipulates that she must be paid the same as the man, the employer can indulge his discriminatory tendencies and not hire her at all, at no cost to himself.”

This example is applied to a comparison of male labour versus female labour. As was our article yesterday.

But in reality, it’s not even a Male v Female thing.

Because just take the same example and switch in ’skilled worker’ in place of ‘man’ and ‘unskilled worker’ in place of ‘woman’ – not that we’re saying all female employees are unskilled of course! – and the same principle applies.

Or interchange ‘experienced’ in place of ‘man’ and ‘inexperienced’ in place of ‘woman.’ Or any other example where wages are artificially manipulated by government decree.

You can use the same comparison to relate it to the minimum wage. In effect, pay equalisation is just another form of creating a minimum wage. It makes it illegal for an employer to employ someone for a lower wage than someone else.

And like the minimum wage, one consequence is that it creates unemployment.

Anyway, we just thought we’d drop that in. You can still leave comments on this article by going to the Money Morning website.

Back to today. We notice that even the mainstream commentary over at Business Spectator is starting to get a bit antsy with all this ‘economic recovery’ thing.

Two articles yesterday, one from Karen Maley and the other from Robert Gottliebsen clearly warn – as we have – that things aren’t as rosy as they seem.

Right now we’d say, hats off to these two mainstream commentators for saying it. However it’s too late, much too late for it to have any impact.

As the saying goes, the die is cast. The bubble has expanded. It’s like when you blow up a balloon. No-one likes having the thing pop right in their face, but there’s still the temptation to try and make it a little bigger, and that’s what’s happening with the Australian economy now.

The only problem is that in mainstream economics they either don’t believe that bubbles exist, or they believe they are caused by something else, or that even if bubbles do exist then they think they’re smart enough to manage them.

I mean, they’ll look at the last eighteen months and conclude they know the recipe for curing bubbles. So that even if another one is brewing, don’t worry about it, they’ve ‘fixed’ it before, they can do it again.

Look at all the economic data that’s been paraded before your eyes. As you know, we’ve been critical of the way the ANZ Job ad numbers have been reported.

Well, finally you could say the February job ads do look more impressive than some of the previous numbers. In February, ANZ Bank reports a total of 158,611 jobs advertised compared with just 109,177 in January.

You’d expect a pick-up in February, but still, it’s a 45% increase over the previous month. Although, compared to the same time last year, when the economy was on the verge of recession, job ads are still down by 3,723.

And remember, we’re using the original numbers, not the seasonally adjusted or trend numbers.

And then look at the other stats: “Australian economy continues to grow: ABS.”

According to the Australian Bureau of Statistics (ABS):

“Latest ABS figures show that GDP, in seasonally adjusted volume terms, grew 0.9% in the December quarter 2009, after growing 0.3% in the September quarter.”

The Australian economy continues to grow, grow, grow. That provides even more evidence to the mainstream that Australia has figured out how to perfectly direct and manipulate an economy to avoid collapse.

Although, the next paragraph from the ABS statement gave the real game away:

“Growth in the expenditure measure of GDP was driven by a 3.5% increase in private investment , a 10.2% increase in public investment and a 0.7% increase in household expenditure. Offsetting these increases was a fall in net exports. The fall in net exports was due to imports (up 7.7%) growing faster than exports (up 1.7%).”

Actually, we’ll rephrase that. We’re not sure it’s really given the game away as everyone knows public spending – or public ‘investment’ as the public sector drones prefer to call it – is going mental: money spent to ‘create’ jobs, then more money spent to ’save’ jobs, then another bunch of cash to compensate for jobs lost.

The madness never ends.

But that brings us back to the point we made above. While it’s good that some in the mainstream press are starting to whiff a bit of trouble, it’s all rather too late.

The time for warning about the nonsense idea that you can borrow to get yourself out of debt was a subject for twelve months or two years ago.

Yet at the time the mainstream press was too excited about making sure their elected representatives ‘did something.’ At the depths of the market meltdown, it wasn’t the time to ‘play politics’ or get bogged down in ‘economic theory.’ It was the time to ’save jobs’ and help those families who seemed to be constantly ’sat around the kitchen table.’

But the biggest problem right now is the sense of false security – or false sense of security, whichever you prefer.

We’ve noticed quite a bit of excitement about all the increased profits Australia’s robust and excellently run companies have made in 2009. Today’s Australian Financial Review (AFR) trumpets, “Earnings return, are shares next”, “Property turns the corner” and “How banks came out in front.”

According to the AFR, 80% of Australia’s companies reported profits in-line with expectations. It goes on, “Profits for industrial companies rose 3.8 per cent from a year earlier.”

But the AFR does point out, “Cost-cutting was an important driver of profits in the half. Some big companies reported falling revenue but were able to increase profits by reducing their spending on wages, property and technology.”

That’s something we noticed last week. This is what we wrote to Australian Wealth Gameplan subscribers last Friday:

“Last week we conducted a simple exercise. We looked at the company results for that week as reported in the Australian Financial Review (AFR). It printed the earnings results for 131 companies – large and small. As you’ll have read in the mainstream press, a lot of companies produced bumper profit results, such as Flight Centre [ASX: FLT]. What the mainstream press didn’t report was the less than exciting news on the revenue figures. Of the 131 companies detailed, just over half (66 of them) reported lower sales revenues than the previous corresponding half-year or full-year.”

It wasn’t just ’some big companies’ that reported falling revenue, it was half of those companies that reported during that one-week period.

What does that tell you? Well, as the AFR reports, many companies have slashed costs in order to beef up the bottom line. So the first question is whether they can keep doing that?

The other question is whether they can increase sales by as much as the market is now pricing in? Our guess is that will be much harder to achieve. And much of that is down to the sense of false security and the misplaced belief that the bright economists and central bankers have engineered Australia’s escape from the global meltdown.

The economy is growing, companies are hiring again, miners are mining stuff, credit is booming, and everything appears to be ticking along as though nothing has happened.

And as for that old subprime stuff, well surely that’s all fixed up, and no-one will make that mistake again. Trouble is, it’s often forgotten that subprime wasn’t the cause of the problem, it was the effect. The cause of the problem was excess credit and government interference.

Excessive credit simply manifested itself as subprime loans. Subprime borrowers were the means by which politicians could parade themselves as helping the poor, and by which bankers and young gun traders could earn themselves a bucket load of cash.

Therefore, solving the subprime problem will do no more than shift the excesses of credit elsewhere.

We’ve seen that before. Look at Enron. The trading guys at Enron weren’t specialists in electricity trading. They were young kid traders sat in front of six computer screens who just had to click ‘buy’ or ’sell’.

As soon as Enron collapsed they went off looking for other things to ‘buy’ and ’sell’. Many of them probably ended up trading credit default swaps and other such derivatives. Financial instruments that they were just as ignorant of as the electricity market.

Solving the global meltdown by blaming it all on subprime and removing that risk is like taking the keys from a youngster who’s been driving a sports car too fast, and instead handing him the keys to a 3000cc motorbike.

There will still be carnage it’s just that it will look different.

As much as the mainstream commentators may claim that lessons have been learned and that Australia didn’t have a subprime culture, it all misses the point. The old habits of excessive borrowing are still unchanged, and in fact are likely to get worse.

So the message is, if you’re looking for the next big economic meltdown to come from the US subprime housing market, odds are you’re looking in the wrong place. So where will it come from?

We’ll look at that another day. But our guess remains that you need to look north. Because China is brewing up quite nicely right now.

Cheers.
Kris.

However, economist Warren Hogan has warned that quoting the internet job ad figures isn’t ideal. “Newspaper ads are a more reliable indicator than ads on the internet because people have to pay for them, or at least the cost is higher.”

Phillip Lowe from the Reserve Bank of Australia (RBA) has warned that the Australian economy could grow at a faster than average rate, which will fuel inflation. Read more here.

The Dow Jones Industrial Average was up by 11 points, finishing the session at 10,564.38. Wall Street has had the best twelve months rise since the great depression. In fact, the Dow is up over 60% since the same time last year.

In the UK, the FTSE was lower by 4 points, closing to 5,602.30. Strong oil prices drove stocks like Royal Dutch Shell [LON: RDSA] higher by 0.77%, but the major banks and miners dragged the index down.

The Nikkei closed at 10,567.65, lower by 18 points. Three companies will be added to the Nikkei 225 Index as of 2nd April, JX Holdings [T: 5020] and NKSJ Holdings [T: 8630] and Nisshin Steel Co [T:5407].

The three companies being removed are Nippon Oil Corp [T: 5001], Nippon Mining Holdings Inc [T: 5016] and Sompo Japan Inc [T: 8755].

The price of spot gold in Australian dollars is trading at $1,226.63 while in US Dollars it is trading at $1,121.45. The price of silver in Aussie dollars is $18.89 and in US Dollars it is $17.27.

A survey conducted among hedge fund managers shows that the US currency is the favorite for 57% of funds. But, the Australian Dollar and Brazilian real are distant seconds.

The Aussie dollar versus the US dollar is USD$0.9149, against the Japanese Yen JPY82.31

Crude Oil closed at USD$81.38.

For the biggest movers on the market yesterday click here…

That’s it for hump day. See you tomorrow.

Shae.

SLASHING the Bank of England’s base interest rate to an historic low of 0.5% was supposed to “rebalance” the economy…tipping it away from galloping consumption towards an export-led recovery.

But all that the Pound’s slump since rates began sinking in March 2008 has done so far, however, is gift a 50% gain to UK gold owners.

“While we were hit with a great recession, we now know that the world has indeed avoided a great depression,” said UK prime minister Gordon Brown at a Reuters press conference in London this morning.

Just as with the war in Iraq, however – another “shock and awe” campaign planned with little thought for the collateral damage – we’ll never know how things would have panned out if brave men like Brown hadn’t done “whatever it takes”. And just like in Iraq, victory has been declared way too early.

New data today showed industrial production in the UK sinking to 1991 levels. The employment rate has sunk back to 1996 levels, meaning a net loss of private-sector work when you allow for Brown’s intervening civil-service jobs jamboree. And despite the collapse in Sterling, the UK’s trade deficit has been widening for more than a year, verging at last count on the record 3% of GDP hit at the very top of the credit bubble, 2005-2008.

“Let us be clear,” says Brown, “the economy is growing, but remains fragile.”

And the cost of this success…?

• The interest paid on the average cash ISA account now lags retail-price inflation by 3.3 percentage points per year – the worst real returns to cash in over three decades (source: Bank of England and ONS data);
• Annuity rates have fallen by 6p in the pound, offering barely £6,000 per year on pension savings of £100,000 (source: WilliamBurrows.com);
• Real wage growth – on average, and after inflation – has gone negative for the first time since 1974, falling well over 1.5% since March 2008 (source: ONS data).

Not quite depleted uranium. But just as insidious.

“In the medium to long term, inflation has to come through,” says Nouriel Roubini’s latest fixed-income hire at RGE Monitor, former Citi managing director and wealth-management strategist, Arun Motianey.

“Just allow it…just admit it. It doesn’t matter where the inflation comes from. It doesn’t have to be through monetization of public-sector deficits, although at a pinch we may need to do that. What I am saying is that if we do get cyclical [demand-driven] inflation, then let that inflation stay…allow it help to write down the real value of debt.”

Naturally, Motianey was talking to CNBC this week because he’s got a book to promote. (We’re all shills in the end, remember.) And naturally, so as to make a few a sales, his policy prescriptions conclude with handy tips for investors on “How do you preserve purchasing power, how do you preserve savings?” amid the inflation which Motianey says we should (and shall) get.

We can have it both ways, in short. Debt can be inflated away, while creditors are somehow protected. I can’t say whether gold bullion is part of his saver’s solution. But when fixed-income economists beg for inflation…and pretend that savers won’t get screwed in the process…you’ve got to wonder where else you can hide.

Adrian Ash
for Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

The general gist of most responses – to paraphrase – has been, “patent protection is important to protect small businesses and inventors from greedy thieving big businesses.”

We’re paraphrasing, so no-one actually wrote that. But some weren’t far off it.

However, we won’t tackle this subject again today, as we’d like to do more rummaging around first.

Until then we’ll throw this question out there: Doesn’t patent protection benefit big businesses more than small businesses and inventors?

Right now, we don’t know the answer for sure. But our inclination is to think that big businesses love patent protection because they’re the ones that derive most benefit. And the ones that derive least benefit are the consumers.

But as I say, we’ll cover this topic again some other time – maybe next week. Until the, feel free to make any comments on this thought and any opinions you have on the subject here.

For today’s subject, we’ll look at something a little different. A subject that could alienate at least half of the Money Morning readers.

It’s always dangerous broaching a subject when we know you may not like what we write, but as you’ll be aware that rarely puts us off.

This morning a couple of news stories caught our eye:

“Gender pay gap shows no sign of abating” – news.com.au

“Bosses to fund parental leave” – news.com.au

Our initial response to these stories is: why would anyone want to lose their competitive advantage in the workforce?

That’s right, if it’s true – and statistics suggest it is true – that female employees are generally paid less than male employees then attempts to ‘close’ the gender pay gap have the potential to rob female workers of one of their competitive advantages – that they are prepared to work for lower pay than male employees.

Whichever way you look at it, whether it’s employers ‘exploiting’ female employees or female employees having little choice but to accept lower wages, the statistics suggest that female employees as a whole do accept lower rates of pay than male employees.

Again, that’s the stats talking.

Therefore it’s reasonable to argue that this is a competitive advantage for a potential female employee. That she can undercut a potential male employee by implicitly or explicitly offering her labour services at a lower cost than a potential male employee.

Let’s take a look at a chart showing the male and female employment numbers since 1978:

As you can see, employment numbers for both have risen over this time. The number of male employers has climbed by around 50%, however, the number of female employees has more than doubled.

What’s the reason for this? Is it due to pay equalisation? Or is it due to fewer restrictions on women entering the workforce?

Or, is it because employers are able to pay female employees less than male employees? Giving female employees a competitive advantage over their male counterparts.

The problem with the idea of forcing pay equalisation on employers is that it’s more likely to create a greater inequality of pay or cause a shift of employment.

Let’s think about it this way. What does an employer want from his or her workforce? Well, they want their employees to produce as many products or sales for them as possible in return for paying as low a wage as possible.

At some point an employer will discover an equilibrium rate of pay at which he or she knows that employees will be happy with. In all probability this will entail different rates of pay for male and female employees – the numbers say that’s true.

But make no mistake, the employer doesn’t set these rates because they are an evil capitalist, they do so based on experience. And it’s likely – as the statistics show – that female employees are prepared to accept lower wages in return for their labour.

It’s fair to argue then, that as more females have made themselves available to enter the workforce in the last thirty years, employers have hired more females based on the ability to pay them a lower wage than they would pay for a male employee who is doing the same job.

Again, that’s not us saying that, the statistics say it is so.

Now, here’s the problem with pay equalisation and paid maternity leave. It robs the female employee of their competitive advantage.

When a female is applying for a job, whether we like it or not, one thought process going through an employer’s mind is whether the potential employee could leave to have a family. And as you know, when a child is born, overwhelmingly it’s the mother not the father that forgoes employment to care for the child.

Of course, it’s against the law for the employer to ask if the female candidate is planning to have a child, so they have to guess. And because they don’t know for certain they may choose to take out an insurance policy by offering the female candidate a lower rate of pay.

If the employer can get away with paying a female job applicant a lower wage than a comparable male applicant then maybe the employer may take the risk. But what if there is now pay equalisation?

Will the employer still take the risk if he or she believes there’s a chance the female employee could ask for time off to look after a new family? Prior to pay equalisation, the employer could have factored that in to the lower wage, but with equal pay the employer can’t do that unless the wage rate of male employees is lowered to the same level as female employees.

And that creates another problem. Our guess is that it qualifies as a social problem.

Again, whether you like it or not, many male employees are likely to think it ‘unfair’ if they’re getting paid the same wage as a female employee who takes six month’s maternity leave, or is away once a fortnight to take care of a sick child.

Or if you want more stereotypes – doesn’t work on the weekend, or in the evenings, or has to pick the kids up from school, etc…

We all know that’s a stereotypical view of the female employee, but the fact remains that the majority of male employees are likely to have those thoughts, even if they’re new age metrosexuals.

The consequent knock-on effect of pay equalisation is that it could harm the employment prospects for prospective female employees. How so?

For a start it could mean fewer females employees are employed by businesses. If there is still the perception that male employees expect a higher rate of pay to female employees then it’s possible that employers will be less inclined to employ females on the same wage.

The other potential knock-on effect is that male employees shift employment to workplaces that offer higher wages, pushing out higher paid female employees.

We note an article from The Age newspaper last year, “Male teachers shifting schools.”

According to the article:

“Educators were perplexed about the drift of male teachers to non-government schools… Australian Education Union president Angelo Gavrielatos was equally puzzled…”

Reasons they give is that perhaps male teachers are being enticed to private schools at the expense of public schools.

Again, we have no idea whether that’s true or not. The article quotes Independent Schools Council executive director Bill Daniels, “It’s not a concerted effort by us and I can’t imagine why the figures would be that way.”

Well, one potential reason is the phenomenon we’ve mentioned above. That male employees are conditioned to expect a higher wage than female employees. If the state schools system mandates equal pay for male and female teachers, and male teachers consider it to be ‘unfair’ then surely there’s a greater chance that male teachers will seek higher paying jobs.

One way of doing that is to seek employment in the private education sector where wages are usually higher.

In other words, pay equalisation in one industry – public schools – has a knock-on effect of increasing the number of male employees in another industry – private schools.

Therefore we can also suggest that a further effect is fewer higher paying jobs for female teachers in the private sector as they are facing increased competition from male teachers.

Look, we don’t have enough space to cover off every scenario here. Naturally, there would also be circumstances where employers prefer to employ more women and fewer men, and are therefore able to set the equal pay level closer to the level acceptable by female employees rather than male employees.

But either way, the overall effect isn’t a bumper payday for women employees.

The fact is, like every other attempt at market manipulation by governments, at the initial point of impact the appearance is that the policy has been successful. Yet as soon as you look at the collateral damage it becomes apparent that many others have suffered as a consequence.

Quite possibly, this could be the most unpopular article we’ve ever written for Money Morning – although that comment itself could be seen as patronising! – but the reality is that pay equalisation and paid maternity has to be paid for from somewhere.

One way is an attempt by businesses to charge higher prices. But this is difficult, as businesses would already charge higher prices if they thought they could get away with it. The fact businesses haven’t raised their prices already suggests their ability to do so is limited.

Therefore the cost has to be born elsewhere. And the only other ‘elsewhere’ is in job losses or a net cut in wages.

There’s little doubt that pay equalisation and paid maternity leave won’t create a new dawn for women in the workforce. Odds are it will do nothing more than lower the overall job opportunities for women in the higher paid jobs, and consequently lower the pay in the lower paid jobs.

We could be wrong, but it’s worth thinking about.

Cheers.
Kris.

The news that’s bound to make the market jittery this week is the European Commission’s proposal for a European style International Monetary Fund (IMF). The purpose of the European Monetary Fund or ‘EMF’ is to rescue countries that have landed themselves in massive debt.

The Dow Jones Industrial Average was down by 13 points, to 10,552.52. It was an ordinary trading session for the Dow.

There was good news for share holders of Cisco Systems [NASDAQ: CSCO] which added 3.65% after JPMorgan upgraded Cisco, suggesting that their future earnings and outlook looked strong. While not a component of the Dow, the makers of the BlackBerry®, Research In Motion [NASDAQ: RIMM], jumped 5.6% after an analysts upgrade for the company.

In the UK, the FTSE added a tiny 6 points overnight, closing to 5,606.72. The UK market had a quiet trading session, and it appears investors were taking a breather after a strong finish last week. Overall, the Footsie is up 200 points since Tuesday last week.

The Nikkei was up 216 points (2.09%) to end the session at 10,585.92.

The price of spot gold in Australian dollars is trading at $1,236.87 while in US Dollars it is trading at $1,124.42. The price of silver in Aussie dollars is $18.98 and in US Dollars it is $17.24.

The Aussie dollar versus the US dollar is USD$0.9092, against the Japanese Yen JPY82.09

Crude Oil closed at USD$81.75.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

As you may have noticed, we’re not very formulaic with Money Morning. We don’t have a system where we write about one thing one day and then switch to something else the next.

Sometimes we may harp on about something for days on end. Hopefully that won’t try your patience too much, but we do like to wring as much as we can from a subject before moving on to something else.

And right now we think we’ve wrung that one pretty dry… For now!

So today we’ll take you back in time by a couple of months. You may recall that in January our colleague, Chris Mayer editor of the US investment advisory Capital & Crisis was in Australia on an investor’s tour.

He asked us to turn up as a guest speaker, which we did, where we blabbed on for 45 minutes or so about the Australian market. Seeing as what we spoke about was a concise version of what we write in Money Morning, I won’t bore you with the details.

Instead, I’ll take you through what some of the other guest speakers had to say.

In summary, there was a US based technology company, a New Zealand agricultural investment trust, and two Aussie small-caps.

Actually, the small caps were more like micro-caps. Too small and illiquid for us to consider as a tip in Australian Small-Cap Investigator, but interesting nonetheless. I won’t reveal them today as there isn’t the space, but you’ll read about them in Money Morning next week.

Today let’s take a look at the US based technology company. And unfortunately it isn’t yet listed. It’s in what they call the pre-IPO stage. In other words you can’t buy shares in the company on the stock market, all you can do – if you’ve got a big enough wallet – is buy a stake in the firm while it’s still private.

Obviously, there’s a lot of risk in that as you may either find it hard to sell your investment, or you may have to take a pretty big ‘haircut’ on the price if you need to sell your holding before it goes public.

But the hope pre-IPO investors have is that the company will turn into the next Microsoft or Google. That they can turn a USD$100,000 investment into $1 million, $2 million or $10 million when the company does eventually list its shares.

The downside of course, is that it never goes public and you’re left licking your wounds thinking about what could have been.

But the plus side for this company is that it’s already built up a pretty good list of paying clients such as AT&T, British Telecom, The Los Angeles County Bar Association, and lots more – including Australia’s own Macquarie Group.

And the firm’s representatives were out here for scheduled talks with Australia Post as well.

So, who is this company, and what does it do? Well, its name is RPost. In a nutshell – I won’t go into all the details – it provides a registered post service and electronic signature service for email.

Now, you may think, “Hang on, I can use the ’send receipt’ facility in Microsoft Outlook, and scan my signature into the PC already.”

While that’s true, based on what the guys at RPost say the Outlook system is neither foolproof and nor is it good enough, particularly when it comes to legal documents.

Take the Registered Email service. This provides an automatic record of when an email has been opened without the receiver of the email having to do anything. It means there is an instant ‘paper trail’ for anyone who sends important emails.

Because not only will you have proof that you’ve sent the email, you’ll also have proof that the email has been delivered and opened.

Look, for most people this level of ‘paper trail’ isn’t important. But you can certainly see how it could be applied for certain corporate or legal email use. The good thing about it is that it’s an opt-in choice for the sender. They can choose to just send a normal unregistered email if it’s not important to have a paper trail, or click the RPost button if a paper trail is required.

And as for the electronic signature, it allows legal documents to be sent across the country in an instant, signed with a legal enforceable electronic signature and then sent straight back. It can turn a 2 or 3 day turnaround time into a matter of minutes.

However, there was one aspect of the presentation that didn’t sit well with your editor. Don’t get me wrong, I like the product and I can see a pretty big market for it. But, it was when they explained how RPost had worldwide patents that prevented competitors from providing the same or similar service.

As we recall from the presentation – we didn’t take a note on this bit – RPost has taken out legal action against around half a dozen companies for possible patent infringements.

Again, as we recall, most of those have been settled out of court, with the remainder still being negotiated.

As you know, we like competition. But we can also appreciate that if you have the law on your side, you’ll do all you can to prevent competition from entering the market. In this case – as with many others, particularly in pharmaceuticals – patent protection provides many favours to those that hold the patent.

That means it can use its privileged government sanctioned position to lock in a monopoly on this line of business. If anyone else tries to offer a similar service they can be sure they’ll get a visit from RPost’s lawyers.

As we say, if that’s the law regarding patents, any company would be mad not to use it for their advantage.

But the way we look at it, patent protection is terrible for consumers.

The argument is always put forward that without patent protection companies wouldn’t bother to innovate because they would know another firm could just copy their product and potentially release it to the market first.

Therefore patent protection is necessary so that it gives the ‘inventor’ enough time to work on and develop their product. And as a reward for all the effort it’s only fair they should have the first crack at the market, unhindered by competition.

On the surface that seems reasonable. Why would you think of great new ideas if you knew someone else could instantly copy your idea?

The reality is that when you consider it properly, the argument doesn’t make sense.

There’s little difference between being the first to market and being fourth to market in terms of the risk you’re taking as a business. Does that make sense? Let me try and explain…

When you’re first to market with a new product you’ve either invented something that’s completely new that no-one else has previously thought of, or you’ve taken an existing method and improved it.

There could be others, but we’d think that covers the two main ones.

But when you’re second, third or fourth to market then you are either providing something similar to what’s already available, or maybe you’ve made some improvements to an existing product.

The point is, as the fourth company that enters the market, you’re still taking a huge risk. In fact you could argue that the late mover in the market is taking an even bigger risk than the first mover.

The first mover had the benefit of patent protection and a head start. The first mover was able to build up market share while the fourth mover had to wait on the sidelines.

Granted, the fourth mover could gain some of the benefits by having a ready made market to enter, but it still runs the risk of business failure just like any other business. Perhaps even more so as it doesn’t have the same ‘leg-up’ that the patent holder had.

So, how would it work if there weren’t patents? As we’ve mentioned, the argument is that people or firms wouldn’t innovate unless they were given protection over their invention.

Without patents, inventions could be lost forever as inventors would maintain complete secrecy for fear of their idea being exposed and exploited by someone else.

Those are pretty strong arguments to try and counter. But we’ll try.

The alternative way of looking at it is that without patent protection, there would be greater urgency by firms and individuals to bring their idea to market.

Rather than spending a considerable amount of time and resources on launching legal action to prevent another firm from offering the same product to a waiting public, firms would scramble to be the first to market.

For the consumer that would have to be good news. More firms competing to provide a brand new product from day one would likely lead to lower prices much sooner. Rather than waiting five or ten years for the cost of a product to decline as more competition emerges, perhaps costs will not be high to begin with. Or maybe prices would drop after just months rather than years.

The pharmaceutical industry is probably the biggest abuser of patents. Years and years, millions and millions of dollars in development costs and legal fees to prevent competing drugs from being released to the market.

But would pharmaceutical companies still look to develop new drugs without protection? After all, the costs to develop a drug that may never make it to the market is huge.

Well, we’re sure much smarter people than your editor have already done a bunch of research on this. But we’d be prepared to say that investors would still invest, and companies would still innovate.

It’s human nature, not patent protection that makes us all want to work less, or do things easier, or have medicinal drugs that will make us better. The demand from consumers will still be there even without patents.

And just as importantly, the desire by entrepreneurs and business men and women to seek out new ways to make profits will also still exist. Whether they end up actually making a profit or not is irrelevant. Some businesses will and some won’t.

Drug companies would still look for a cure for cancer or AIDS. They would do so because of the massive potential reward if they unlock the secret. Sure, under a patent they could potentially end up with bigger profits in the short term, but even without a patent, if they produce the same result, they’ll still make handsome profits.

And those profits would arrive sooner due to the urgency to be first to market under a non-patent system. Their urgency to act now would increase five or ten-fold.

In the case of RPost, governments have granted it the right to provide a registered email service to the exclusion of all other potential competitors. Competitors that may have invested an equal amount of capital and risk into their inventions.

Yet because RPost – and other patent holders – secure a government favour, consumers are prevented from enjoying and utilising the services of others that may not only be better but could also be provided for a lower cost.

In our view patent protection should be kicked into touch. Market forces and innovation by entrepreneurs would ultimately ensure consumers gained access to the best new products in a more timely fashion.

Cheers.
Kris.