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Podcast episode

French Journalist Guillaume Pitron argues the Digital World is Costing the Earth – EP189

French journalist Guillaume Pitron discusses his book “The Dark Cloud: How the Digital World is Costing the Earth” with guest host Tim Hughes. The book explores the environmental impact of the digital world. Pitron delves into concerns about energy usage, e-waste, and the carbon footprint of the internet. The episode concludes with a debrief of Tim by regular host Gene Tunny on the conversation. 

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You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest

Guillaume Pitron is a French journalist, author and filmmaker. He has written two books, published in some fifteen countries, about the natural resources needed for new technology. He has been invited to share his ideas in the French and international media (Le Figaro, BBC World Service, Bloomberg TV, El País, La Repubblica) and at international forums and institutions (Davos, IMF, European Commission, Unesco).

Link to Guillaume’s website:

https://www.en-guillaumepitron.com/

What’s covered in EP189

  • Introduction to this episode. (0:06)
  • What is the dark cloud? (1:27)
  • There is no digital life without rare earths. (3:54)
  • What is the real cost of digital technology? (8:06)
  • What’s the cost to the environment? (13:07)
  • What can we do as individuals to make this better? (17:38)
  • Facebook’s Lapland data center. (22:22)
  • Facebook uses hydro-electricity to run its servers. (24:25)
  • What happens if there’s no water? (28:05)
  • What is the future of the internet going to look like in 10 years? (33:18)
  • Are there any governments around the world that are taking steps forward to regulate the internet? (41:02)
  • What can be done to address this issue? (43:59)
  • What were the main takeaways from the conversation? (48:11)

Links relevant to the conversation

The Dark Cloud book:

https://scribepublications.com.au/books-authors/books/the-dark-cloud-9781922585523

Digital Cleanup Day:

https://www.digitalcleanupday.org/

Jevons paradox:

https://en.wikipedia.org/wiki/Jevons_paradox

It appears the Amiga hard drive Gene’s neighbour in the late 1980s had was a 20MB hard drive:

https://bigbookofamigahardware.com/bboah/product.aspx?id=534

Transcript:
French Journalist Guillaume Pitron argues the Digital World is Costing the Earth – EP189

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. This episode features an interview with French journalist Guillaume Pitro, about his new book, The Dark Cloud, how the digital world is costing the Earth. Guillaume visited Brisbane a few weeks ago for the Brisbane Writers Festival. I was in Adelaide when he visited and so Tim Hughes stood in for me and interview VR. I’m very grateful for Tim. First, I’m going to play the conversation between Tim and Guillaume. And then I’m going to catch up with Tim for a debrief on the conversation. I hope you enjoy it.

Tim Hughes  01:27

Okay, so welcome to Economics Explored. I am Tim, you’re standing in for your host, Gene Tunny. And we’re very excited to have with us today Guillaume Pitro. I’ve pronounced that correctly. Very well. Thank you. And Guillaume has a couple of books out that we’ll discuss. But the main one at the moment is called the Dark Cloud. So again, without any further ado, would you mind just letting us give an overview or give us an overview of the Dark Cloud?

Guillaume Pitron  01:56

Well, again, thank you for receiving me here in Brisbane, I am giving Bitcoin, just to introduce myself in a very few words, a French journalist based in Paris, I am an on the field reporter. That’s what I do most of the time, do documentaries and also write books. The Dark Cloud is my second book published by scribe in Australia. It’s basically a worldwide investigation, which took me two years on the trail of my email. Yeah, if I do send an email to you, for example, you’re sitting just less than a minute away from me, where does my email go? What is the real trip of my email between you and I, and actually, the real distance between you and I is that one metre, it’s several 1000s of kilometres, because this data will actually travel through 4g antennas, Wi Fi boxes, but also submarine cables, constellations of satellites, it will be stored in data centres maybe all around the world. So it’s a huge infrastructure that has been built over the last decades by the digital industry, in order to make us live connected. And we are not aware of the physical impacts of the so called virtual life, and also of the environmental costs of being connected. This is what the book is all about.

Tim Hughes  03:18

That some really interesting because I know that this is a subject that has been talked about quite a lot. And one of the areas that I mean, for instance, particularly here in Australia, so we have a lot of rare earths rare metals at our disposal for mining. So some of the areas that you talk about the the environmental cost, the human cost of our digital technology, our use of digital technology. What are the biggest pitfalls or what are the biggest problems? So you talk about, for instance, you know how far that email goes, for instance, what are the costs of us environmentally and a human cost.

Guillaume Pitron  03:54

For the rarest extraction? Yeah, okay. First, there is no digital life without rare earths rares is you find rare earths into your smartphone. And this is the magnet of your phone, which vibrates is made of iron, boron, and a rare earth, which is called neodymium. So you wouldn’t be able to be on silent mode, if you didn’t have rare earths to make your phone vibrates. Basically, this earth is in a way being extracted in Australia, in the Western Australia region. And most of the barriers are being extracted in China, where I’ve been several times I’ve been in rare earths mines and refining areas north of China, south of China for the last years. So I can tell you that extracting these resources is nothing but virtual, everything that is called virtual stems from a scar in the ground which are called a mine. And the refining process of the rare earth is actually very, very dirty. You need to separate the rare earth using water and chemicals. The water which is very polluted is just being rejected directly into, into the nature, it causes cancers, a lot of problems right for the human health and also for the environment. And you have in your phone not only one rare earths, but you have 60 metals in your phone, whether it’s cobalt and lithium and graphite to run the battery, but also a silver, a bit of gold, you have Indium in your phone, on your phone in gym is a mineral, which in the form of powder, makes your phone tactile, so you wouldn’t be able to leave your modern life without having an tactile screen, which is made six to indium, once again, this is being studied in China. So basically, all these metals come from mine, and it comes at an environmental cost.

Tim Hughes  05:45

So is the is the issue of the processing of those minerals. Is that where the impact is largely found mostly? Yep. And so does that vary around the world, I mean, what was the percentage of where these minerals and metals come from?

Guillaume Pitron  06:02

On the initial basis, these metals would come from third world, underdeveloped countries with less strict regulations and the one we would have, if we were in Australia, or in Europe, or in the United States and Canada, we’ve been offshoring the production of this metals for the last decades, we haven’t wanted to have this metals being extracted on our ground, I may make an exception for Australia, because you’re the world’s most producer of lithium. But most of the time, we just have preferred to let poor countries extracting these resources in a way, which is just not consistent with an environmental standards, not sustainable. So that we could just get the metal refined, cleaned. And we could say how we can use this metals for virtual and clean technologies. This is where the paradox is, I wouldn’t be able to precisely give you a figure like in terms of percentage, it depends from a metal to one another. But most of the time, you will find this resources in China, in Burma, in Indonesia, DRC in Africa, and also in South America, for instance.

Tim Hughes  07:12

So DRC, that’s predominately cobalt. Is that right?

Guillaume Pitron  07:15

Yeah, from the Democratic Republic of Congo DRC, you may extract, this is a country, which extracts and trades about 60% of the world’s cobalt production. And you have no smartphone without such a cobalt, which is being used for batteries.

Tim Hughes  07:33

So it’s really the processes in the extraction and the processing of those minerals and metals. That’s the issue.

Guillaume Pitron  07:41

Most of the environmental costs of the digital world comes from the manufacturing of the tablets, the screens, smartphones, sorry, 4 billion units are being used and speak to you right now around the world. Each of them requires such metals. So manufacturing these devices, these electronic devices, is the main cause for digital pollution. This is very first and foremost, a material pollution or resource production pollution.

Tim Hughes  08:14

I think that leads us into one of the other questions which I was going to ask, because part of the this unseen, this invisible side of our digital technology. One thing is the hardware. And then the other one, which he started off with, which is that you know that an email, for instance, appears to be of very little consequence or very little energy needed. However, that’s not the full story. The energy consumption is one of the big issues as well as that right.

Guillaume Pitron  08:40

So once I’ve said that, making a phone stands for the most important part of the digital pollution, that doesn’t mean then that watching video on streaming, or sending an email doesn’t have a cost, right? Basically, I can give you a figure of if you send an email to someone with a big attached piece like one gigabyte, we roughly consider that sending it emits about 20 grammes of co2 into the atmosphere. 20 grammes is as if I was driving 150 metres with my car in for one gigabyte, for such an email. Yeah, so basically, you see, it’s not that much, but it’s not nothing. And if you keep sending emails and emails, and we send every day 363 billion emails, mostly spams, still. And if you add to that, well, you know the costs for the environment or of you know, swiping on a dating site or watching a video, listen to music. I’m not saying here is that we shouldn’t do that. I’m no the Taliban and coming here to tell you don’t listen to music because it has enormous environmental cost. But I’m just saying, even if it’s the short impacts, little impact for each and every tiny action that you have on your phone, if you multiply that by the 4.5 billion users of internet multiplied by the number of digital interaction that they have every day, that starts meaning something,

Tim Hughes  10:12

The invisible part of it is that normally when there’s a resource involved, water, electricity, etc, we have to pay for it, you know, we pay for them as utilities. And, and so it’s clear, if we leave a tap running, we’re going to have to pay for that. So even though it’s, it’s poor management, it’s expensive. And we can see that. So it seems to be there’s a bit of a disconnect with our use of digital technology. And like I say, understanding really the real cost of this because it’s taken up elsewhere. It’s out of sight, all that information. I mean, I was thinking, for instance, I’ve got 20,000 photos on my phone, I don’t need 20,000 photos on my phone, I got 800 videos, I mean, it just accumulates. So that is sitting somewhere that’s taken up,

Guillaume Pitron  10:58

Actually, the photos on on your phone, there are in the cloud. Yeah. So I mean, you believe that these are on your phone, that may be actually, they may be stored on your phone, but they may be on your Apple drive or whatever things and actually you connect yourself from your phone to an account, which is a server, which is somewhere sitting into data centre, wherever it is. So you access the cloud, because you access the pictures, which are once again outside of your phone.

Tim Hughes  11:29

So there’s a there’s a cost to that.

Guillaume Pitron  11:32

The cloud is a data centre, whatever you use your phone, whenever you want to send an email, you’re not sending an email to someone else’s phone, you’re sending an email to someone else’s account, your Gmail account, which is stored somewhere and this person will connect herself or himself from him his phone or her phone to such a server which is stored with other servers in huge warehouses, which are called data centres. And a data centre can be can be as big as dozen soccer size of a dozen of soccer fields. And you find hubs of data centres all around the world. Washington, DC, Sydney, Paris, Frankfurt, London, Beijing, it says a commonly accepted figure that there are around 3 million data centres around the world where all of our data are stored. And these data centres, you know, cannot break down there cannot be any electricity breakdown. Because that means that you can’t access your emails. And you don’t want that right. So if you want to make sure that you get an access to whatever device, whatever internet service for 24 hours a day, you want to make sure that the data centres are running all the time that the data is being replicated in another data centre. So that if the first data centre runs out of electricity, another one is just working instead of the first one. So you duplicate the infrastructure in order to just you know, secure the service continuity of the internet. And this needs electricity to run. And this is where we realise that there’s some points where the cloud touches the ground. And when it touches the ground, it needs to be fed with electricity, which comes either from coal, or from oil, or from a solar power plant or from a nuclear power plant. And this, again, is a cost.

Tim Hughes  13:28

That currently stands at 10%. Is that right? Yeah,

Guillaume Pitron  13:31

10% of the world’s electricity is being used for digital technologies. And that figure is going is increasing at such a fast pace, that there are some, you know, estimations saying that these 10 person may become 20 persons within a decade.

Tim Hughes  13:48

Okay, so it appears to me that like it seems to be, amongst other things, it’s very much an efficiency situate or an efficiency problem. So for instance, like, if emails and pictures and everything was physical, and we could see them, and we were to put them in our backyard, our backyard would become very messy very quickly, we would be compelled to tidy up. This is out of sight. It’s somewhere else we need to as consumers be aware that there’s a cost to this, which is I guess where you’re coming from? Is that right? This is a sure this is a big message. I mean, very much it opened my eyes massively like this. I had no idea. I knew it was something but again, I didn’t really know what understand these terms cloud, etc. A very fanciful or ethereal, whereas in fact yet as you’re pointing out, they’re real.

Guillaume Pitron  14:36

And this is what’s interesting what you’re saying because that maybe that makes me rebound on Education Day, which has been created a couple of years ago by an Estonian lady. She’s an activist, and she created I forget her name right now, but he she created the first World Digital cleanup day. So basically, you’re not going to go into the streets to clean the rubbish on the sidewalk. You’re going to go back to your phone and your computer, and you’re going to follow a course it’s going to take you a couple of hours during that specific day, usually takes place in March depends from countries to countries in my country, France, it takes place in March. And basically, they’re going to tell you how to clean, not your room, or the sidewalk, but to clean your email to clean your cloud. And you’re going to realise that on the rubbish of your cloud, there had been for years old pictures and old videos, yeah, which were still being, you know, kept in the cloud, running thanks to electricity, and you just didn’t know them. So how do you clean that? And how do you actually make a good contribution to the environment by following such a course. But as you said, it’s about cleaning your digital world in a way. The name of the girl is Anilee Overal.

Tim Hughes  15:51

So could you say that again.

Guillaume Pitron  15:54

Anilee Overal, the Estonian militants who created this world digital cleanup day.

Tim Hughes  16:01

That’s really cool. Because it strikes as being an education, which I guess is a big part of your message is like to let people be aware of it, because people will generally do the right thing. If they know,

Guillaume Pitron  16:12

Oh, yeah, we’re turning virtual. Everything is dematerialised, your paycheck in is a cloud. Okay, why not about the cloud, you know, people don’t really understand what that really means. They don’t understand that all these virtual things are really material, very physical. And the first challenge here, as you say, is to educate. And we are just at the beginning of this process, where we just try to understand what this reality is all about. And how do we educate the young generation, the climate generation, they want to do good, they’re on strike on the Fridays, telling me not to take planes and not to eat meat. But actually, they’re spearheading such kind of a pollution. And they’re just not really aware of that. And so the very first challenge is to make people understand that this is becoming big.

Gene Tunny  17:03

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  17:09

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Gene Tunny  17:38

Now back to the show.

Tim Hughes  17:42

Part of this is this efficiency, you know, reducing the waste and stopping the habits that produce more waste, you know, so, for instance, if you’re taking photographs to delete the ones you don’t want and try and minimise the ones that you keep thinking about what you send as an email, trying to minimise all of that. And should we be deleting as we go far more because I know that my email for instances and there is this with spam, and all sorts of other things. It’s a massive, I can’t imagine what percentage if it’s easy to put a number on it, it’s okay, if you don’t have one, but spam obviously contributes a lot to it. There’s so much unnecessary information being stored, it’s clear. So we can do some things as individuals, are there any technical or is tech coming to the party with this to try and make it a little bit more efficient.

Guillaume Pitron  18:32

First, where you could do run the next World Digital cleanup day course, maybe all the picture that we’re talking about, I’m just talking about my own example. Yeah, my phone is an iPhone seven, I don’t have much space into my iPhone seven, which is a good thing. So I don’t change my phone. So that, you know, I’m running out of space at some point, so that I have to take my pictures out of the cloud. And I just put them on a hard drive on an external hard drive. And that doesn’t cost much more to the environment that just storing it in this device that puts less picture on the cloud. What you could do personally, individually to, which is a very important thing is to keep your smartphone and other computers as long as you can. Yeah, I mean, once again, my example iPhone seven, I bought it three years ago, it was a secondhand phone already. And for the last three years, I’ve broken it seven times, four times the screen twice, I had to change the battery. And one time I had to change the main button. But that could be repaired. And actually, I still have the same phone and maybe I can keep it for three more years. And maybe once I don’t want it anymore. I can resell it. If we all do this rather than changing our phones on average, every 18 months, 24 months. Yeah, it’s a huge it’s makes a world of a difference because this main pollution impact, which is once again, the manufacturing of the phone, you can developer to issue keep your phone twice as long. So that’s a very important thing to do. And then you ask me another question, which I forgot

Tim Hughes  19:59

well I was going to, part of that was what the tech companies are doing. Like if they’re on board with this, I mean, because clearly, so for instance, in that regard, they’re looking to sell phones, you know, as a business, they’ll be looking to sell their hardware. So, and I know that, in many areas, the quality of many things has dropped in our printers, for instance, like it’s cheaper to buy a new printer than No, nobody gets one fixed anymore, which is an awful waste of resources. And it’s a really bad way of, you know, going around business for us as custodians of this planet, if you like, you know, so is there anybody in the tech space that’s looking to make this better.

Guillaume Pitron  20:39

It starts being something which companies care about, and they care about it, because first, it costs money to change devices every two years, it costs money to run your data on electricity for service company, the digital devices, and running the digital part of the company may account to 30% of the consumption of electricity of such a company. And it’s also becoming a reputational issue you want to have in your company’s new brains from the new data generation very much worried about the, you know, environmental impact of everything they do. You need to have a message here, and you need to do actions. And I’m very much invited myself by companies, which are just like, we want to be better in a way. And suddenly we realise that there is this new chapter of human pollution, which is digital, how do we cope with this? What do we do? And obviously, they’re starting to understand that. And Google and Facebook and Amazon are very much into these things now, because they don’t want to be seen as being ecologically non friendly companies. You know, when you have Greenpeace, you’re flying a huge balloon over the data centres. And the headquarters of Google in California. And what’s printed on the balloon is How clean is your cloud? That is the good for the reputation. So they want first to green, their electricity mix. They want to say, oh, okay, we need electricity. But this electricity come from solar panels and wind turbines. It doesn’t emit any co2. They do offsetting also, which is kind of a problem, in a way kind of a scam. Because you never know, where’s the trees being planted in? I can tell you many more stories about that plane is claimed, basically, yeah, very much. And also, what Facebook is doing is very interesting. Facebook has been moving some of its data centres for European consumers to Lapland, they moved it close to the Arctic Circle to cool your data, because your servers, the servers where your data is, are actually heating to 60 degrees Celsius, that need to be cooled back to 25 degrees. So either you use an air conditioning system, which is very much energy intensive, or why don’t you move the cloud to places where it’s just naturally cold. So your exercise videos of cats and other emails are literally sleeping under metres of snow in the nose of Lapland, where I’ve been? Alright, I’ve been there. I’ve been to send a data centre not inside I was just outside of it. Yeah. But basically, I was where my Facebook account is. Well, the good news for Facebook is to say, well, not only is it cold, so I use less electricity. I don’t need air conditioning devices. But the thing of the thing is, they say whatever electricity I use, it comes from agile electricity plants.

Tim Hughes  23:21

So this is they’ve got one in Sweden. This is face but would you like to tell us more about about that the hydroelectric plants so I’ve

Guillaume Pitron  23:28

been there. I took a train from Stockholm crossed the Lapland in order to meet my friends, because we’re all there. literally speaking. Yeah, there was a lady in the train. And she came to see me she was just she just wanted to discuss her number. She was a tourist. And she said to me, okay, you want to travel? What are you doing here? And I said to her what I was doing and she looked at me she was just like, this is gonna cycle literally speaking, I went to this data centre couldn’t get in and took my stuff on a picture with all this huge warehouse behind thinking my WhatsApp account is here. My I don’t have an Instagram account. Our Instagram accounts are here. My Facebook accounts are here my 600 and something friends are literally here. This is where all of it is. It’s not for the European, the African Middle East consumers, okay for your designers truly, I believe they are storing US States probably in Oregon, where Facebook is. Okay, the data centre from Facebook is in Oregon. So basically there was a story and then I figured out but so the electricity comes from the Lhuillier river. And this is on that reverse that back in the 60s, some electricity dams. Hydroelectricity dams have been built, not for Facebook because no one at the time knew that Facebook would come to an existence, but Facebook is still using this electricity infrastructure in order to actually run my Facebook account. And I found out by travelling through Lapland, that back in the 60s Is the Swedish state had dried up. So small little river for about 15 to 20 kilometres. And this is the driest. This is the longest river ever dried up by human activity in Western Europe, in order to change the direction of the water and feed this hydroelectricity dam, there’s a guy here, a horrible Mo, I had an amazing countering with him because he’s no is in 60s, but even for the times back in the 60s, where suddenly from one minute to the other, this part of the rivers a smaller river just ceased to exist. It’s just disappeared, and is still crying for this Lost River. And is writing is trying to attract Facebook attention, saying, Have you got a single ID about the impacts of running the electricity that makes today your infrastructure work? So that was amazing story that was in place before? Yes, Facebook is not responsible for the, for the building of such an infrastructure. But Facebook does still today use such an infrastructure. And it keeps this river still dried up today.

Tim Hughes  26:15

I mean, I guess, um, any hydroelectric plant that was in Australia, there’s the Snowy Hydro plant down the snowy mountains. I think it’s 2.0. Now, I’m not too sure. But that has been going since the 50s. I believe like a you know, it’s and now they are big, any damage or anything is gonna have consequences, I guess for downstream. It’s the waterways of the world are getting very much challenged by agriculture and the taking of lands and everything. So it’s sort of getting into into different areas in some ways. But what we’re talking about in many ways is resources and not not wasting those resources. And so the amount of electricity used to fund our digital technology, our habits is significant and growing. So water is also one of those resources. Yeah, that’s getting that’s getting challenged. Sorry, gone.

Guillaume Pitron  27:10

No, no, because we are surfing on internet, we are looking videos and streaming. But let’s take it literally these expressions, these phrases, literally, we literally wouldn’t be able to surf on internet, if there was not water for real.

Tim Hughes  27:28

And now when you mean as a resource,

Guillaume Pitron  27:32

as a resource for making the electricity producing the electricity as part of the process as a resource for refining the metals that are being used in your phones and other servers as cranes as a resource for running the air conditioning systems, the data centres, a big data centre may use as much as 600,000 square metres of water every year. So you need such a water for making internet work. And yeah. Is there risks that at some point, you couldn’t serve anymore on internet? Because there is no water?

Tim Hughes  28:06

Well, this is I guess, with any resource, it has to be managed wisely. And with water. There was something with the NSA in America. So we had a quick chat about this before we started recording. So would you mind? Sure, just telling the listeners,

Guillaume Pitron  28:20

the National Security Agency stores that are from everyone. And back, I think it two sons 13 as they started to run their biggest data centre, and they made it run in the city of Bluffdale, which is in the state of Utah. As you will understand this data centre needs water in order to run the cooling systems. The thing is, we are in Utah, which is the secondary states of the United States, some local journalists started to ask the question to the NSA. But what is your consumption of water? The NSA would first reply, I don’t want to tell you because if I tell you how much we are consumed, that will tell you information about how much data store, okay. Eventually, they found out and the NSA replied, and it was clear that the NSA was not consuming that much water, taking water out of the Jordan River, which is just running through Bluffdale city, Byrd suddenly some NGO militants, and we’ve had the moment where it was Snowden hadn’t made the revelations about all this surveillance politican stuff. And they start to think but if the NSA doesn’t have water, there is no operations anymore. What if we strike an action on courts in order to forbid the state of Utah to make water available to the NSA? What if we could afford or to the NSA? Maybe this is the actual tool of the NSA. And if there is no water, we just stopped as a server and stuff, because this is the resource that is being needed for surveillance, which is an amazing story, right?

Tim Hughes  29:58

So with that, so Same with the water would be diverted towards civilian use or towards the NSA is that there

Guillaume Pitron  30:05

was no such a conflict of usages. Okay. So once again, there wasn’t so much question of consumption, so the water would have probably remained in the Jordan River and whatever kind of things. But once again, if the water cannot be fueling the NSA the same way as oil can be fueling a motor of a car. You don’t run this system anymore. And there was a thing a bit crazy ID that this NGO militants were having. They were being supported by also by a local senator or local parliamentary member to stop the civilians literally by by just stopping the availability of such an important resource for such a panopticon.

Tim Hughes  30:48

Right. Okay. So the implications are far reaching, basically. Yeah. Okay. I want to circle back to the question of efficiency. So cryptocurrency? I guess that’s included in our digital technology very much. I know that the the energy consumption for cryptocurrency to perform is really high. I’ve heard statistics that it takes the same amount of energy as Portugal, as a whole country does for all the transactions to happen, especially for the Bitcoin. Yeah, because last year, I think it was last year Aetherium managed to develop a new way of doing their transactions where it’s massively undercut, I think it was 99.9% reduction. That’s right. So that kind of tech, technical, technological improvement, if you like that efficiency, is there anything on the horizon in other areas where we might be able to clean up our act by just reducing the amount of power that we need to run our digital technology,

Guillaume Pitron  31:47

the data centre industry must no respect some specifications, which are being called the P e, u e, the power unit efficiency. So basically, it is a ratio that tells you how much power you need, in order to run a server to run a certain amount of data. And this PUE can be very high, maybe close to two. And then you can go as low as as low as 1.2, which shows that your data centre is kind of more eco friendly. And the more we are going with, you know, investments in researchers, the more the PU E is going down, and the more it’s a good news and the more the industry can say, Look, we’re doing efforts in order to store our data and to run the internet in a more efficient way in a more ecologically friendly way. And once again, this is important that is good. This industry tries for reputational reasons for money reasons to do better, I think is we can take that for granted because we consume more and more and more data. So at the same in the same by the same token at the same time. We keep discovering new ways of using the internet. Yeah, this is new cryptocurrencies. This is maybe tomorrow creating new avatar in the metaverse this in requesting, asking questions to the chat boat chat GPT for Yeah, that’s

Tim Hughes  33:12

the new thing. AI is a massive new one. Definitely arising introduction to this.

Guillaume Pitron  33:18

Yes. And, you know, 10 years ago, we would not have thought that we would be speaking in 2023 about you know, Metaverse and Chad GPT. For what is internet going to look like in 10 years? Nobody knows. But it’s going to be crazy. We are just in the, you know, very early ages of the internet. We’re just turning. We’re just discovering this new technology. Where will it take us in the future? I don’t know, what I’m absolutely sure about is that is going to make us produce more and more and more data. And this is what a techno profits from the Silicon Valley, an American techno profits, cause the Internet of Everything is advocating for the Internet, everything, the internet, the internet of everything is basically we’re going to connect everything, my glass will be connected, your body will be connected with sensors, animals will be connected trees will be connected, we’re going to connect everything because everything that is connected, produces information, produces data speaks to someone else, or some or something else, which is connected. And that is information, which is money and which is power. So we are in a world where on one hand, technologies are getting much better, and much more efficient, very good news. But on the other hand, there is a rebound effects. Oh, because I don’t have any impact on the internet because for each data I produce, it has less and less impact. Why don’t I just you know, produce and consume more data. And the other dynamics here is the fact that in the next 15 years, humankind with will probably produce and consume 50 times more data than what it does today. So there is a race here between the tech nology, which is getting much more efficient, and the fact that our usages of such technologies are getting exponential. So this is where the big story comes. figures tell us that in the next 10 years, the 10%, electricity consumption of the digital world might become 20. And the four persons of co2 emissions, which is more than planes might become eight persons. Yeah, I’m not sure. But if these figures are true, that means that the race is being lost by the technology, and that we consume more new data than the technology is able to offset them in a way,

Tim Hughes  35:35

how much difference can we expect to make through changing our own habits? Like is that just not going to be enough like, because I can’t imagine the way that you say that the way that data is coming to us, it’s coming more and more from different directions. It’s unmanageable, in many ways, on a personal level, to sort of having a habit all in order. What’s the best we can do here? I know, we know, we sort of touched on this week we go back to it. And do we really have to depend, for instance, on the technology changing to suit us, you know, like, rather than us changing our habits to try and manage that amount of data.

Guillaume Pitron  36:12

You’re asking me a difficult question. Yeah. And I wish I would be able to answer to you in a clearer way. But when I look at the way we are using Internet today, when you want to look at the ways young generation is spending, its time, you know, sticked to talk in other kinds of devices. I don’t think there is anything here that relates to the very basic wisdom we should be having while using such devices. And I don’t think any of these new technologies are being offered to us in the future. Whether it’s Metaverse new cryptocurrency is the niche, next version of chat boat would make us use the internet in a more sober way. So I’m a bit worried in a way that we behave like child’s in front of this technology were so much impressed by what they can do. And we don’t want to change our habits. Now, there are limitations, which are starting to appear into the debates, limits to the way we will be using internet in the future. The first one can be ecology, as I speak with you right now, okay, so whenever I am on such devices, I have an impact on the planet. So that may, in the future, play a role in changing your habits, first and foremost, keeping your phone longer. Second, is democracy. We have seen states, including in Europe, trying to, you know, frame the use of certain social networks, because it spreads hatred, because it’s pray to fix news. And we want to protect a beautiful value, which is democracy. So you want to make sure these social networks don’t go too far in the face of such a value, which is democracy. And there’s certainly mutations that I see coming, right now is health, whether it’s your physical health, spending your days on your couch, watching a video on your phone, or whether it’s mental health, and we can’t count today, it’s the number of scientific studies, which are being produced, telling you how that much affects your attention capacities, such tic toc and other kind of things. I would like to believe that ecology, health and democracy may be some hurdles to just keep using these devices, without any real thinking about the impact that they may have. That makes a

Tim Hughes  38:43

lot of sense, because it can feel very insignificant as to what your own contribution might be to a solution such as this problem. But the reality is that we shouldn’t underestimate market pressure. So you know, companies, individuals, demanding or asking of the tech of the companies who are providing the services in this hardware, that they’re not happy with it, they’re not okay with it, and they want it to change. So that kind of pressure coming from the bottom up, is quite likely the thing that will most likely change what happens,

Guillaume Pitron  39:15

I very much agree with you. And we live in such a contradictory age in a way because on one hand, what I’m telling you, in my view, make sense is debatable. But I think we know we can understand this message. And on the other end, everyone understands that the country which in the future will be the most powerful in the cyberspace, cyberspace will, you know hold many strings of the future of geopolitics. So if you want to keep running in this race that we’re all watching right now between the United States and China, you need to be up to date with these technologies. 5g has come to France. And there’s not been such a big debate over the impacts of the environment of 5g antennas. The French that said, but we need to have our own 5g devices. Why not because they know what 5g will be used for. We have no ideas or roughly an ID. But because we don’t want to have Chinese 5g networks installed in France, with potential spying capabilities. So it’s all about geopolitics, accelerating towards the 5g is just because you want to remain independent, sovereign, technologically, independent from the countries, and you will still want to play an important role in the future of geopolitics. So, in a sense, what you were saying just a minute ago is so interesting, because we are codes in this contradictions involved in makes sense, but geopolitics. And independence from other powers makes a lot of sense, too. And I would like to be Macomb my president, or I would like to be Albin ease, and be able to see clearer in the future. How do I make a choice between these two contradictory messages?

Tim Hughes  41:02

That some as funny because that leads me into volley one is going to be one of my, my final questions. So I appreciate the time you’ve given us today. Is there any other any governments that are doing anything in this space, are making positive steps? In my view, what usually happens is what we mentioned before where it’s like, it’s the pressure from the voters, the people at the market demand, you know, that is often the most powerful things. And I think governments around the world are struggling to keep up with this, the speed of this technology. So things are being implemented before legislation can catch up with it. But are there any governments around the world who were making steps forward to try and take responsibility for the direction that this is all going in

Guillaume Pitron  41:45

from an environmental standpoint? So

Tim Hughes  41:47

all all of it really like? Health? Because I think the health perspective you mentioned is really, really valid, because the health implications from this are really quite strong, mentally and physically.

Guillaume Pitron  41:57

I have in mind the example of China, where, you know, there has been some regulations enacted by the state saying that when your Chinese teenager I think I’m not sure when you listen, under 1414, one four years old, you don’t have the right to use tick tock more than like 40 minutes a day.

Tim Hughes  42:17

And is that a regulated it within the household? Or is it on the devices? That’s I wouldn’t be able to tell you because there’s a parent, I know how challenging it is, but it’s not that they can’t be done. But I know, there’s challenges

Guillaume Pitron  42:30

the fact that the state says so in a know how the SLO is being respected. Yeah, tells you something about how the Chinese government can care in a way about the mental health of the young saying, all right, it’s fine to a certain extent with after that, you might get into trouble from mental viewpoint. In the United States, an average a young in the United States is spending seven hours and 22 minutes on internet every day, outside of school. So I would probably mention the Chinese state in terms of environment, the French are doing something right now they have passed a law, which is the first law in the world. I don’t say that they could infringe on here. But basically tackling on a general manner, globally is a question of the impact of internet on the environment. And so there have been many things being decided, whether it is that, you know, the tech companies must inform their consumers about the number of data that have consumed and what it means in terms of co2 emissions. There are some specifications to the data centres, and all this kind of thing. So that is, I think, a good thing that’s just starting, mostly North European countries, Germany are very much in advance when it comes to regulating such kind of ways of using internets, including on the environmental angle. But for the rest of the world, this is just an unknown subject. Yes.

Tim Hughes  43:59

And then that’s good to know that those things are happening in those countries, which is, which is a good start. And I guess it’s sort of points towards the fact that whatever needs to be done, clearly hasn’t been done on any level at the moment, just yet. But whatever can be done. Well, one of the things I guess about this as building awareness, which is what you’re doing is educating, making people understand what the issue is, and what the implications are around the world. The problems with the environment and the human costs that come with this. So that then we can take responsibility for this individually and as communities and countries etc.

Guillaume Pitron  44:36

Yeah, and this is why I quote Stephen Hawking in the beginning of the book, when he says the future is a race between the growing power of technology and the wisdom with which we’re going to be able to we’re going to be able to use it. And the such wisdom can only start with understanding with education. It’s a paradox that the knowledge economy and the knowledge technologies don’t make you knowledgeable about the way the work kind of products is going to take years before we understand all these technologies, which are being up in the air, or donor their feet buried into the ground in the form of wire networks, or laying in the depth of the oceans, in the form of submarine cable optics is going to take years before we really, you know, put some names figures and descriptions over this Leviathan, which we just don’t have an idea of because we haven’t sensed it with our senses. It’s huge battle coming in here, in order to to understand that enormous ecological challenge coming for the decades to come.

Tim Hughes  45:44

Well, that sounds like a good place to wrap this up. Do you have any further closing comments on that gear?

Guillaume Pitron  45:51

Pretty much. I don’t want to be looking like someone was coming to make lessons of normal. Because I use internet every day. I need internet’s to write my books. And I need you to podcast what I’m talking to you about. So I’m going to tell you, you know, you should feel guilty whenever you open your email account, or whatever kind of things. That’s not the position I can hold. And I really would like to make you understand that I’m adopting every day myself, I’m questioning myself all the time. But I keep always in mind this ID, this which is new to us, which is that whenever we will use internet in the future, we’re going to have to make something which we have never done, which is a cost benefit analysis.

Tim Hughes  46:38

Actually, that’s a really good question that I will put to Jim, because that’s his area of expertise. And so the book that you have is the dark cloud. Yep. And that’s now available, we’ll link to everything in the show notes, with some of the things we’ve talked about. And the Estonian activist will make sure she gets a link there. And you also have the rare metals war. So you have you’ve got my first book published was truly a couple of years ago. And I just want to thank you for the work that you do. Because I think it’s so important, you know, and it’s so easy to not be aware of this, I for one was somebody who had a feeling you get a general feeling that things aren’t always as they appear, and that there’s a cost. But thank you for bringing to light, the cost of our digital technology. And also, I would encourage all of us to have these conversations more and to know that it is something that will grow. And that we have a responsibility as we’re here now on this planet to ourselves and future generations to try and sort out this issue sooner rather than later. And if that then comes to how we might vote and what we might do with our personal practices with digital technology. We have the power. We have the power, we have the power. So Graham Photron. Very, merci beaucoup. Merci. Merci. And and thanks for everyone for listening. We’ll have everything in the show notes. And we’ll look forward to seeing you next time. Pleasure. Thank you.

Gene Tunny  48:11

Tim, he is good to be chatting with you again,

Tim Hughes  48:14

playing good to be here, Mike.

Gene Tunny  48:15

Thanks for filling into me for the conversation with Guillaume that was, that was great. I really appreciated it. You had a good conversation with Gam about his book, The Dark Cloud.

Tim Hughes  48:27

Yes, it was fascinating. I really enjoyed it really enjoyed it. Thanks for giving me that chance. And

Gene Tunny  48:32

overall, I mean, how do you think? Or how do you think it went? What were the main takeaways for you?

Tim Hughes  48:39

I was fascinated by what he had to say. And I really appreciate the fact that he was able to bring attention to this issue, because it’s clearly a big issue. And it’s growing. And I thought it was a really good thing to talk about. And to continue talking about because no doubt this is an ongoing problem that we need to work with.

Gene Tunny  48:57

Yeah, it’s important to raise this as an issue. It’s still unclear to me exactly how big a deal this is and how much we should worry about it. I guess what he’s highlighting is that the digital world is not necessarily providing the environmental benefit that people 30 years ago or 20 years ago may have thought it was we moved away from having paper, you know, paper based offices and, and also having more services delivered online rather than us having to travel somewhere or, you know, travel or conferences or whatever. So he’s highlighting that this increasing digital footprint that’s having an environmental impact. I think that’s an important point. It’s still unclear to me exactly. How big a deal this isn’t how much we should be concerned about. I mean, clearly we should be concerned about environmental damage, environmental impacts, and we have various regulations that are that are at attempting to resolve those. There is an issue with climate change, of course. And we know that internationally many countries aren’t really agreeing to on or they’re not they don’t have the framework or the policies in place to really do much about that. I mean, there’s a lot of talk. There’s not a lot of action. Yeah. So that’s, that’s possibly an area where you could argue that better policies are needed. You know, in other cases, there is, well, at least in Australia, there’s very stringent environmental protections. I guess the issue is, well, what if they do you know, that’s what Guillaume was talking about mining in the impact of mining in emerging economies, wasn’t he? So there there are issues. And so perhaps that’s something where it’s worth focusing attention on. And there needs to be there could be some international pressure to improve conditions in those those countries. Did he mention Congo? I’m trying to remember now. Yeah,

Tim Hughes  51:01

he mentioned DRC. And cobalt, most of the cobalt seems to come from there. And without a doubt, it’s the processes with getting these rare earths out of the ground, that are the issues, environmentally, and the human cost of that. So there was really, I mean, I thought it was very clear that there was some big impacts from our digital technology, our digital habits, that we should be aware of. And that can be improved on that was the big, I thought that came over really strongly. So just to repeat some of the figures, he said, 10% of the power that we use currently is running our digital technology. And that’s understandable, there’s going to be an amount that goes into it, we’re highly linked to the internet, really dependent on the all of this new technology. So it’s not surprising that there’s a cost there. However, the rate that that is expected to increase up to 20%. Within the next decade, it currently accounts for 4% of the carbon emissions, and that’s looking to double as well. So this is the tip of the iceberg in the way I guess, there were two main areas that I could see where this inefficiency was a problem. One was in the use of electricity with storing data and unnecessary data, which is, and it was something we were talking about a little bit before we did this wrap up. It’s unknown, I guess as to how much of this data that’s being stored currently in 3 million data centres around the world that Guillaume mentioned, how much of that data is necessary or not, which is, you know, can update for conjecture. But I think personally, we could all see from our own habits, there’s a lot of data that we have, that has been saved, that’s completely not necessary. So there’s an efficiency problem there for sure. That can be improved upon. And whether, you know, for any of us to go through our phones, or whatever storage, we have to retrospectively go through our photos videos is a daunting task that is unlikely to happen to be fair. So if technology can come to the help AI, with some kind of solution with this, which I know they have, they can detect duplicates, and this kind of thing. So that that kind of technology is already there, technology could hopefully come up with something quite clever to try and either compress the amount of data that we have, which is one possibility, I guess, or to somehow diminish the amount of storage that’s needed, because it’s clearly unnecessary for a lot of personal use, we don’t need anywhere near as much as we currently use. You mentioned before that it’s cheap data is cheap, which I think is great for the consumer. But this is, I think, allowing us to have bad habits of just being wasteful with the amount of things that we hold on to just in case or just can’t be bothered to delete because it’s too clunky or too time consuming currently,

Gene Tunny  53:50

well, I think you made a good point there. It’s too. It’s too time consuming. So therefore, if you’re doing this efficiency calculation, you should take into account the fact that if you were to go and clean it up, you’d have to spend all this time doing so. And yeah, I did mention when we were chatting, storage is cheap. And as an economist, I mean, as long as people are facing the irrelevant, or the proper prices at prices, which fully incorporate all the costs, then what’s the problem? I mean, if we want to have a lot of data stored online, there’s no real problem with that. I guess the issue does come if we’re not properly if businesses and are not internalising all the costs that they’re imposing on society if there are these environmental impacts that aren’t properly costed and then priced into the product so that your look that could be an issue, right? I’m not I’m not denying that. But in terms of the you know, the photos I mean, I don’t know how big a bigger deal that is and how big a part of the problem it is. And this 3 million data centres. factoid, that’s not the huge Google or Facebook data centres, there are 3 million of those around the world, he must be talking about various computers, various servers that are associated with different websites around the world. That must be what he’s talking about.

Tim Hughes  55:17

Yeah, I mean, we didn’t go into any detail of the sizes, but clearly, they vary in size, as some of the ones we did talk about with the bigger ones Facebook. Yeah, it’s an Oregon and was it Lapland I forget now, which country was part of that plan? Yeah. And Finland, one of the one of the colder regions, which makes sense, as far as energy expenditure goes, however, I thought it was really clear, like if that were those figures, as they stand 10% is a lot of power. And so there’s a real environmental impact from generating that 10% of electricity. So I think it was really clear that there were impacts big impacts already, which were only expected to grow. So I think whatever inspections can be done, they do need to be considered important, and also to be done as soon as possible. And but I do think that the big steps most likely will be technology steps, you know, somehow of reducing our capacity or not our capacity, but I need to source so much data. So if it’s a compression issue, I don’t know that

Gene Tunny  56:17

well, there is compression already. I think we’re probably solve the compression problem. They’ve got very good algorithms for compressing data. I don’t know how much more efficient we can get on there.

Tim Hughes  56:28

I mean, I’m coming from a non technical background. So I mean, you know, how, for instance, the initial computers were massive, and they became smaller and smaller to the point we had, you know, a small computer in our pocket that can take cameras has all this capability. That is amazing. Yeah. I don’t know how that happens. I just trust that, you know, it has happened. So I just go with it. And I just wonder, like, you know, hopefully, there might be some future leaps and bounds that we can do in the forms of storing data. You know, if that might be something if we might go through the same process of efficiency and finding better ways to to manage this before it gets more of a problem.

Gene Tunny  57:03

Yeah, in terms of storage technology. Yeah. Yeah, I’m not sure. I mean, I’m not an expert on that. Either. You were talking about the, the size, I mean, the compression comes into it, where you reduce something that is 10 megabytes down to two megabytes or whatever. That’s the compression. So it has a smaller storage requirements in terms of storage technology becoming better and, and cheaper. I don’t know. I’m presuming it will. I mean, I remember, back in 1989, my neighbour, Simon had a hard drive for his Amiga computer. And I think it’s stored a couple of megabytes. That was like a big deal for saw.

Tim Hughes  57:48

And that’s the thing, like, you know, neither of us are equipped to sort of see, I mean, clearly, there were constraints. And there are, you know, people are trying to no doubt make this as efficient as possible. Yeah. You know, so if, in, you know, in the meantime, what we can do, though, which are made some really good points is that, you know, we have a couple of options, you know, to store our photos or videos on external hard drives, which, like you said, rightly, before we started recording again, but that would come at a cost, to create that harddrive, etc. But the point being that, once it’s on that it’s not consuming electricity, to keep it stored, it’s not stored in the cloud, etc. So that’s one of the areas I thought was worth mentioning. And again, the digital cleanup day. So he mentioned, I think we worked out it was Anneli overall, as the Estonian activist, and, again, with whatever is at our disposal, now, we can use that technology or that little bit of time, or like, it’s okay. You know, we do the same with our gay marriage, or whatever storage we have at home, I think it’s okay to put a bit of time into into making our digital storage habits more efficient and less, less cluttered. So there’s good information on what does it digital digital cleanup day.org. So if anybody wants to check that out, there’s some good information there. So the other part of the efficiency process was back to what you were talking about with the rare earths and DRC, etc. And that was a big one big takeaway I felt was to hold on to your phone. So that’s in the hardware element of our digital habits, so phones, laptops, tablets, etc. The production of those is where all of this comes into it. And so if we can hold on to our phone, get it fixed. I think GM said he had an iPhone seven, and getting it fixed, meant that he wasn’t then getting the latest one, they’re all perfectly good. I don’t have to have quantum leaps of technology. With these things. You can do everything with, you know, a model that’s a few years old. And so there are definitely things we can do to to help with these current issues and to try and slowed down that dependence on requiring more energy to store and the issues that might come from extraction of these rare earths from different parts of the world.

Gene Tunny  1:00:09

Yeah, I’ll have to look up and put in the show notes. What that the size of that Amiga hard drive was it probably, I think it was a bit more than a couple of media or

Tim Hughes  1:00:19

anything I just said, Jane, are you just thinking about that? You’ve been thinking about that for a while. Sorry. That’s totally fine. I’m used to it. I’ve got three kids. But yeah, so quantum leaps in that regard in a relatively short period of Yeah, exactly.

Gene Tunny  1:00:41

Exactly.

Tim Hughes  1:00:45

That’s another big point, I thought was really interesting was the value that you put on democracy, you know, that we have the opportunity in democratic societies to make change. I thought that was a good point.

Gene Tunny  1:01:01

Yeah. Yeah, I think well, certainly is. Yeah, we hope that the changes are sensible. So I guess the challenge here is to come up with sensible policy recommendations and not just react to the fact Oh, there’s a lot of data, we’re using a lot of energy for the digital world? Well, of course, we are because we’re role online now. So what’s the actual problem? I think we’ve got to make sure the policies are addressed at where the so called market failures are addressed at tackling those who were not properly pricing the costs of, of the environmental impacts. So that’s what I would say.

Tim Hughes  1:01:44

I think one of the main points was this is out of sight. So we’re not we’re not aware of this cost, in power, or in environmental and inhuman impacts. It was just bringing it to the fore to bring it into view, I guess, you know, with with rubbish that we do household waste, etc, we can see that it gets picked up. And it’s it still goes into areas that we may not be so aware of. But we’re aware of that daily. Yeah, contribution to. And I guess this is like there’s a digital landfill that we need to be take some responsibility for. And I guess that was what I felt from from.

Gene Tunny  1:02:24

Yeah, look, I think he makes some good points. So I think it was a good conversation. And from doing the some reading on this, in preparation for our chat, I discovered that there isn’t really a lot of information or a lot of analysis of this. And there’s a great article I found on data camp.com that I’ll link to that goes through the impacts of digital technology in it right. And in that they write despite recent progress to improve corporate transparency, there’s still significant data gaps and blind spots and the evidence of environmentally relevant digitalization impacts, which I think is true. So it’s something that further research would be useful on.

Tim Hughes  1:03:04

Yeah, yeah. It’s a big subject, and no doubt one that’s going to stay with us for as far as we can predict at the moment. So yeah, it was it was good to get that perspective on it.

Gene Tunny  1:03:15

Very good. And one thing I liked about his book is he, he does talk about the economics of it. He talks about the Jevons paradox. I don’t know if you came across that I needed and talk to him about about that. But the idea is that as we become more efficient in something, rather than using less of it, we can actually end up using more of it because it’s, it’s cheaper, so electricity as we become more efficient, and well, if we become more efficient with electricity, so the use of electricity, more efficient lighting and refrigerators and washing machines, then those savings we just ended up, you know, getting more appliances in we that gives us some room to to use more electricity. And it can be that we ended up using more sounds like

Tim Hughes  1:04:03

Parkinson’s Law where yeah, we fill up the available space to do whatever we can. So if we have more money, we spend it if we have more, fill it.

Gene Tunny  1:04:12

Yeah, so I’ll put a link in the show notes on the Jevons paradox, which was originally discovered by a British economist Stanley Jevons. Thing was William Stanley Jevons in the 19th century with regard to coal. So I’ll put some I’ll put a link in about that. And that might be a good topic to cover in a future episode.

Tim Hughes  1:04:34

And there was a cost benefit analysis that Guillaume mentioned.

Gene Tunny  1:04:38

Well, I think he was saying that you really need to do a cost benefit analysis on any measures to deal with these issues. Was that what he was saying? Or you’d want to do a cost benefit analysis of our use of digital technology? Now my feeling is, it’s going to come out in favour of the use of digital technology,

Tim Hughes  1:04:54

for sure. And he was very clear with that, that he’s not against it, like he uses it. And so it’s not a question of, for or against, it’s a question of better use of and better practice in how we, how our hardware is made, and, and also being mindful of how much power is being currently used. And to see that, you know, wherever we can be more efficient in that whole process that we do what we can. And that was where the democracy sort of comes in, you know, we can, as voters, you know, this is something through discussions through this kind of discussion. And the kind of, you know, I guess this is the awareness that Guianas bringing to us. And it’s just making sure that we can have these conversations and talk about it so that, yeah, at some point, it can be better, or we can be less wasteful.

Gene Tunny  1:05:48

Absolutely. And I think he does the point that we’re not going to solve all these environmental challenges. If we just move to renewables and EVs, there’s still going to be environmental impacts that we need to think about. I think that’s a that’s a good point. So anything else, Tim, before we wrap

Tim Hughes  1:06:03

up? No, I really enjoyed it, Gene. And thanks again for giving me the guest spot. I really enjoyed it.

Gene Tunny  1:06:09

Oh, of course. Thank you, Tim. And one thing I should note, as you please check out the show notes, I might put in the the capacity of that Amiga hard drive for 1989. I may have underestimated underestimated that but it was very low relative to what they are now is quite incredible. Was it eight or 20 megabytes? I’m struggling to remember, but I’ll do some research on that. Very good. The 80s wonderful time. Okay, Tim? Yes. Thanks for your time. today. It’s been a pleasure. Right. Oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

1:07:29

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Podcast episode

Seaweed: the next big thing in sustainable agriculture? w/ Scott Spillias, Uni of Queensland – EP188

Seaweed is being advanced as a potentially important future food source, the greater farming and consumption of which could avoid environmental impacts associated with other agricultural production, especially of beef. Scott Spillias has recently submitted a PhD thesis at the University of Queensland on seaweed farming, and he’s been getting a lot of attention regarding his findings on seaweed’s potential. Show host Gene Tunny and Tim Hughes talk with Scott about the potential of using seaweed as an alternative food source. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. What’s covered in EP188.

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP188

  • The importance of plant-based foods in our diets. (1:36)
  • The market for plant-based foods is growing. (9:39)
  • Estimating the environmental impact of food production – the Economist’s banana index. (14:03)
  • Scott’ Spillias’s research on seaweed farming. (27:27)
  • How do you farm seaweed? What does it involve? (30:04)
  • Where can we grow seaweed in Australia? (35:14)
  • Seaweed has the potential to remove 2.6 billion tonnes of CO2 from the atmosphere per year. (40:02)
  • What kind of seaweed is growing in the world? (44:49)
  • How does seaweed farming prevent biodiversity loss and climate change? (49:50)

Links relevant to the conversation

Scott Spillias’s UQ page:

https://sees.uq.edu.au/profile/13311/scott-spillias

Australian ABC News article on Scott’s research “Seaweed researchers find bright future for underwater crop”:

https://www.abc.net.au/news/rural/2023-01-27/seaweed-research-uq-future-farming/101895072

Guardian Australia article on Scott’s research “Food, feed and fuel: global seaweed industry could reduce land needed for farming by 110m hectares, study finds”:

https://www.theguardian.com/environment/2023/jan/27/food-feed-and-fuel-global-seaweed-industry-could-reduce-land-needed-for-farming-by-110m-hectares-study-finds

Economist article featuring the banana index:

A different way to measure the climate impact of food | The Economist

UN and World Bank reports on food and climate:

https://www.un.org/en/climatechange/science/climate-issues/food

Chapter 5 : Food Security — Special Report on Climate Change and Land

What You Need to Know About Food Security and Climate Change

Review of scientific evidence on “Risks and benefits of consuming edible seaweeds”:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6551690/

Please note the key message of the above review:

“If the potential functional food and nutraceutical applications of seaweeds are to be realized, more evidence from human intervention studies is needed to evaluate the nutritional benefits of seaweeds and the efficacy of their purported bioactive components.”

Transcript:
Seaweed: the next big thing in sustainable agriculture? w/ Scott Spillias, Uni of Queensland – EP188

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I’m talking about a bit of a quirky topic with Tim Hughes. My colleague at Adapt E1conomics, Tim helps me out with business development. We’re talking about seaweed. So a little bit quirky. Yeah, but there’s a reason for it. And I might just have a brief chat with Tim about that. Tim, good to be chatting with you. Yeah. Good to be here, Gene. So Tim, we had a conversation with Scott Sebelius at University of Queensland, he’s been doing a PhD on seaweed. And there is a logic to looking at seaweed because there’s this conversation going on about what future food sources are. That’s where a couple of different reasons. So you thought this would be a good topic, didn’t you to cover?

Tim Hughes  01:36

Yeah, I think it’s really relevant because there’s clearly a huge increase in the demand for meat, certainly in places like China, where the the amount of meat per capita has has gone up remarkably, over the last 20 years. And but around the world in general, and this has been well documented the pitfalls and the dangers for the environment, in that mass production of meat. So there’s a lot of plant based foods or, you know, meat alternatives, for instance, that are coming through, which, you know, there’s a lot of good research to show that that can help the situation. Remarkably, and also be good for us. Like, you know, I don’t think there’s any nutritional advice out there that says to eat less fruit and veg, maybe a bit less fruit but on the whole It’s like eating plants is good for us.

Gene Tunny  02:28

Well, according to Kelly Starrett, oh, we’ve got to eat 800 grams of fruit and vegetables each day, isn’t that right? That’s right. Yeah. optimal health. Now that’s, that’s a challenge.

Tim Hughes  02:38

It’s a really good is excellent book built to move has just been out recently. And I think he borrowed that from someone else. I can’t remember who originally came up with that. But it’s, it’s worth sharing. Because yeah, it’s a very simple premise of having 800 grams a day of plant food. And so the premise being is like, because it’s very easy to just go for the stuff you like, if you’re like kiwi fruit, for instance, if you have 800 grams of kiwi fruit, well, you’re gonna get sick of it. So the idea with just 800 grams and not putting any stipulation on what it is, is that people will generally mix it up a little bit, just to get that variety. But if you want a direction with it, the direction would be to get a good array of colours, primarily vegetables, and some fruit and 800 grams a day is a good target

Gene Tunny  03:30

Right, okay. So I thought this would be okay, this is a bit of a quirky topic, but I think it is relevant. And it’s, it’s something that we should look at on this show or consider on this show. Because, well, food security is incredibly important. And this is another way we could help improve food security, I mean seaweeds and other possible source of macronutrients as they call it. So it’s got some protein in it has an ad. And then there’s some mean carbohydrates, I suppose.

Tim Hughes  04:01

Yeah, I’m not too sure if the nutritional constitution of the different seaweeds but I know, they always score highly on the nutritional scores as in, they’re not high in fat, they have no fairly high vitamin content. But it’s what you can do with it. And this is where one of the questions that comes into I guess that there’s only so much seaweed, I guess that in its raw state or cooked state that people would eat, but it’s the opportunity of using it and processing it to create other foods. That is where a lot of the opportunities are. But it’s also where a lot of the questions are as to well depending on those processes. And you know how healthy the final product would be, because any process generally degrades the food quality or the nutritional quality at some point. Our friend Paul Taylor, who we listen to quite a bit he’s he’s got a really cool way of looking at food which is low a chai, which is low human interference and So if it’s an ingredient and not full of ingredients, and it’s generally good to eat. And so when we look at something like seaweed or kelp or whatever, it’s great. But then we do have to really consider the processes that then it might have to go through before it ends up on the plate as whatever it is. Because there’s, yeah, it’s probably reasonable to expect we’re only going to eat so much kelp or seaweed.

Gene Tunny  05:21

Well, well, yeah. So this is what I want to talk about. And think about, because this has been pushed by certain bodies and such as well, UN and other international organisations. They’re arguing we need to, to eat more plant based food, more plants, essentially. And seaweed is one of those potential foods. And so I thought, well, this is interesting. But and, and the reason that these bodies and I’m not saying whether this is good or bad at this stage, the reason that these international organisations are doing that is because they’re concerned about the contribution of, of agriculture currently for the food that it produces the contribution of that to climate change. They’re concerned that well, this is a major source of greenhouse gas emissions, I think it accounts for on one estimate. Well, looks like it’s a bit, there’s a wide range. In the IPCC report on chapter five on food security, about 21 to 37%, of total greenhouse gas emissions are attributable to the food system. That’s a fairly wide range, I guess that shows how much uncertainty there is about all of this stuff, right. I mean, you know, it could be a fifth or it could be over a third, we, we just don’t know, but I guess it’s hard, because you’ve got to think about the impacts on the land and what it means for vegetation, and also transporting the food to all of the, the emissions involved in that. So

Tim Hughes  06:52

Yeah, and the other thing is like, I mean, I think it’s great, personally, because I think any exploration of securing different plant based foods for human or animal consumption is a good thing. And it needs to be, you know, researched thoroughly and taken seriously. But it is interesting that, you know, this could be done on a scale, because it now this is going to have to take a certain amount of space in the ocean. And so that’s going to be obviously a consideration as to where and how, but it’s certainly not beyond the realms of you know, it’s certainly not a barrier, we have a lot of ocean to use.

Gene Tunny  07:32

And this is what Scott’s research is on. So we’ll talk about, we talked, we talked about that with Scott. Yeah. So that was, that was really interesting. So I might just read from this UN report. But what the UN writes are theirs on their website, I’ll put a link in the show notes, alternative proteins, such as plant based meat and dairy substitutes, insect based proteins and cell based cultivated meat, provide promising prospects and are attracting growing demand financial investment and technological innovation. So there’s all of this research going on and r&d into these alternative food sources. Now, we don’t want a situation of course, where the UN or even our own governments tell us you must eat. It’s so you must eat cricket. So you must eat seaweed. We don’t want that at all, where we that we believe in, in freedom and liberty on the show for sure. So we don’t want that. My take on this would be to the extent there is a concern with the existing food system and contributions to greenhouse gases, and we need to do something about that, then the way to do it is get the policy settings, right. If we can get an international agreement on a carbon price, for example, that’s one way that you could do it. If you’re worried about land clearing for agriculture, then you could you could have things like biodiversity offsets, or that sort of thing whereby they have to try and improve the condition of the land somewhere else, or, or try and protect species somewhere else. Yeah, there are these sort of mitigating or offsetting actions that could be taken that we could require farmers to undertake so I think, so I wouldn’t want to have anybody telling us you’ve got to eat this, this seaweed or you have to eat crickets. But it’s about getting the policy settings right and and assuming that there will be action on greenhouse gases and we will be decarbonizing and we there will be changes over the next few decades, then look, it’s fair enough that there are people like Scott researching seaweed.

Tim Hughes  09:39

Yeah. And I think that the market is really strong in determining these outcomes. Like a lot of people want to eat clean, they want to eat healthily. And there is concern about you know, the amount of meat being eaten so, and it’s not to say that meat shouldn’t be eaten. That’s a choice for the individual. But the amount of meat that has been eaten And it’s certainly of question to the environment and also to your own health. I mean, there’s only, you know, there’s only so much meat that we should eat, I guess. And it shouldn’t be a choice. But I think a lot of people are really interested and willing to try these new plant based foods, you know, plant based meats, but especially if the company can show that they’re doing the best they can towards sustainability, ethical farming methods, etc. People care about that. And I think that market will drive the popularity of a lot of this research and a lot of the companies who might come into the market, because there’s a hunger if you like for, for these solutions, you know, a lot of people want to want to see these foods on the shelves.

Gene Tunny  10:47

We are seeing them on the shelves. Now, Coles and Woollies aren’t really the plant based. Yeah, and it’s good, you know, based meat. And

Tim Hughes  10:55

it’s not cheap, you know, which is one of those things that I guess with scale, the price can come down from that, because it’s hard to pay more for a lot of these, these foods, but if they can be really shown to be highly nutritious, and tick all those boxes of sustainability, etc. I think there’s the market will drive the success of those companies.

Gene Tunny  11:19

Yeah. And on seaweed, there was a study I found, while I was preparing for this, that I think there’s some evidence that seaweed can help reduce some health conditions like if you eat enough of it, and apparently it’s in one in five Japanese meals. So sushi, for example, it’s in sushi, isn’t it? So I won’t have the wrap. Yeah. But apparently, it’s in one in five Japanese meal. So they eat much more of it than we do. And I think that’s what Scott’s looking at. Well, what if Western countries started eating? Or seaweed was making the same contribution as it does in say, Japan? Or perhaps China? Or Yeah.

Tim Hughes  11:57

And to be fair, like him, I’m coming from a very, you know, from a Western background, I guess, like, we don’t eat seaweed in our house as a general thing. And undoubtedly, there are loads of ways to eat natural seafood and a really great way that happens in different countries around the world. That’s part of their staple diet. And so in many ways, it’s just being open to try new things. And yeah, and generally, the closer it is to its natural state, you know, the state that it was when it was harvested, it’s going to be better for you. So there are certainly options there that can be, you know, good healthy options for us to use straightaway.

Gene Tunny  12:32

Yes. Look, I mean, this isn’t a health podcast. So I can’t comment on that. I mean, I think that’s probably true. I mean, the more process something is, the more likely it is to be bad for you. And, and this is why that study, if I remember correctly, I’ll put a link in the show notes is saying that, where you have a diet that has a lot more seaweed in it, the people are less likely to have conditions like diabetes, for instance,

Tim Hughes  13:00

I mean, I am coming from my background in the health industry. With this, I do bring some, some background into it. And it’s, you know, it is that thing of like, yeah, if you can eat these foods, or going back to Paul Taylor, you know, low human interference, then it’s generally going to be good for you if you have something like seaweed before it gets processed.

Gene Tunny  13:22

So Paul Taylor’s got the Mind, Body, Mind Body, Brain Project, Mind Body Brain Project podcast, which is really good. We both enjoy listening to it. Yeah, he’s great. Not actually friends with Paul to

Tim Hughes  13:37

say that, because we talk about him often, as we do with several other podcasts that we listen to. So yes, friends, and

Gene Tunny  13:45

we would love to have him on the show. So if you’re listening for and you want to come on the show, and you know, we’d love to have you on to chat.

Tim Hughes  13:51

But it’s back to the good science. That’s so yeah, sure. It’s not advice, but check out. Paul Taylor, and Andrew Huberman is also really good with nutritional based information. Yeah.

Gene Tunny  14:03

Yeah. So I just wanted to in this intro, I just wanted to give some reasoning for why we’re talking about seaweed just seems like a bit of a quirky thing to have on an economics podcast, but there is a some logic to it. And it’s all part of this thinking about what’s the impact on the environment of the food we eat. And the economist, the international newspaper comes out of London, that that had a recent article that I found really interesting, a different way to measure the climate impact of food. I’ll put a link in the show notes, but it’s probably paywalled. And what they did, did I tell you about this they they estimated the impact of food in terms of bananas, so they compared food, different types of food with bananas. Indexing greenhouse gas emissions to a single food gives a sense of how different foodstuffs rank. Unfortunately for carnivores, beef is bad for the environment, no matter how you slice it. Producing one kilogramme of Minsk causes as many emissions as 100 kilogrammes of bananas, call it a banana score of 109. Adjust for nutritional value and Beast, banana score, it’s a hard one to say, boost banana score falls to 50 for one calorie of beef mince causes 54 times as much carbon emissions as one calorie of banana by protein at scores seven. Okay, so it’s that’s a really cool way of looking at I like that. Well, there’s some great charts in the in that article. So it’s worth it’s worth looking at the economist is renowned for coming up with these quirky ways of looking at the issues. So they had the Big Mac Index, I think, I don’t know if they still do it, I’ll have to check. I haven’t read a physical edition of The Economist in years, I get to digitally and just look at the the articles that that are of interest. But they had this thing called the Big Mac Index, which compared the cost of living in different countries based on what a big man Oh, okay. Yeah. Okay, now trying to use that as an indicator of whether exchange rates are overvalued or undervalued. I think that’s what they’re doing, if I remember correctly. Yeah, so they’re good at quirky things like that.

Tim Hughes  16:13

I mean, as for this subject, being relevant to economics, I think it’s really, it’s really relevant, because, you know, the direction that’s going in it is to try and do these new plants on scale, which can absolutely make a difference, you know, to people’s health and to the back pocket,

Gene Tunny  16:32

potentially. So that’s why it’s one of the things I wanted to, that’s one of the things I think we need more information on is just what will this cost? And in terms of calories, I mean, meat is, although it’s it’s, it can be expensive, but it can be a good way of getting your well the protein, it’s a good way of getting protein in whereas how much seaweed would you have to eat to get an equivalent amount of protein? And that’s where I think the problem is that what’s the cost of that? Will we actually want to do it? Well, will our tastes adapt? I think that’s one of the problems with these. Thinking that we could move to an insect based diet or, or a plant or a plant based diet more broadly, I think there are going to be barriers to doing that.

Tim Hughes  17:23

I think it’s only ever going to make up a part of the daily intake, you know, as any food would. Yeah. But certainly protein is one of the hardest ones to fit in like going back to Kelly’s Tara and his book. He talks about 1.6 to two grammes of protein per kilo of body weight. I think I’m sorry, that was Paul Taylor. And but it’s actually it’s comparable with what Kelly Starr is has in his book. Yeah, it’s funny because he is all about grammes of protein, two pounds of body weight, so it sort of flips over the measurements, but it’s quite a lot, you know, I come to get that amount of protein in from food is is tricky. So that’s where supplements can come in. And sometimes that, you know, that’s where the protein supplements are really useful to be able to boost your protein intake. Because it can be Yeah, it’s harder to do with purely food. Do you mean protein powder? Yeah, protein powder was a supplement is a good way to to boost that, okay. And that’s largely from milk, but you can get it from plants and also pea protein. And you know, there’s, there’s proteins from all over the place. Yeah, that will suit pretty much everyone, you get vegan proteins that have been processed in a way that’s vegan friendly. So it is it can be done. But clearly, there’s a process with it.

Gene Tunny  18:42

One other thing I should mention, and my colleague, Steven Thornton has mentioned this to me in the past, and I can’t remember if I’ve spoken with Steven on this show about about it or not. I have to look through the archives. This is pushed to have lab grown meat. Have you heard about this? Yes, the hub, which I think would be great, because one of the problems with the plant based meat is that it doesn’t have the texture or you just know it’s not meat. Whereas this new the lab grown meat, it’s it’s actually me, but you don’t have to raise you don’t need the actual cattle for the you grow it in a lab. And that’s more arguably more humane or, you know, it’s it’s more ethical to do that.

Tim Hughes  19:29

Yeah, there were a couple of I’m going from memory here and the, from when I looked at it, and that was released a year or two ago. I remember reading about there were two main sources, there was a protein that had been isolated, which could be synthesised to be like meat. And so that was like, fairly straightforward. They were growing that in the lab but the other one involved taking cells from a cow foetus for instance, and then growing it from that. So different ethical sort of origins. And also, you know, I think people might be a little bit uncertain about, you know, people still have ethical considerations when they want to have these foods. And so yeah, there was, it was early days in the lab grown meat, and I’m not too sure where it’s progressed to now. But that’s where the plant based meats come in pretty well, because ethically, there’s nothing really that some too funky that’s happened in the origins, because we all care at the end of the day. I mean, I’m sure most of us care about, you know, for instance, if we are going to eat meat that we would like that animal to have had as good a life as possible before it’s been, yeah, mercilessly slaughtered. You know, but because I mean, there are instances, for instance of beef production where the animals never see the light of day. Peter Singer was talking about that recently. Yeah, he mentioned that. And so ethically, yeah, it’s not great. And

Gene Tunny  20:52

doing poultry production.

Tim Hughes  20:54

There’s poultry, I think it was mentioned about cows as well, based on such scale, where it’s just this, they don’t have any outdoor time or space, I’d have to

Gene Tunny  21:04

look into that. I mean, that was not like we do it in Australia. I mean, we have this was overseas, they spend a few months or however long it is in a feedlot. And then before they go

Tim Hughes  21:13

to the abattoir, but in an ABC article,

Gene Tunny  21:16

I’m not sure whether be efficient. I mean, that it anyway, I mean, I’ll have to look into that. I wasn’t aware of that. I know that I think that’s an issue with the chickens, some chickens that

Tim Hughes  21:27

kind of that kind of those farming practices. No. So it is that thing, ethics has a big part behind the meat. Anyway, for sure.

Gene Tunny  21:36

Just on the chickens, the chalks, that’s a really, they’re really, they’re a lot better for the environment than than beef. So if we can switch to eating a lot more chicken, and I like chicken. So I think that’s, that’s fine, that would improve things that would be good for the environment. And so maybe that’s what we do, we see a lot more poultry. But I think the way to do it, I mean, because people aren’t going to follow any directive from the UN, the UN says, oh, you should eat more seaweed or whatever. Not that they’re explicitly saying that, but they’re hinting at that sort of direction, that we should have more plant based food, rather than the government saying you should do this. If we get those policy settings, right, then people will be incentivized, or they will naturally move to food that is better for the environment, if we are properly pricing, the impact on the planet, the co2 emissions, then, as I’ve talked about, on this show, before, we’re going to make sure everyone else is doing it. Because there’s no point Australia wearing a hair shirt, or Australia, or another major agricultural producer, there’s no point us undertaking these measures if if other countries aren’t doing the same thing. So that’d be the one caveat I have on that.

Tim Hughes  22:55

And I think with that, because it’s a similar scenario to coal, for instance, isn’t it? And I think when technology takes you beyond the point, so for instance, when in the instance of coal, when it’s cheaper to produce renewable energy than it is to dig coal out of the ground, then that’s when people will follow suit. And I guess the same would happen with food, you know, food can be produced economically on a scale, that’s healthy, that’s of no great harm to the planet, people will go towards that when it becomes affordable and available enough.

Gene Tunny  23:28

Yeah, yeah, exactly. And maybe that’s what we need to see, to see happen. Yeah, I mean, it may be that there’s this flywheel effect are there are these economies of scale that they discover as they start doing this in, in life on a larger scale with seaweed, I mean, it looks like Scott and people like that are looking into opportunities to where seaweed could be grown. And then there could be a demand for it to industry starts expanding seaweed production, and then their costs go down. And that reduces the price of seaweed over time. And that could help that leads to additional demand.

Tim Hughes  24:06

So I guess, with government, if they were to champion or back those kinds of projects, and that’s where maybe, you know, their biggest input could be, you know, in making those circumstances in those conditions as available and smooth as possible. And that could also attract, you know, new investment into regions. So there’s no reason why not, you know, so governments can be influential in that regard.

Gene Tunny  24:30

Yeah, well, apparently Australia’s got quite a lot of favourable locations for seaweed growing, which is one of the things we learned from Scots. It’s

Tim Hughes  24:37

got a big coastline. Got a lot of a lot of coast.

Gene Tunny  24:41

Exactly. Okay. So not such a quirky issue, after all, but again, I just want to reinforce we’re not saying you must eat seaweed. We’d never say that. We’re saying that this is it’s one of these alternative food sources that is becoming well there’s a lot more interest in it now because have concerns over environmental impacts of our existing food production system? And also concerns about health. And there are people well, particularly rich role of the Rich Roll podcast. He’s a big believer in the plant based diet. Yeah, I’d find it challenging. But I wonder about the nutritional benefits of it, I can’t see how you can have a balanced diet without me. But then again, I’m not a nutritionist, and this is not a health show. And so that could be a discussion. Well, that’s a discussion for one of those shows, or we’re gonna have that discussion. Outside of the podcast in.

Tim Hughes  25:39

I think it’s relevant. It’s okay, like people shouldn’t be changing their habits on what we say. But I think it’s part of the discussion. And as part of that discussion, it’s, yeah, 100% people can generally do much better by eating more plants, you know, like, ritual is a good example of that,

Gene Tunny  25:57

relative to where we are at the moment that if we’re consuming too much, too many too much meat or too much junk in our diet, then certainly swapping that with plant based food or plants or seaweed, for example, or that probably is a good news. Well,

Tim Hughes  26:15

that’s just one of the premises behind the 800 grammes of plants a day is that if you eat that much, then you’re less likely to eat, or have the appetite to have other highly processed junk food around that. So naturally cuts down the amount of processed food that you would have. So it’s fairly, you know, it makes good sense

Gene Tunny  26:35

to him. Very good. Well, we should get on to the conversation with Scott. Let’s do it. We’ll play that. And, Tim, thanks for the conversation again. Thanks, Jim. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  26:51

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Gene Tunny  27:20

Now back to the show. God smelliest Welcome to the programme.

Scott Spillias  27:27

It’s nice to be here. Thanks for having me. Of course. Yes.

Gene Tunny  27:29

It’s good to have you on. Tim, came across an article mentioning your work your research work on seaweed recently and thought it would be great to have you on the show for a chat. So Tim, what was it about that article that that interested you? And made you want to chat with Scott?

Tim Hughes  27:49

Yeah, it was really interesting. You know, we’ve talked before about new sources of food for humans or animals or, you know, as a fuel source and seaweed that I’d heard of before, but not spoken about in the scale that you had been researching Scott with your team? So yeah, maybe you’d like to tell us a little bit about what you’ve been doing? Sure,

Scott Spillias  28:12

yeah. Well, I’m doing a whole bunch of work on seaweed farming and trying to understand kind of what the, I guess Sustainable Development implications of farming seaweed on a large scale would be for the planet, you know, how we can use seaweed to address some of the global challenges that we hear, talk about things like climate change, and food security and energy security, things like that. So PhD that I’m just completing now is covers a wide range of topics. But yeah, the article that was published recently, what we wanted to know is we wanted to kind of see what it would look like from a global perspective, if we were to farm seaweed, almost on a similar scale that we use the land to produce things like food, feed and fuel. And so what we basically did was we came up with a few different scenarios of seaweed use, aiming at looking at those kinds of those things food, feed and fuel. And we use a big economic model called glow biome, which is the global biosphere management model, which is located at a Yassa, which is a research institution and in Vienna. And we basically, what that globe globe icon does is it looks into the future looking at population growth and consumption in different regions. And it basically predicts where you would need to grow certain amounts of food or feedstock to match to meet that consumption into the future. And so we made the scenarios we looked at where seaweed could possibly be produced in the ocean, how much can be produced, and then said, Okay, well, what if we were to, instead of relying completely on the land to provide for the growing global consumption, what if we instead use seaweed for some of that supply? And then we looked at how that would affect potentially potentially land use, climate impacts things like that.

Gene Tunny  30:04

Right? That’s fascinating is go Casca. I’d love to ask a couple of questions. One, how do you farm? Seaweed? What does that involve? Because you’ve got seaweed growing in the, in the ocean, but how do you, you’re doing it in a specific area? And do you have a handoff? What’s it involve? And second, what does the research say about where we could grow it here in Australia?

Scott Spillias  30:29

Yeah, certainly see where you can grow seaweed and a whole bunch of different ways. And to be honest, that actually kind of depends on what kind of see where you’re growing. See where it is? A pretty general term, almost as general is just saying, Wait, can we grow plants? So how do we grow plants, you know, there’s 1000s, of different species of seaweeds, and they all have their kind of unique characteristics, both in terms of what we can use them for, but also in terms of what you would need to do in order to cultivate them. And in some, in some cases, seaweed can actually be quite complicated to cultivate, they have pretty complex life histories. But in some ways, they can also be a bit simpler than like terrestrial crops. For instance, you know, on land, if you want to farm corn, you often have to put in a lot of things like fertilisers and pesticides, water, seaweed, if you’re growing in the ocean, you don’t, you shouldn’t have to input any of those things. So basically, all you need to do is put the soil things out there on the line, and hopefully just grow in places where there’s enough nutrients, you don’t need that water, anything like that. So, of course, the kind of complicated thing. And like I mentioned, there’s two main ways. Seaweed is often grown these days, oftentimes, people so in places like Indonesia, or in Africa, people grow seaweed tend to tend to grow seaweeds, and kind of intertidal areas where you can walk out, stick some sticks in the sand or the mud in the bottom of the ocean, but some strings, some lines between them and grow the seaweed on that. That can have some implications for whatever habitat was there before. But there’s a lot of research these days going into floating farms. And this is something that’s already practised in places like China and Japan and Korea, where you actually have kind of floating lines or rafts that are attached to the bottom, and you’re growing seaweed on lines at the surface like that. And that, you know, you can imagine takes a bit more infrastructure. And certainly, if you want to have a platform that’s going to last for a while it can, it can require quite a bit of investment in materials from that perspective. So yeah, so your second question. Yeah, go ahead.

Tim Hughes  32:38

Because that I’m just intrigued by the, it seems like there’s a few different size or scales, that this can be done, obviously. So I think I saw in your article or the article that I noticed your work, the sort of smaller farmers doing what you were saying, like with the estuaries, you know, putting lines out in a in a small way for their own sort of little income, which is great. But I’m intrigued by what the bigger operations would look like. And if that means then that, you know, it’s the shipping free area that you know, I imagined, any shipping going through that would would cause a lot of damage. Is that the case? Like is that is that one of the big challenges is selling off those areas?

Scott Spillias  33:18

Yeah, I’m not 100%. Sure. I think though, there are definitely a governance issue. And that’s something where that was, that’s something that we had, we could definitely learn a lot. So here in Australia, where seaweed farming is almost non existent at the moment, growing but not like, very small. We can definitely learn a lot from places like China and Korea and Japan where they have been doing this for a long time. Yes, you’d probably want to separate those areas in the ocean from things like marine traffic. It’s, it’s kind of an interesting question, to what extent we can integrate seaweed farming with other marine uses, though, and certainly in places like Europe, there’s a lot of work going into understanding how we can integrate seaweed farms with things like offshore renewable energy, recognising the fact that, you know, if we’re gonna be putting more things like wind turbines in the ocean, which is a certainly a growing industry, then if you already have that infrastructure there, why don’t we just string some lines between the wind turbines basically, and grow some seaweed on them. And so I think, for me, that’s pretty exciting. And that’s definitely something that we need to figure out. Because if we’re going to be investing in this industry on a large scale, and figuring out how it’s going to not compete with other marine uses is going to be a big challenge. And I think an integrated way is going to be the best use of marine space.

Tim Hughes  34:39

And what sort of size of those farms in China the the bigger commercial spaces, what sort of area are we talking?

Scott Spillias  34:46

I mean, off the top of my head, but couldn’t give you an exact figure, but they’re very big. So some bays are completely full of seaweed farms and in many cases, it’s not just seaweed farms, but it’s also I like bivalve farms, and sometimes fish farms. But yeah, certainly you can. You can go on Google Earth and look at some satellite images and zoom in on some coastal areas of China, and they are just absolutely full of seaweed farming. Right. Right.

Gene Tunny  35:16

Wow. And what about in Australia? Where could we grow seaweed? Scott? Yeah. So

Scott Spillias  35:22

when Australia those in our analysis, we find that Australia has a very large amount of potential certainly compared to other regions. Some of that might be a bit biassed just by the species that we actually incorporate into our analysis. And also could also be biassed by the fact that we rely on historical observance of observations of seaweeds. And so there’s a lot more kind of science and recording of those kinds of things happening in places like Australia and Europe and the US. But that being said, yeah, there are lots of places and I think we could probably, you know, there’s heaps of different endemic species of seaweed here in Australia. And like I was saying before, there’s a huge variety of seaweed species with a huge variety of uses. And I suspect that for almost anywhere, any coastal area in Australia, you could find a seaweed that would probably grow there. Whether or not it’s the right seaweed that you want to grow for your given market or anything like that may not necessarily be the case. But there’s a lot of seaweed species here and a lot of a lot of coastline. And not just coastline, but a lot of space in our exclusive economic zone. If we can kind of crack that nut of building offshore farms. So yeah, lots of potential. At the moment. There’s a lot of research happening in Tasmania, where I’m based now into growing seaweed, South Australia. There’s a lot in Queensland, it’s starting to pick up there’s a few in New South Wales, but it’s definitely starting to pop up all over the country,

Gene Tunny  36:50

Ron, and once the seaweed that’s been produced in China, so what’s that been used for? What is it being used for food and how and how is it processed? How is it prepared? And I mean, what does it taste like? I mean, if you can tell us something about that. I mean, that’d be great. Yeah.

Scott Spillias  37:08

I haven’t been to China myself yet. But yeah, pretty sure most of the seaweed that’s being grown in East Asia, a lot of its being used for food. So things like noise. So when you buy, you know, your sushi or whatever, that’s probably some of that’s coming from China. Probably some of it’s coming from Korea and Japan. But yeah, I think globally, food is still one of the main uses of seaweed biomass. If you look at places like Indonesia, where the seaweed industry has grown dramatically in the last couple decades, a lot of that seaweed is actually being used. A lot of the biomass is being used for the hydrocolloid industry. So not necessarily for food, per se, but it’s being processed, and kind of thickeners. So like Carageenan are being extracted from it, and used and sold on for incorporation into other processed things. What does it taste like? Yeah, I mean, yeah, like I was saying, there’s lots of, there’s lots of different seaweed species, and they’re all pretty different. And so they’re all processed in different ways and can be used for different things. And I think, for me, that’s what’s really exciting about all this is that, you know, when we think about seaweed, we think about seaweed, as this one thing that really, it’s this huge, diverse group of things. And I think it’s this diversity that we haven’t really, fully come to understand, we have a pretty good understanding of the diversity of terrestrial crops, and things that we can use terrestrial crops for. And I suspect that seaweeds could be just as diverse and certainly if we put in the time and investment to develop, and domesticate different seaweed species, then we might find that they can be incredibly useful for a wide variety of things.

Tim Hughes  38:49

I was gonna ask as well, Scott. So you mentioned there’s a diverse range of seaweed? Do they have a similar sort of macronutrient build up? Or are they all very, very different, but primarily with proteins and say, omega threes, you know, some of these quite expensive, macronutrients to, to grow or to farm on terra firma? What does the macronutrient look like? In seaweed generally?

Scott Spillias  39:17

Yep. Yeah, that’s a great question. Yeah. I’ve only looked specifically at that we use 34 species in this recent study. And we looked at the nutrient profile of those. And we found there to be a huge amount of diversity in those 34 species. And so I suspect, if you were to look at even more than the ones that we looked at, you’d find just as much diversity and it’s also one of those things where, even within a single species, there’s probably going to be a huge amount of diversity just based on the conditions that it’s grown in. The nutrients it has available to it, how much sunlight it gets, things like that. Yeah.

Tim Hughes  39:55

For instance, with in going to windy this algae farm So, that have been done commercially. And omega three is one of the main sort of

Gene Tunny  40:07

that’s the aspirations, right? Yeah. trialling it at the woods group is trialling at the moment there, which

Tim Hughes  40:14

is great. And I’d be able to get that from a plant essentially, or allegations. So the potential for farming for these, you know, harder to produce macronutrients protein, definitely a big one would be a huge benefit, obviously, the the impacts of farming for beef and chickens, etc. That’s one of the issues that the seaweed potentially can help with. And I saw that there was a 2.6 billion tonnes of co2 removed, or that has the potential to remove 2.6 billion tonnes of carbon dioxide from the atmosphere per year. Is that right?

Scott Spillias  40:53

Sort of so in our analysis, that number is coming from we looked at what would be the mitigation potential compared to a baseline of feeding every ruminants on Earth with this diet that incorporated asparagopsis, which is the red seaweed that recent research has shown if you include it in the diets of ruminants, it reduces the amount of methane they emit. Right? Okay, we should definitely treat this number with a lot of caution and understand that, that is a would be a logistically, very difficult thing to do. And, you know, just remembering that, it’s, first of all, it’s gonna be very difficult to grow that amount of seaweed, even though it’s a relatively small amount, especially compared to the other scenarios we looked at. We definitely difficult to grow that amount of seaweed, but then also, just bringing that seaweed to livestock can be difficult, remembering that a lot of livestock doesn’t spend most of its time within feedlots where it can be easy to administer kind of special diets. That also number also comes from this fact that we project that to 2050 and compare it to a baseline scenario. And so in the baseline scenario, we’re expecting that ruminant production will increase drastically over today. And so if there are changes in kind of the amounts of, you know, the rate at which we’re consuming livestock or anything like that, that might change.

Tim Hughes  42:18

Yeah, yeah. Yeah. Cool. Thank you.

Gene Tunny  42:20

So yeah, it’d be good Scott, just to get a sense of what you modelled and the other shifts the changing pattern of consumption. So are we changing? So humans? Are we changing what we eat? Are we substituting are we bringing in some seaweed? And then we’re, we’re taking out some, some beef or poultry, we’re replacing that. And then, I mean, I understand the what’s happening with the cattle. But you know, what’s happening with humans in terms of our diet? What are you modelling?

Scott Spillias  42:55

Yeah, thanks for asking. Yeah, we, it’s a pretty simple shock that we incorporate into our model, we basically assume that every person on earth will consume seaweed out of it, right, or about 10% in their diets. So that’s a huge increase over what most of us certainly in the western world are, are consuming. People in kind of East Asia, probably eat seaweed at the highest rates, and even the probably the maximum would be somewhere around 2%. And so, you know, that obviously represents a huge increase. And we, we justify that in our in the research by making the case that I’m certain we could all incorporate more seaweed into our diets. And that could be kind of raw seaweed kind of in the same way that you would eat it in sushi, right? You’re actually eating seaweed itself. But it could also be if seaweed is used as a feedstock in some sort of industrial process in the same way that we use corn or soy, where we grow those things, and we break them down into their constituent nutrients. And then we incorporate that into a variety of foods. So just like, you know, you go to the grocery store, and you buy, you know, some packaged food, now thinking that it’s full of corn, but actually, it’s like 90%, corn, you know what I mean? And so, if seaweed were to be incorporated in that way, then we suspect that we could get up to higher rates of inclusion in our diet, so wouldn’t necessarily need some sort of cultural shift. But it would require kind of the economics to align. And also those, those processes to be developed to make that possible. Yeah.

Gene Tunny  44:31

And what did you find about the economic Scott? I mean, how in terms of cost per calorie, how does seaweed compare with other with other foods? Are you modelling an improvement in a reduction in that cost over time? How have you modelled that plays?

Scott Spillias  44:49

Yeah, great question. Yeah, we actually, we declined to do that. So it’s a it’s a very simple, a very simple modelling exercise. So we didn’t want Don’t make any assumptions about that just because we didn’t want to make any hard assumptions about we had to make an assumption, of course, because because there is going to be such a diversity in terms of where the seaweed is grown, what kind of seaweed you’re growing, the quality of it, all those things. So we make the very simplistic assumption that in our model, at least, we make the very simplistic assumption that see, we will reach some kind of price parity with the things that it’s it’s replacing. Of course, that’s not going to be true. But that at least gives us a very general baseline from which to start to understand kind of some of these impacts.

Gene Tunny  45:36

Right. So at the moment, would it be more expensive? Is that?

Scott Spillias  45:39

Probably yeah, at the moment, it would probably be more expensive. And I think, certainly in places like Australia, yeah. But we suspect that as as we develop this industry, and it becomes more sophisticated than that price may come down. And it also just depend on to what extent governments around the world want to support these industries. And if they get subsidies, or in the same way that we subsidise farmers all over the world, in different places.

Tim Hughes  46:05

You mentioned corn before, Scott. So are we talking that this may be possible to replace some high fructose corn syrup? Is that one of the possibilities for seaweed?

Scott Spillias  46:17

I can’t speak exactly to that, because that’s not my area of research. But I suspect it could. And there are certainly lots of people who are researching with different things we can do with seaweeds. And we’re finding that they’re very versatile in terms of what we can use them for. We can turn see we did a whole bunch of different fuels, we can create ethanol from seaweeds the same way we can. Corn. So yeah, it wouldn’t surprise me if we can also create high fructose seaweed syrup.

Tim Hughes  46:45

And I just want to seem like a silly question, because we’re talking about seaweed here. But are there any freshwater varieties that may be viable options? Or is this all purely saltwater plants? No, yeah, that’s

Scott Spillias  46:56

a great point that there’s definitely there’s heaps of freshwater allergies. And again, that’s not my focus of research. So I don’t know. But yes, there’s lots of freshwater algae that could almost certainly be explored for these kinds of different applications. Yep. Cool.

Gene Tunny  47:12

And do you know if anyone is making ethanol out of from seaweed? Scott, are there any? Any?

Scott Spillias  47:21

I couldn’t say if there is a lot of commercial, commercially viable operations, but that it’s a very active area of research. Not just ethanol, but also like Bio Oil. And people are looking at making aviation fuel from seaweeds. Yeah. So yeah, there’s been there’s a lot of exploration happening.

Gene Tunny  47:42

Right. And so it’s got potential, because there’s just so yeah, there are so many places we can grow it, I suppose, aren’t there, if you think about it.

Scott Spillias  47:51

Yeah, and some spirits species are just very fast growing. And so you can get really high yields. And because there are so few inputs, depending, you know, if you’re in the right place, then you could get really high productivity, really high biomass.

Tim Hughes  48:07

Can I ask Scott as well. So Australia, certainly has had a history of introduced species wreaking havoc on the local landscape, introduce plants have just run riot and animals etc. are there any risks with seaweed, but the same kind of issues are being introduced to areas where there may not have normally been, you know, the impact on you mentioned before that the onScale? Clearly the be an impact of some sort. But as far as displacing natives, plants and native marine life?

Scott Spillias  48:40

Yeah, absolutely. That’s a very real and serious concern that we should take very seriously. There have been heaps of seaweed introductions all over the world that have led to exactly that. Even just this, this asparagopsis that is becoming very interesting and popular and exciting because of its anti myth, antigenic properties. A species of that has been introduced in the Mediterranean where it’s highly invasive. So I think any successful implementation of seaweed farming will be done using locally endemic species, and will not include spaces that are being shipped in doing that could be could run a huge risk when there are also examples of introduced seaweeds being cultivated safely. However, you know, you just run a huge risk in doing that to introducing things into the marine environment that could cause lots of problems.

Tim Hughes  49:38

And is there any governance internationally at this stage with with cultivating seaweed

Scott Spillias  49:43

in terms of like preventing those kinds of things? Yeah. The governance around this is pretty weak at the moment. I can’t I don’t know a whole lot about the international space. But you know, in Australia, I’ve spoken to a bunch of folks in the industry here and in government and it’s Generally recognise that there’s a lot of work that needs to be done in terms of getting the government governance in place. So that, you know, we’re making sure that we’re not running the risk of causing environmental damage, but also just making sure that we’re making it accessible for people to get started in this industry. I’ve also heard from people who are really interested in growing seaweed in whatever place they are, and they’re finding that there’s just so much red tape associated with it. And even just in Australia, state to state there’s a lot of there’s different regulations, you know, I don’t think necessarily that we should make any kind of fast track kind of thing for putting seaweed farms into the environment. Because I think we do need to be very cautious about where we’re putting them. And I think there are going to be places that are going to be much better than others. And there is damage that can be done from farming seaweeds in the marine environment. But I think we do need to make it possible for people to get involved. And I think there’s a lot of potential for good to come from them. So hopefully, we can start to introduce or just get our heads wrapped around how we can allow people to get into the market.

Gene Tunny  51:08

So Scott, the takeaway from your study, is it that, and this is from a UK, the UQ media release. So basically, it says expanding global seaweed farming could go a long way to addressing the planet’s food security, biodiversity loss, and climate change challenges. So I understand the food security, because there’s another potential food source, climate change challenges. Well, that’s from the seaweed being used as feed for cattle. What’s the How does it prevent biodiversity loss,

Scott Spillias  51:46

basically just comes from the assumption that if we’re, if we’re farming more in the ocean, then we hopefully won’t need to farm as much on land. And so we already know that land use change is one of the main drivers of biodiversity loss on lands when you change, of course. So if we can relieve some of that pressure, then hopefully we can maintain some of those last remnants of pristine habitat for land. ecologies, that’s that’s also a strong assumption that we shouldn’t. We should also question, you know, if we’re growing lots of seaweed in the ocean, there’s no guarantee that we’ll be growing less things on land. But we’re hoping that that’s what does happen. But we also need to be careful about, you know, growing seaweed in the ocean, we’ll also have biodiversity impacts. This is a hotly debated topic at the moment in the space and the extent to which seaweed farms will provision habitat for marine organisms. I think most people accept that seaweed farms will be their own unique habitat, which may harbour some things, certainly things that grow on seaweeds, but those aren’t necessarily going to be valued by people who are growing or farming the seaweeds. You know, if you have fouling, you have little things growing on your seaweed that could decrease its quality as a as a product. But then there’s also the hope that, you know, if you have lots of seaweed growing in the in the marine environment, it could be habitat for fish, which could improve fisheries. But we haven’t really come to a firm conclusion on the extent to which that happens. And also, it’s just going to depend on where you put these seaweed farms, you know, if you’re putting a seaweed farm in a highly productive area, that’s a place that’s already highly productive, it’s probably going to make it a little less productive, because it’s seaweed farmers are going to be a simpler kind of ecosystem in the same way that, you know, a tree plantation on land is a simpler ecosystem than an old growth forest. But if you’re putting a seaweed farm in a place where there’s not a lot going on already, then it could, it could provide some biodiversity benefits. So there’s definitely a lot more research that needs to be done in that space.

Gene Tunny  53:54

Right. And one final question for me is, is seaweed more climate resilient? That I know there’s a concern that with climate change that will affect the yields of some crops? Is, is this a reason that we might want to switch to seaweed? Yeah, that’s such

Scott Spillias  54:11

a good question. That’s something I’m really interested in. And I don’t have a good answer for that, either. i My suspicion is that might be the case. At this point, it’s just speculation. And that’s something I’d really like to look into further. You know, when I think about some of the main threats from climate change for our food systems, you know, thinking about droughts or thinking about floods, both of which have major implications for growing crops, neither of those things are going to have much impact in the marine environment. If you have a food system that’s diverse, that incorporates terrestrial production and marine production, my feeling is that that’s going to be a more resilient food system all around. So because if your crops on land are suffering, maybe you have your crops in the ocean that are doing okay, now, there threats like marine heat waves can impact seaweeds negatively their diseases, seaweed diseases that are exacerbated by rising temperatures. But but same so if we have a marine heatwave in the ocean that’s affecting our marine crop that maybe there’s a, we have a chance that our terrestrial crops are doing okay. So my feeling is that having more diverse food systems will provide climate resilience. That’s not to say necessarily that seaweeds are more resilient than terrestrial crops. But I think the combination of both is the key here.

Tim Hughes  55:30

I see on that note, Scott, I know, historically, they’ve been kelp forests disappearing from a lot of places where they’ve been for many, many years. Is there an opportunity with this research to replace or replenish those kelp forests?

Scott Spillias  55:45

Yeah, there’s a lot of research going into that right now. Here in Tasmania, that’s very, very active, hopefully, I guess is the short answer. Yeah, we know that. Warm water is not good for many kelp species. And that’s why we’ve lost a lot of kelp. But we also lost a lot of kelp to other kind of human pressures. But yeah, we’re there’s a lot of research into that space, since hopefully, we can keep kelp kelp forests into the future.

Tim Hughes  56:09

Yeah. It’s it’s great research. And it was one of the things he had going back to your original remote, trim it to the article is, it’s so good to see. Yeah, well, we might be able to get a more diverse range of food and is potentially a very healthy food as well, like, you know, it’s a natural, it’s a natural plant. Really interested to see what happens next. So where can people go to find out more about this guy?

Scott Spillias  56:36

So yeah, I would just say keep an eye out for the news. There’s a lot of really exciting work being done in this space by not just me, but many other collaborators, University of Tasmania is doing a lot of really interesting work. That’s the thought I guess all I would say on that. Well, we’d

Tim Hughes  56:49

love to have a chat in the future as well as things develop, because it is a really interesting space. And yeah, it’s, you know, we wish you well with it, because I think it’s a really a great area to be researching. And hopefully, it’ll come to some kind of commercial fruition at some point not too far away. Yeah,

Gene Tunny  57:07

I was just, I was wondering, just finally, another thing occurred to me with the harvesting of Scott, how do you do that? Is that by hand? Is it manual?

Scott Spillias  57:17

It’s done in a few different ways. I think, these days, a lot of it is being done by hands too. Yeah, I think there’s probably a lot of room for improvement or automation in that in that in that area. Just off the top of my head. I’m just thinking about where how it’s done in different places. And yeah, for the most part by hand.

Gene Tunny  57:37

Yeah. Yeah. It’s just interesting. I might look into that, too, because of how that affects the economics of it. It’s fascinating and yeah, okay. Well along. Yeah, that’s great. Scott. Yeah, really appreciate your time. Tim, did you have any other question? No, that

Tim Hughes  57:51

was it. I really appreciate your time with this. Scott. I know you’ve had this conversation a few times. You’re very prolific with your, with your media requests. So thank you for granting us are one and yeah, really looking forward to hearing more?

Scott Spillias  58:06

Oh, it was absolutely. My pleasure. Thank you guys. So much really interesting. questions and conversation.

Tim Hughes  58:11

Cool. Good. Thank you.

Gene Tunny  58:12

Okay, thanks. That’s good. All right. Hey, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com, or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

59:03

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Podcast episode

Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

Show host Gene Tunny talks with Dr. Nicholas Gruen, CEO of Lateral Economics, about the increasing focus of governments on wellbeing. For instance, former NZ PM Jacinda Ardern rebranded the national budget as a Wellbeing Budget, Wales has a Futures Generations Commissioner, and Australia is developing a new wellbeing framework, Measuring What Matters. Gene and Nicholas discuss the limitations of the current top-down approaches and platitudes, and consider potential solutions for better integrating wellbeing into policymaking. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP187

  • What is the “well-being agenda”? (2:44)
  • The “Easterlin paradox”. (5:08)
  • How do you make these judgments? How do you measure well-being? (10:50)
  • How is this relevant for policy? Should governments be tracking this broader measure? (28:36)
  • Is complexity a plus or a minus in the Treasury wellbeing framework? (33:39)
  • Why do you need a framework? (40:02)
  • Good examples of programs which could improve wellbeing. (44:29)
  • The importance of being connected to family and friends. (53:42)

Links relevant to the conversation

Nicholas Gruen’s YouTube channel:

https://www.youtube.com/@NicholasGruen

Video version of this episode on Nicholas’s Uncomfortable Collisions with Reality podcast:

Wellbeing: can we escape the iron law of business-as-usual 

Measuring what matters — second consultation process | Treasury.gov.au

Fairfax Lateral Economics Index of Australia’s Wellbeing Final Report (the HALE index discussed in the conversation).

Transcript:
Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dr. Nicholas grilling about the growing interest of governments in well being something broader than living standards or GDP per capita. Former New Zealand PM Jacinda Ardern, rebranded her national budget as a well being budget, Wales as a future generations Commissioner. And now Australia is going to produce a wellbeing framework called measuring what matters. As you’ll hear in our conversation, Nicholas is highly supportive of bringing wellbeing into policymaking. But at the same time, he’s sceptical of the way we’re going about it. He breaks down what’s wrong with the way we’re doing it. In short, there’s too many platitudes and too much top down thinking, and he explains how we could really make a difference if we did it right. Nicholas is CEO of lateral economics. He’s an angel investor, and he’s headed various government inquiries, including the Australian Government 2.0 Task Force, according to the Financial Times as Martin Wolf, Nicholas is a brilliant man who deserves to be better known, although he’s widely known within Australia, and he has an ever growing international reputation. This episode is at joint production with Nicholas as YouTube show uncomfortable collisions with reality. So please consider checking out his other content on that channel and you get a chance, a follow up to the conversation, this episode will be available on that channel brought out now for my conversation with Nicholas grown on well being. I hope you enjoy it. Nicholas, thank you, good to be with you. So I mean, you’re aware that New Zealand has a well being budget doesn’t it? And our own government here in Australia, it’s going to be releasing a measuring what matters statement. So it’s looked at what New Zealand’s done and it’s been? It’s excited by that. There’s a lot of interest in well being at the moment. What do you attribute that to Nicolas?

Nicholas Gruen  02:43

It comes goes, Gene, I think this, this urge, it’s an anti agenda. In other words, it comes from a frustration with the idea that we are obsessed with economics, we’re obsessed with dollars and cents, we’re obsessed with a single measure. And that single measure is GDP. And there’s a lot to be said for that. GDP is in fact, a much better measure of human wellbeing than we think. But that’s a little bit like saying democracy is a terrible, it’s a terrible mess. If you have to have a single measure, it’s, you know, I think you we can improve it somewhat. But there are all kinds of ways in which GDP is a much better measure than you might think. And that’s kind of partly because you can’t get rich without attending to basic social facts. And social institutions like schools, hospitals, families have to be in reasonable functioning order, if you’re going to have a wealthy society. So in a kind of an indirect sense, measuring how wealthy countries are, does help you distinguish between societies that are relative functioning relatively well, and societies that are not functioning relatively well. Please don’t think that that’s me saying we should put down our classes and forget about the deficiencies in GDP. So Bobby Kennedy put it best many years ago, 1968, when he said that GDP measures all those things in life, except the things that matter most to us, how well we bring up our kids, how beautiful our cities are, how kind we are to each other, how we manage how effective we are staying out of wars, GDP doesn’t measure any of those things. And it doesn’t measure a whole lot of other things as well. So that I think quite a good way to think of the well being agenda is to say that it’s trying to draw our attention to those deficits. And I’m very happy to say that it should live or die by how successful it is in addressing those deficits.

Gene Tunny  04:59

Okay. So wellbeing is going to be correlated with GDP per capita to an extent and is it the case?

Nicholas Gruen  05:08

And we see that in the there’s this famous thing called the Easterlin paradox. Why don’t you tell us what these? Oh, well, I

Gene Tunny  05:15

Was gonna ask you that. The way I the way I remembered if I’m remembering correctly, is that up until level of Is it personal household income, which years ago, I think was about 75 or 80,000. US dollars,

Nicholas Gruen  05:31

it was quite a lot less. Was it a lot less? Was it? Yeah, yeah. So you get a strong correlation between GDP and subjective well, and people telling you that they think their lives are working out relatively well, if you go, and it’s not very surprising, you go and ask people in war torn Sudan or somewhere like that a lot of highly corrupt and poor places. Well, being is low and GDP is low, and they climb together, and then they tie a lot and then the relationship tails off. And I think it was about $20,000 per annum, where you get that tail off. We remember this is maybe even less than that, because remember, I think it’s dates to 1974, the Easterlin paradox. And in many ways, it probably comes out of the kinds of sentiments that Bobby Kennedy was giving expression to in 1968. And it’s it says, Look, after you get tolerably wealthy, other things seem to matter more to people than how much more wealthy they’re getting.

Gene Tunny  06:37

Yeah. And what’s this idea of well being is so I’d like to ask is this happiness? Is it utility? To what extent is governments when they’re promoting well being is that about promoting the greatest good for the greatest number as Jeremy Bentham expressed it? How do you know?

Nicholas Gruen  06:54

I mean, I like to be vague about this. And I like to be vague, constructively invasions. And what I mean by that, in fact, if you’re vague, then you can honour the well being agenda as and when I called earlier, a kind of anti agenda, it is saying, hang on, where we’re never, it’s pretty unlikely we’ll ever not managed for GDP, but that leaves out all these other things. And the thing is that if you try and same, you can use words, I mean, Bentham had this problem himself, when he said the greatest good for the greatest number, he could never quite say what good was, he would sort of associate it with pleasure or whatever. And, as you know, what economists did in the, towards the end of the 19th century is that they did a little bit of on the spot, metaphysics and said that economics was about utility, that the ultimate out quote from the economy was not money, can’t take it with you, and you can’t eat it. It was money existed to improve utility. And I think utility is a nice word, it anchors the activity to what we all think of what uncertainly we did in the late 19th century and early 20th century, as all the useful things about life. Today, our lives are much more postmodern, they’re much more saturated with fantasies, entertainment, advertising, and so on. And that’s created all I mean, it’s right, why rather like that, the the, this is an Australian word for people overseas, but I’m going to use it anyway. The Daggy if you like nerdy sense of the word utility, it’s saying how can we be useful and we get a lot of utility. A poor person who is a paraplegic gets a lot of utility out of a wheelchair, or hundreds of 1000s of dollars worth of utility. If you want to get that much use that much usefulness to someone who is able bodied and has plenty of money, you’d have to do an awful lot to be more useful to them than a wheelchair is for a paraplegic person. So I think of it as quite an anchoring quite an egalitarian idea. So to Bentham, and this is one of the things that’s one of the characteristics of economics during its period of what I call clarified common sense. People like Alfred Marshall, Cecil Pigou, who were working toward in the turn of the 20th century, they built their idea about what the economy about was about around usefulness. And one of the upshots of that was that if you’re just focusing on usefulness $1 to a poor person or a pound to a poor person buys much more usefulness by It supplies them with much more urgent needs. If they spend it halfway wisely, then it can provide to a wealthy person. So that injects into our thinking a degree of egalitarianism in the guise of scientific thought, or if you like, economics has clarified common sense. So I see the well being agenda as reviving some of those ideas. And one of the people who’s responsible for it, Richard Layard, at the London School of Economics has written very much in that in that kind of tradition.

Gene Tunny  10:38

Right? Okay. So you talk about this idea of $1. In a poor person’s hand, the more valuable than in a wealthy person’s are the utility that comes from it? Yeah, but how do you make these judgments? I mean, can you do this scientifically? How do you measure well being for example, can you actually put a number on it? How do you think about that,

Nicholas Gruen  11:00

and you can’t measure utility either. So So modern economics, after that period got mesmerised by the idea of being scientific. And it didn’t get anywhere. All it managed to do is to we had a, if you like, a blurry vision of what was true, because I think almost every person listening to this will say, yes, yes. In general, on average, it’s strongly true, that money going to poor people, right now, with a budgets being prepared, and people are talking about increasing the dole for people over 55. Well, there will be some people who take it to the casino. But most people and I don’t know whether that buys anything, probably buys less, they probably buys less utility, less well being than money to me or you. But most people will spend it on things that are much more useful. So I don’t want to say Oh, well, we can’t be scientific about that thought, therefore, we’re just not going to have it. But that’s essentially and we can talk about this more if you want to, but what you can just agree with. That’s essentially what happened in modern economics from about the 1930s onwards, where we moved from a criterion of well being, which basically said, everyone’s wellbeing can be presumed to be everyone can presume to count the same. And therefore, if we’re just focusing on well being, and of course, we can’t just focus on well being, we’ve also got to think about incentives and stuff like that. But abstracting from that, ignoring that it’s a powerful, stylized fact, that money to the poor, is urgently needed, and money to the rich is not. And that basic idea kind of disappeared from the methodology of economics, in the pursuit of making it more scientific. And so we watered down the idea of what a improvement in the well being of a population was. And all we said was something which is sort of useless for practical purposes, it’s okay for modelling and that’s called Pareto, making a Pareto improvement, named after bill for a great thinker, Vilfredo Pareto, who ended up being rather sympathetic to Mussolini towards the end of his life. But he was he didn’t like the idea that you could compare any one’s subjective, state with anyone else’s, he produced Pareto wellbeing, which says, you get a Pareto improvement only if you can show that you can improve one person’s well being without harming anyone else’s. Well, that rules out progressive taxation, it rules out actually pretty much anything you’ve worked in the treasury, it’s almost impossible to do anything in policy without fight without some losers turning up. And then economics has nothing to say about that. And I don’t think that’s good news. And I think the well being agenda is one way to remind ourselves of that lack that absence. And it’s an excuse to try and bring back some of this not to, and maybe we’ll get to this not to erect a kind of big alternative approach with a big brand new thing, but a correction to some of the obvious moats in our eye on this in the sort of ways economists are thinking at the moment.

Gene Tunny  14:39

Okay. So how can we measure this? You’ve done some work on this Hale index? Is that a way of measuring well being can that be useful for assessing whether our well being has increased or

Nicholas Gruen  14:52

moving into that? That’s a good illustration of what I’m trying to say because I guess you could mark at the Hale index. I’ll explain what it is in a minute, as a sort of brand new way to conceptualise well being. But that’s not how we thought about it. We started with GDP for some of the reasons that I’ve outlined earlier. And then we said that there are some obvious ways in which GDP doesn’t tell us, that doesn’t give us what we can correct this in big, ugly ways. Where there are big ugly deviations from common sense. And then we know that we’ll, we think we’ll have a better measurement of well being, and it won’t be perfect. And it’s not something we want to run away with. But it will help us think about policy priorities, and talk about whether we’ve been getting richer or poorer as a society. So let me give you some examples. GDP is blind, to whether young people from 15 to 25, are spending their extra money going on holiday, or going to TAFE going to uni, going to school, and building what economists call human capital. We take that into account because we say that if you are spending this money, on your education, your knowledge, your training, your capability, then you are investing it. And so we put that back into GDP. And of course, if you think about how long in our lives we educate ourselves, well, 12 years is a kind of minimum for people pretty much now. And a lot of us have at least another three or four or five or six years. That’s a huge amount of your life. And therefore it’s a huge part of the economy. And so when we started, when we put that in, we changed the you know, you could see that as Australia invested in increasing retention in schools, which happened quite in a big surge during the whole government. And then, as we as we got more and more people with cert three and above qualifications, that that produced a large surge in benefit. And that would be a good thing to think about. That’s something we should congratulate ourselves on when we when, when it’s working and, you know, give ourselves a talking to if we’re not making those things happen. And another way to think about this is to say that the business will alter in this period, the business community, we’re obsessed with talking about workplace relations and workplace relations are quite important. But that’s the interface that businesses have with policy, that’s the one that they think about. And it’s vastly less important. I mean, if you do a really bad job of either, you’ve got a lousy economy on your hands. But if you are doing a halfway tolerable job of either, then human capital is vastly more important than exactly how you configure workplace relations. And anyway, no one’s ever worked out a perfect way to configure workplace relations. So one way to think about this is to say that the Hale index, this index that we built, tells you what’s important and what’s not. And some other big differences, that reflecting the comments I made about money in the hands of poor people buys you more urgent needs than money in the hands of wealthy people. During the last 20 or 30 years, Australia has become somewhat more unequal, it’s it’s a little overstated. People tend to overstate it, they tend to think we’re nearly there were as bad as the United States or the or Great Britain. And we’re not by quite a long chalk. But nevertheless, there’s an effect there. And so that that should go in. And if we have become richer, but more unequal, it’s not clear that we’re better off. And so, you know, I think quite a good, quite a good measure of a just a single measure of economic well being is median income, and median income has not grown as much as actually I’m not sure about that median income. No, I think median incomes not grown very strongly, you might be able to correct me on that. But what we’ve done well as we’ve looked after people at the bottom quite a lot better than they have in the United States. And the PR people at the top have been very well looked after, but not nearly as well looked after as they have been in the United States. Anyway, so it takes into account inequality. It tries to take into account natural capital and the result that natural capital is you know, the quality of our air and our streams and, and the amount of minerals that remain in the ground. One Upshot from that which I’m not, I’ll just tell you about it is that we, the methodology we arrived at We certainly didn’t try to come up with this result. But the methodology we arrived at told us that natural capital, at least in terms of diminution of natural capital, at least in terms of what’s happened so far was pretty minor. And that even took into account greenhouse. But of course, that depends on the trajectory that greenhouse takes. So that at least gives you something to argue about that, you know, you’re not just waving your arms around, as I’m doing right now. And then the other thing we did is we talked a few areas of mental health, which have, which are common, and have large impacts on well being. And they were depression, and anxiety and obesity. Well, obesity is a physical condition. But that has a notice that is correlated with large reductions in self reported well being. And so we threw that in the mix. And as obesity has been rising, that’s been taking 10s of billions of dollars off our GDP. So that’s what it looks like. And that to mention what I said before, I don’t want to con anyone into thinking this is a comprehensive measure of well being even though sometimes it gets reported in the press is that, but I want to say, look, it’s GDP, and then we’ve made some big changes where the worst problems of GDP exist. And that’s got to be a good thing. It’s, it’s the old clarified common sense idea, rather than welcome to the new paradigm.

Gene Tunny  21:32

Okay, so the Hale index, Harold age, lateral economics index, on well being Yeah, well being just so clarification, you talked about human capital. So are you valuing the time input that people are spending in education and training because the the actual resource cost of the education and training or the value added, that’s already counted in GDP are

Nicholas Gruen  21:58

correct. So what we say that if you go to TAFE, you go to uni, you build your human capital, the resource cost of doing that as already take is already measured in GDP, we paying your tutor as your lecturers, we’d pay for the buildings if you go to them, and, and so on. And but then we say that at the end of this process, you have invested in an asset and that asset and so and we do the same, you see GDP doesn’t contain depreciation. So it’s a basically, it’s purely recurrent. And it has no way to conceptualise the capital account, it has no way to conceptualise whether you’ve made yourself richer for the future, or poor for the future. And so it tries to do that. Does that make sense?

Gene Tunny  22:55

I’ll have to have another look at it. Yeah. Because I mean, the, what I’ve seen in the past is that people have adjusted GDP for the depreciation. So part of the That’s right, well, yeah, yeah. Part of capital expenditure that occurs is just to replace existing capital. So, you know, some people argue, well, you should actually look at net domestic product or net rational product. And

Nicholas Gruen  23:21

we do that in. So we start at that. I mean, I didn’t mention that because I just thought it was too technical, but we start with NAMI national income. Okay. So we got depreciation in there. So we put capital, so we need to put capital appreciation in as well.

Gene Tunny  23:38

I see what you’re driving at. Yeah. Okay. Capital appreciate. Yeah. Okay. Right. Well, I’ll put a link.

Nicholas Gruen  23:44

I mean, let me just let me just so people can conceptualise it. So you start with GDP, which has no measure of depreciation, your point, but the buildings you had this year, are worth less at the end of this year than, let’s say plant and equipment. Yeah, the cars you own are worth less at the end of the year than this year. So we take that out of GDP. And if you’re going to do that, by exactly the same token, you would put back into GDP all the ways in which you’ve built capital. And the main ways in which you built capital is through human capital. There’s sort of three four times as much human capital in the economy than there is physical capital.

Gene Tunny  24:27

Okay, okay. The big effect

Nicholas Gruen  24:29

two big effect.

Gene Tunny  24:32

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  24:38

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Gene Tunny  25:07

Now back to the show. Like what I wonder, is whether we are actually much better off than we were, say, in, in the 80s or 90s. Because, I mean, clearly the technology is just incredible that we’ve got now I mean, I remember having a Commodore 64 When I was in high school, with 64 kilobytes of RAM. And now I mean, everything you’ve got now, it’s just I don’t know how many 1000s of times better it is. But it’s just an incredible improvement. But yet, I don’t know how much better the quality of our life is, particularly with all the smartphones and the distraction? And do you know what the evidence is on that though? What is it?

Nicholas Gruen  25:50

Well, my style? Well, I mean, leaving the smartphone, the distraction point out, because that’s a very different sort of thing you’re thinking about, we can talk about that. But my kind of guess from scanning the literature on that is, so I think one of the main things you’re talking about is that a lot of the streams of benefit that we get from technology of free, or you go to Google, we go to Facebook, if you call that a benefit, there are just all these free services and free doesn’t work with GDP, GDP to GDP, it’s just invisible to GDP, because GDP, put your binoculars on and then whenever someone’s paying for something, you work out, you know, you say, Oh, that was $2, that’s $2 to GDP last whatever they paid for it. And anyway, it’s a, it’s an process of serial accounting, working out how much value has been added with each transaction. And in this process, the value that’s added is not counted, some of the commercial value that added is counted, and that is the advertising revenue. But so so again, it’s it raises the question of the household economy as well. I didn’t mention one of the great weaknesses of GDP is that GDP goes up. If you go out to dinner, and it doesn’t go out, if you if you get someone else to pay for your dinner, or you know, to cook your dinner and pay for them, that that GDP rises, but if you cook it at home, GDP doesn’t rise, I could give you some more striking examples, more sexual examples. They’re a bit more striking, which is that most people’s sexual activity doesn’t contribute to GDP, but going into a prostitute does. So that doesn’t seem to be a very good way of measuring human wellbeing. So there are anyway, we haven’t tried to correct for those things. But those are the those are some of the sort of paradoxes of GDP. Yeah. But I don’t mean to be too critical of GDP because of it. Clearly, we are, we are wealthier. And

Gene Tunny  28:06

to an extent, I mean, just given the expansion of I mean, houses are much larger, on average than they were 30 years ago. We’re probably I mean, the quality of cars is better. We can you know, then they’re cheaper in real terms, I think. And partly that’s because we’re brought down the tariff wall here. But yeah, I guess we are better off in a material sense. But it’s not as much as you might think, if you just look at the GDP per capita numbers, because there are these other things we should be taking into account. Yeah,

Nicholas Gruen  28:36

yeah, that’s right. That’s right. I mean, the other thing is, I’ll just tell you, I went this afternoon to somebody who was looking at an MRI of my shoulder, which is sore and tingling. Now, I’m pretty confident that I mean, there are various ways various pathways, you can imagine that the existence of MRIs is picked up in GDP, I mean, you pay money for the for the MRI, but the fact that the fact that he can look inside my shoulder and look at where the bone is, and where the where the sinews are on sale, there’s a spur there. And we couldn’t do anything remotely like that. As an economist sitting there, very few people would have this reaction when they’re doctors looking at an MRI. But that was what I was thinking about. I was thinking, well, I doubt if that is properly reflected in productivity statistics. And in GDP. It’s an incredible thing to basically have your doctor be able to look right inside things and you know, that that’s a very powerful thing.

Gene Tunny  29:43

Yeah, yeah. Okay. Okay. So I think basically, the takeaway is that well being is this it’s much broader than than GDP. It’s challenging to measure. How is this relevant And for policy, Nicholas, I mean, should should governments be tracking this broader measure? Should they be tracking something like the Hale index? Or the ABS be producing it? And should they therefore then adjust their policies to address this if there’s a deficiency? And yeah,

Nicholas Gruen  30:15

so So that’s, that’s the nub of the question. So there are various lots of people say how wonderful it is, you’ll hear this it’s almost a cyanide, I will hazard to guess it’s a sign that you’re listening to someone who hasn’t really thought about these things very carefully, or sceptically when they start talking about Bhutan. So Bhutan made a really big splash by saying that it was managing its economy for gross national happiness. But if you take it seriously, and you look how they do it, it’s a bit of a joke. No offence to Bhutan, good on them. And they’re doing quite well. So you could argue that it’s all because of well being. But if you try to look at what they’re doing, I mean, it’s very hard to get anything published after about 2009 on the subject anyway, from Bhutan. So it’s a cart that people love the idea that they’re managing for wellbeing. I’m not sure exactly when, but probably in the, the tooth, the, you know, the 2000 to 2010. But maybe earlier than that fair bit of pressure was put on the Australian Bureau of Statistics to produce a wellbeing measure. And I basically pushed back and said, Look, we will produce a thing with series of indicators called measuring Australia’s progress is that it, of course, and we will not aggregate it all and pretend that we can put this all in a single measure. And so you know, they look at natural capital, they look at equity, they look at the environment, and they produce rich data on this stuff. But the calls keep coming, oh, we need to. So in other words, if we had this big demand to manage for well being, then that’s fine, the ABS could produce this data. And then our politicians and our senior thought leaders will put inverted commas around that. They’d be saying, Good, we’ve got the data. Now we’re going to manage for wellbeing, but that’s not what happens. So that’s a sign that something funny is going on. And so around the world, we hear this idea that we’re going to, we’re going to manage for wellbeing. Now, we might be able to go into this in more detail in the next podcast that we’re going to have on this where we’re going to have a closer look at some of this. But I think that is a mistake. I think it is a mistake to go running around creating, quote, wellbeing frameworks, if there are a wellbeing framework of a particular kind, because so New Zealand has done that. Well, let’s go through what’s happened. The Treasury announced that it had a well being framework. And this was announced in a speech by a senior Treasury official, who shall remain nameless, but is closely related to me. And it was announced that there were these five principles in the treasury Wellbeing Framework. And you can imagine, you know, we can work out what they are the first, you know, the top three or four are going to be prosperity, equality of some kind, and we’re going to read a reference to equality. Another one will be a reference to the environment, you know, health, happiness, stuff like this. And the fifth one was happened to be complexity, which was intriguing. And I sort of looked at this and thought, Well, that’s it that’s on what’s like, I can see how complexity is sort of important. But is it a plus? Is it a minus? What’s it doing that? Now, the Treasury Wellbeing Framework or so it was called a well being framework? I think it was quite obvious at the time that it was not a well being framework. It was a set of talking points. Is that a bad thing? I don’t think it is a bad thing. Can Henry wanted the Secretary of the Treasury at the time wanted to make the point or wanted Treasury officials to think more broadly about what the Australian economy was about? No problems there. But it wasn’t a framework because of framework constraints. You and it’s it, you will be applying this framework. Wherever you do work, wherever it’s relevant. I can prove that that didn’t happen, because the Treasury wrote a submission to I think the a triple C on Consumer Policy and another submission on regulation of financial instruments. Now, if that doesn’t raise the question of complexity, nothing does and the word complexity did not appear in those submissions. I’ve documented this So, so it wasn’t a framework. That’s okay. But it’s a very good illustration of a number of things, which is that, you know, it’s very easy to grandly talk about visions. And we should be suspicious of that, we should be suspicious of that for lots of reasons. But without going into, like, if you’re serious about that, I’d be suspicious, because I don’t think it can be done, I don’t think it’ll be helpful. I think it’ll all fall over. But in fact, you don’t really have to worry, because when you get suspicious, what I’m mainly suspicious of is that this is what I call a re skinning operation. And we will get business going on more or less, as usual, with some new words dotted around. And I think that that’s clearly demonstrated in the, in the case of the Australian treasury. And And to top it all off. John Fraser, when he was the Treasury Secretary, just got rid of it. And a number of people were quite upset. I think you were a bit upset. And you said you were sad to see it go. And I said, Well, I’m sad to see it go. But it will it made no difference and making everything go will make no difference. And and I said, Can you tell me anything? Any thing, any piece of work that was changed for you in the treasury by the framework? And I think you had nothing to say then. But you might have more to say now?

Gene Tunny  36:24

Well, I think what I said at the time, Nicholas, was that I think it was designed to change the mindset. There authorising words. Yes, yes. And I don’t think you could ever say, Well, as you mentioned, there was a a submission that it appears wasn’t informed by the well being framework at all, which I think is a really, that’s a that’s, that’s not very good. I mean, I’m surprised that complexity wasn’t, wasn’t mentioned in that. But yeah, you’re right. I mean, it’s very hard to operationalize these things. I mean, because you know, these things come from, you know, the senior executive, or I think it was either Ken Henry, or Blair calmly or someone like that very senior in the treasury. And I mean, you know, that they wanted to have it permeate through the organisation, they wanted people to change their, their mindsets from because there was a concern treasury, or we’re just all the corner Kratts. And all we care about is GDP and the the economic numbers, we’re not concerned enough about broader well being. So I think it was well motivated. It just didn’t, it’s hard to change practice

Nicholas Gruen  37:32

being stuff is well motivated. And that’s my point. Let’s, let’s have a little D tumescence, about how well motivated we all are. And let’s attend to the difference that we’re making. So that’s the Treasury, that’s the Australian treasury. Now the New Zealand Treasury is a very different story than New Zealand Treasury, actually kind of contacted me I’d written some stuff on well being and they contacted me. And I was amazed when I had a look at what they’ve done. They’ve been working away before Jacinda Ardern, turned up and said, Let’s have a well being budget. The New Zealand Treasury were actually doing a great deal of work, trying to reconceptualize the national accounts, and all this kind of stuff. And they were pretty serious about doing it. But I’ll tell you what’s happened. We can talk a bit about this, about their well being budget in a minute. But what’s happened is they have put a lot of work in and the result is that at least in principle, whether they’ve got to this stage or not, I don’t know. But in principle, they would be able to tell you, the world self reported well being of Maori in Rotorua. Now, isn’t that impressive? Well, actually, it’s not impressive, because what’s not impressive about it is that you’ve you’ve put a huge amount of effort and resources into something and thinking resources. And what are you missing out here? Well, what I’m arguing you’re missing out is, you know, what the Mary well being in Roger or is and you’ve got no further information about how to improve it. And that’s what matters. So I want to use well being frameworks. Well, this this hankering for well being as an authorising environment, to start finding some things where wellbeing and GDP deviate the way they were something where there’s a big problem with the well being and GDP is ignorant of it is it’s invisible to GDP, there’s suffering. And I would like to, I would like the well being thinking to start being used to authorise this and I was talking to a state government a treasury, actually, Treasury state government this year, and and I was saying this to them and they said, Well, you Yes, but we need a framework. And I said two things. I mean, firstly, why do you need a framework, it’s not going to help you achieve anything. But I said, I can give you a framework, the framework will be not on how to measure wellbeing everywhere for no apparent reason. But how to build a framework which will deliver wellbeing benefits. And we already have a bit of a, we already have a bit of a picture of that, because we’ve done it conceptually, in another area, which is sort of simpler and more technical, and therefore doesn’t involve the human element so much, and doesn’t therefore engage our feelings in quite the same way. And that is greenhouse. So we have cost curves are very basic, the firt, the first language we ever developed about greenhouse before, even before Kyoto, which I think if I’m correct is 1997, we develop the concept of no regrets measures, what are no regrets measures, they’re things that are good for the economy, and good for greenhouse. And there are quite a lot of those. The classic case of trying to improve the efficiency of at small levels, that management don’t pay a lot of attention to the installation of warehouses and factories, the energy efficiency of electric motors in those things. And they’re actually quite large economic benefits. And they come with greenhouse reductions, and there are still some of those around so I think so the very first thing you go looking for is wellbeing benefits that are no regrets measures, things that have a big impact on the work on wellbeing, while they actually do no harm to the economy. But if that’s the case, is highly likely, given that people who feel good about themselves are more productive and less fractious, and less likely to try and pinch, you know, try and blame other people for their problems and so on. That is that something that could be we could do something very exciting. Now, let me give you a very small illustration, my best illustration of this, it’s actually happening now might have happened earlier, if we’d taken this seriously. In hiring, there is a bit of a craze, you can call it a bit of an ounce, maybe one of the best part best outcroppings of the the woke stuff, which I’m not terribly fond of in lots of guises. But here, if you go to an interview, and you don’t, one way of presenting well you’ll tell most people is you, you aren’t afraid to make eye contact, you make the right amount of eye contact. Well, autistic people find that extremely hard. And autistic people can be extremely productive. So your HR people, the people doing interviews need to be aware of this. And if you’re running an organisation that has lots to do with computer programming, statistics, various kinds of management probably pretty much anywhere, people who who are somewhere on the autism spectrum, not wildly over so that they become socially dysfunctional, but people on the autism spectrum can be if you know that and you manage for that you can massively improve their well being you can massively and you can go do yourself on the productivity benefits that this produce. And so that problem I just mentioned is a large problem. It’s not you know, it might it might affect 234 percent of the population. And it’s in some way, I think, another large problem is that carers, older carers, so I get a bit older and my wife looks after me or vice versa, they tend to be socially isolated. Now Australia has got some quite good policies on this. And we have, we were an early innovator in funding people to go round to older people’s houses and make them a cup of tea, have a chat and then move on or put their dinner on and things like that. But there are lots of things we could do to improve the social connection between carers and of carers and their community and so on. So that’s another area. Another area I would argue would be teaching and probably kids on the autism spectrum, teaching and dyslexia. There are all kinds of things that we don’t manage for these things. Well, well, these things massively depressed, the well being of the particular kids with those with who who have those characteristics. So that’s just a bunch of they’re right at the no regrets area. Yeah. And then I’d like to see some real curiosity about what other kinds of things can we do, which have very low, low short term costs and improve well being. Because a lot of those are actually going to be over any reasonable period of time, no regrets measures, they’re going to contribute to GDP, and they’re going to improve well being. But other than our kind of broad sympathy for such things, you don’t see these types of this type of thinking and those types of initiatives being very high up on the agenda. For in in, for instance, just interact Dan’s wellbeing budget. And if you ask the right question, I will then opine on the well being budget. I just feel I need to give you a word in edgewise.

Gene Tunny  45:51

Okay, okay. Well, I do have a, at least one more question. And but yeah, it would be good to talk about just in the well being budget, too. I was gonna ask, I mean, how are you gonna go about this, but without it being? Like, one of the concerns I have about this whole? Let’s try and, you know, I guess governments have a role of, you know, they’ve got to look after the population, but you don’t, you don’t want it to go too far. Because you don’t I mean, in my view, this is my opinion, you don’t want to reduce the capacity of people to look after themselves. I mean, we should be encouraging Self Reliance to an extent. To what extent does this become paternalism? I mean, how do we do this without public servants becoming busy bodies without interfering too much? How do you go about this? That’s what I’m doing. So I’ll

Nicholas Gruen  46:41

give you an example with Yeah, with I mean, I completely agree. I mean, the idea of public servants fixing that problem, you know, with a hub and spoke model with Canberra bureaucrats or Sydney and Melbourne bureaucrats is just take just take me out and kill me now. What Yeah, this sort of thing is an example I chaired a thing called the Australian Centre for Social Innovation and they have a programme called weavers and weavers is an I call it place base. That’s a term that a lot of people understand. And essentially what it does is there’s a little bit of money there and it engages carers it so it sort of is engaging carers in a local community. A particular care might be my get an honorarium for being a weaver and a weaver will be weaving together, we’ll be running some activities, keeping in touch with local carers, etc, etc, etc, just realising that, because of the circumstances they find themselves in, they need a bit of help and resourcing in maintaining social connection. So it has to be and it’s very cheap. And, you know, and also your some of that money will get wasted, and it won’t work very well and others, it will do terrific things. And it can be, it can provide sort of different kinds of sinews for a community. I’ll give you another example. My wife set up an organisation, my wife and a friend of hers set up an organisation in Seymour called I Wish I’d asked, it was based on it began thinking about oral history. And the idea was to connect school kids and people in aged care homes and older people in the community to record our oral histories. But it turned into a much bigger programme than that. And it was, was it conceived of itself as a multi generational, well be a multi generational anti loneliness programme. They didn’t actually use the word well being. But and it was a, it was a fabulous programme. And I’ll let me just give you an example of because it does go to the connectedness of things. And this is something which maybe we’ll talk a bit more about when we when we look at when we talk about this again. But one of the things that people involved in well being boys talking about is the way things are connected up. And I think so many of those connections are serendipitous, that they’re very difficult to manage for but let me tell you that in Seymour, one of the app camps of this was that young boys so they’re 14, they’re going they’re thinking to themselves, I’m going nowhere, probably they’re not that good at school, their inseam or they’re not quite sure, you know, they’re thinking I might just end up unemployed I don’t really want to end up unemployed and they get in they get involved in this programme. Now some of them are gonna think all people don’t want to talk to old people, and they get in their various the programme have various ways of ensuring that these introductions worked out as well as possible Anyway, they start making friends with these old people. And they saw one autistic kid, we saw an old RSL guy. And they, and the autistic kid became very obsessed with the metals that the old guy or the old guy had. And they talked about these metals and the battles that he’d had every week. Now, that was fantastic for both of them. That is, we’ll be back, let me tell you something else that happened, you know that three of seven or eight boys who were about 14, you know, what they decided they wanted to do for a job. They wanted to work in aged care homes. Wow, you don’t think of young 14 year old boys wanting to do that. But because because we’re brought up in silos. Because, you know, this is reintroducing into the community stuff that existed on its own 80 years ago. And I don’t think, well, I don’t think what happened is that these three kids thought, Oh, I’ve always wanted to do tarot, that’s, that’s me to a tee. I think they thought I can do that. And I won’t be unemployed. And I’ll be useful. And I like these people. And I’ll feel useful. And I’ll have a decent life. And we’re sitting around in Canberra worrying about how do we staff our aged care homes?

Gene Tunny  51:24

That’s a great example.

Nicholas Gruen  51:25

Yeah. So you could justify that. But you could justify this programme, which is run, that wouldn’t cost. It doesn’t cost nothing. But it’s run on the smell of an oily rag, you could use it. I mean, one of the things that the institutions, the aged care homes and the schools, I won’t call them resistant to doing this. But some are. And of course, all of them are subjected to strong regulation, which has been put in place for completely other reasons. So safety checks, police checks, insurance. And it’s not that you want to ignore the issues that those that that regulation is trying to address. But you do want to say that this is a valuable thing. And if it’s getting in the way we want to know about it. And then we want to think about the costs and benefits and whether we can do this in a better kind of way. And so it’s those kinds of things that the the well being agenda, could could address, but really only by making stuff happen and then watching the ripples come out and working out where government’s getting in the way where it can help, generally speaking, not with large amounts of money.

Gene Tunny  52:41

Yeah, yeah, I like that. Good ask what we’re seeing more is that a disadvantaged area in Melbourne as it is

Nicholas Gruen  52:48

pretty disadvantaged, it’s the place where the Australian would furphy comes from see more and further for fees, which have now make money selling their name as a beer, and they give that money to charity. And, and I wish I’d asked picked up some of that money. So shout out to Murphy’s. But so so it’s about 120 My best guess out of Melbourne up north, just getting into Kelly country. And yeah, and it’s where a lot of canned fruit came from, and the firt and the further fees made boilers. And a furphy. In the Australian idiom is what soldiers the story soldiers told, I think this was in Gallipoli, sitting around the boiler and having a cup of tea. I think that’s roughly the story. And that’s where Seymour’s very good learn something.

Gene Tunny  53:41

And I was just thinking that shows the importance of connection and, and connections and important part of well being being connected to family or to friends. And, and that’s, and a lot of people would argue that’s what we’ve lost. We’ve got more people living alone. Yeah. And people just aren’t connected generations as generational divide. Yep. So yeah, I think you’re highlighting that that’s a such a great example of highlighting how you can improve well being with something simple. Now, this might this might have to be the last question for this. This part one of this conversation. You talk about these could be cost effective. This could be low cost is this where something like Andrew Lee’s evaluation unit could be an important part of this story and figuring out okay, we’re spending billions of dollars on these big welfare programmes. And you know, that it could be that it’s better, we’re better off spending a small amount of money on little interventions like this. Yeah,

Nicholas Gruen  54:37

yeah. Yeah. Well, one would hope that some nows about evaluation would enable us to get counterfactual snapshots. I wouldn’t want to say let’s do away with welfare, I would want to say welfare costs us an absolute shedload of money. And for a tiny fraction of that money. We could be doing these kinds of things which are broad health benefits and by health I mean in the broadest sense physical, mental, and community and the health of the community. And we could try to be, I won’t use the word rigorous because that conjures up people with clipboards and bureaucrats, and I just and mathematicians and economists, and I’m not talking about that. I’m talking about trying to be trying to be evidence based, trying to work, trying to notice what works, doubling down on what works and just doing less of what’s not working so well. So I think that’s a great place to finish up. We didn’t get to talk about New Zealand’s well being budget and we can certainly fit that into the next exciting episode.

Gene Tunny  55:42

Excellent. Okay, thank you, Nicholas. Fantastic.

Nicholas Gruen  55:45

thanks very much, Gene.

Gene Tunny  55:47

rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

56:34

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Credits

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Categories
Podcast episode

The Greedflation hypothesis – EP186

Economics Explored host Gene Tunny talks about the “greedflation” (greed + inflation) hypothesis with his colleague Arturo Espinosa from Adept Economics. They discuss whether greedy corporations might be responsible for high inflation rates in advanced economies such as Australia and the United States. Gene talks about how the excessive fiscal and monetary stimulus during the pandemic has been a major contributor to higher inflation. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

What’s covered in EP186

  • [00:01:28] Australia’s high inflation rate.
  • [00:06:57] UK windfall tax on oil and gas companies. 
  • [00:10:27] Greed inflation hypothesis. 
  • [00:13:29] Markups as a contributor to inflation. 
  • [00:16:20] Industry concentration and inflationary pressure. 
  • [00:21:11] Inflation outbreak and COVID stimulus relationship. 
  • [00:25:45] Problems with Covid stimulus. 
  • [00:27:58] Excessive stimulus and inflation. 
  • [00:32:35] Corporate power and antitrust.

Links relevant to the conversation

Greedflation articles:

Blaming inflation on greedy business is a populist cop out

Profits and Inflation in Mining and Non-Mining Sectors | The Australia Institute’s Centre for Future Work 

Underlying Australia’s inflation problem is a historic shift of income from workers to corporate profits

Corporate profits have contributed disproportionately to inflation. How should policymakers respond? | Economic Policy Institute

‘Greedflation’ is the European Central Bank’s latest headache amid fears it’s the key culprit for 

price hikes 

How Much Have Record Corporate Profits Contributed to Recent Inflation? – Federal Reserve Bank of Kansas City 

Cost-Price Relationships in a Concentrated Economy – Federal Reserve Bank of Boston 

Inflation is being amplified by firms with market power  

Chris Murphy’s economic modeling on stimulus and inflation in Australia:

https://onlinelibrary.wiley.com/doi/full/10.1111/1759-3441.12382

UK windfall profits tax:

What is the windfall tax on oil and gas companies? – BBC News

Energy Profits Levy Factsheet – 26 May 2022 – GOV.UK

RBA on sources of inflation in Australia:

Box C: Supply and Demand Drivers of Inflation in Australia | Statement on Monetary Policy – February 2023 | RBA

Charts:

Australian bank deposits

Australian money supply (M3)

Transcript:
The Greedflation hypothesis – EP186

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you could join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I chat with my colleague Arturo Espinosa from adept economics about the greed inflation hypothesis, our greedy corporations to blame for the high inflation that we’ve been living through. After you listen to the episode, please let me know what you think about the greed inflation hypothesis. You can email me at contact@economicsexplored.com. I’d love to hear from you. Okay, let’s get into the episode. I hope you enjoy it. Arturo, good to have you back on the programme.

Arturo Espinoza Bocangel  01:12

I’m very happy to be here.

Gene Tunny  01:14

Excellent. Arturo. So it’s at the end of the week, it’s Friday the 28th of April 2023. Earlier this week, we had the March quarter inflation number for Australia. It came in at 7%. So it was lower than at its peak of 7.8%. The quarter before but it’s still it’s still high. And mean, there’s still concerns about cost of living in Australia for sure. I mean, that’s something we’ve all been noticing as we go to the supermarket and other stores. So for sure inflation is still high. One of the things I think is interesting, and I must admit I’ve come to this issue late. Is this issue or this accusation of greed, deflation? Have you heard about this concept of greed, deflation? Arturo?

Arturo Espinoza Bocangel  02:05

Well, lately, yes. But when I was student in Peru, I haven’t heard that

Gene Tunny  02:11

nine. I think it’s a it’s a new term that that’s been thrown around. There’s this accusation that a lot of the inflation we’re seeing is due to profiteering it’s due to greedy corporations. So obviously, we do need to be concerned about big business and monopoly power. There’s, that’s a legitimate thing to be concerned about. But there is this question of, to what extent can we explain the inflation that we’ve seen by greedy corporations? So is it greed, flotation. And this has been quite prominent in the media. So there’s a think tank here in Australia, the Australian Institute, and it’s put out a paper in which they’re saying that this is a big part of the inflation problem. So we might talk about that in a moment. And it’s an accusation that’s been thrown around in other countries, too, in the States. And also in Europe, there was an article in Fortune magazine earlier this week. Greed flash deflation is the European Central Bank’s latest headache amid fears it’s the key culprit for price hikes. And I mean, what we see in whether it’s in Europe, or whether it’s in the States, or whether it’s here in Australia or the UK, if you just look at the data, if you look at data on inflation, you look at data on corporate profits and wages, and you look at data on other input costs. It is the case that profits have been have been high and they have grown in this post pandemic period. And this has led some people to argue that, well, they’re just profiteering they’re putting prices up more than can be justified. Now, I think this is a difficult hypothesis to prove it been thinking about it a bit and how you might demonstrate whether it’s the case or not that this is true, or whether you can whether we can rule it out, or or is it something that is it is a legitimate possibility. We do know that certainly profits for oil and gas companies and also coal mining companies here in Australia. They’ve been, they’ve been very high and also profits in other sectors to have been, have been higher. So in banks and, and in other sectors, and that’s what The Australia Institute argues. One of the challenges I see however, is that in economics as in other sciences, you need to be careful to distinguish should join correlation and causation. I think what Institute’s such as research, researchers think tanks, such as The Australia Institute have found I think they’ve found a correlation isn’t causation I think that’s a lot harder to establish and might go into, into why that’s the case. So I want to talk about correlation versus causation, how might you prove whether there’s green inflation is, is a legitimate thing or not? And we’ve also got to think about here, what’s the what’s the scientific way to look at this and to come to a conclusion now, The Australia Institute is a think tank, and it has a particular agenda. It has a progressive or a left wing bias. And so this type of hypothesis of green inflation appeals to it. So we need to keep that in mind. And we should think rigorously about whether it makes sense or not. Okay, so that’s, that’s a bit of an intro to this idea of greed, inflation. Or one of the other things I just wanted to mention in the intro is that there have been calls for a windfall tax on oil and gas companies in, in many countries, and they did impose one in the UK, I don’t know if you saw the news about the that windfall tax that they imposed on oil and gas, know, what will happen are they put on a, an energy profits Levy, because arguably, a lot of the the excess profits that the oil and gas companies were making, that was due to the higher prices associated with the war in Ukraine. And if you think about it, from an economic perspective, they really didn’t need those profits to have been motivated to invest in the first place. So you could argue that they were, they were x supernormal profits. And so therefore, you could make a case for a some sort of excess profits. Levy. And so that’s what they did in the UK, they put on a an energy profits levy a 25% surcharge on extraordinary profits, the oil and gas sector is making and, and that’s we saw a similar thing here in Australia wheeling, Queensland with the higher royalty rates on coal. So they put in a new, a couple of new tiers in their royalty rates. I think they had a 40%. There’s now a 40. What is it a $40 a tonne royalty rate, once the coal price gets above a certain, certain level? And I mean, this, this is something that’s controversial, because then companies say, Well, there’s a sovereign risk that oh, there’s a risk of that, that we didn’t anticipate before. Now, we have to really think about whether we invest in your state or your country. So there’s that that to consider. But that’s just to say that why this is relevant is because if you think that this green inflation is a problem, then you might be more inclined to to advance policy measures like that, like a windfall profits tax or higher, higher company tax or something like that. So I think that’s a that’s one of the issues in the policy debate I thought I’d mentioned. Okay, Arturo, any thoughts on ADD or green inflation? So far,

Arturo Espinoza Bocangel  08:26

it seemed that probably these inflation can be caused by these corporate big multinational corporation that wants to maximise the profits. Without taking into account what happening in the White House household level, the pressure of these inflation particularly is on the household Australian households, that they need to pay higher prices in energy, fuel, my grocery staff, so that is, that is painful.

Gene Tunny  09:04

Yeah. How plausible Do you think there’s greed inflation hypothesis is so basically it’s saying that the corporations are taking advantage of this concern over inflation? Or that they see that? Okay, so prices have started to rise and corporations think, okay, let’s just keep increasing prices, because we’re, we’ve got the cover to do. So now. We’re, it’s, we can get away with it, essentially. Now, what’s the problem with that argument? So we’re thinking like economists would say that the problem with that argument is that if one company decides to do that, and they’re doing it illegitimately that their costs of production really haven’t increased. Wouldn’t another company try and undercut them or try to they just, they wouldn’t raise their prices as much and then they could steal some market share from them. Yeah, the third point? Yep. So it requires some time. coordination among the companies, doesn’t it some sort of implicit collusion. And I think this is where some of these models, there are some theoretical models that appears which are trying to lend support to this greed inflation hypothesis. Did I think you found a study, didn’t you, Arturo, that said that this or that? Was that an empirical study you found that said that where there’s market power, it looks like there is some tendency to have

Arturo Espinoza Bocangel  10:25

there’s a few of them, the the those paper have found positive correlation between higher concentration higher inflationary pressure,

Gene Tunny  10:36

really? Okay. And do you think they’re good studies, though they published in good journals, do we what do we know?

Arturo Espinoza Bocangel  10:42

Those are probably most of them are publishing good journals. And also in economy, we know that the mythologies bar are different. And also each metal he has his pros and cons. So we need to, to consider that and analyse in detail what is.

Gene Tunny  11:05

So probably too much for us to do in this episode. But we’ll put links in the show notes. So if you’re in the audience, and you’re interested in having a look at those studies, you can check them out, and I might have a closer look at them after this. I know that there are studies like that, and that would lend support to this greed inflation hypothesis. And so maybe we can’t completely rule it out. There’s a paper by John Quiggin and Flavio ministers, and John and Flavio, their professors at University of Queensland and economics. I know both of them. Well. And John’s actually been on the show before. And they wrote a piece in the conversation. I think they had a working paper to back it up and inflation has been amplified by firms with market power. And so their argument is that where one or more firms is big enough to have market power for any given quantity sold, prices will be higher. Yep, and increasingly higher as demand for the product climbs, okay. This means that after a boost to demand such as the one that followed the COVID stimulus, in the end of the lockdowns, firms with market power amplify the resulting inflationary shock. Okay, so they’ve got a model where they come to a conclusion that having market power means that you’re more likely to be able to take advantage or to put your prices up if there’s this, this demand shock, okay. Possibly. I mean, my feeling is that if there is a level of competition in the market, then that should constrain that. But look, if there is market power, maybe that’s an interesting, interesting hypothesis. And there are studies from the States did you see this isn’t just something in Australia, there are studies from the US as well as a Kansas City Fed study from 2021 There’s a really interesting point they make in this that I think it’s worth thinking about in this whole green inflation conversation. So I think Andrew Glover Jose, I think you know how to pronounce his name. Yeah, cuz Sam was traded veal. Okay, that’s great. And Alice Vaughn and Rebecca they present evidence that markup growth so markups on products sold. So for the to get the profit. So the markup growth was a major contributor to inflation in 2021 markups grew by 3.4% over the year, whereas inflation as measured by the price index for personal consumption expenditures was 5.8%. Suggesting markups could account for more than half of 2021 inflation. This is what I think’s fascinating. They note that the timing and cross industry patterns of markups growth of markup growth are more consistent with firms raising prices in anticipation of future cost increases rather than an increase in monopoly power or higher demand. I think that’s a really critical point. So look, it might be the case that if you look at the data, at the moment, that it looks like the businesses are doing incredibly well. So they’ve got high profits. And they’ve they’ve increased their prices, but it could be that they’ve increased their prices in anticipation of future cost increases. Now to some extent, you have seen those future cost increases will in fuel I mean fuel prices were higher for I think they’re starting to come down. But energy prices here in Australia are still going up. Costs of other inputs are increasing labour costs. Labour hasn’t responded as much as some people have been forecasting for years. So wages growth is still It hasn’t really been that spectacular. But look, I mean, there’s something to that that could be the case that what we’re seeing is businesses. It’s not as if they’re being greedy. They’re just concerned about their own costs rising and they’re increasing their profits. Another thing to keep in mind, of course, is that that profits are procyclical. And this inflation has occurred at a time of a booming economy, the economy post COVID boomed. And as we came out of the pandemic, and that’s a time when you’d naturally expect to see higher profits. And we’ve also seen high inflation, unfortunately. So it could be correlation rather than causation. Again, look, lots of there’s a lot going on. There are lots of aspects of the economy. And I think that Kansas City Fed study, and I’ll link to that in the show notes that makes a good point about how you need to consider expectations in assessing what companies are doing. Okay. There was also a study by the Boston Fed that you found wasn’t there. So this is one of the other Federal Reserve Banks. So what was that cost price relationships in a concentrated? Economy? Was this a study you were talking about before?

Arturo Espinoza Bocangel  16:15

Exactly if the concentration, right,

Gene Tunny  16:19

okay. So the US economy is at least 50% more concentrated today than it was in 2005. So they, their findings suggest the increase in industry concentration over the past few decades, could be amplifying the inflationary pressure from current supply chain disruptions in a tight labour market? Okay, so this was a paper from 2000, until I’ll put a link in the show notes. Right. So that’s, that’s supporting that greed foundation thesis. Look, there’s there’s a whole bunch of you know, there’s studies that support it to an extent and then there’s others that question it, or there’s commentary that questions that. And one of the things you found Arturo, which I think was fascinating was that the so the Reserve Bank of Australia, so as central bank, and here in Australia, it doesn’t really give any credence it doesn’t really think much of this whole green inflation idea, does it or it hasn’t hasn’t raised it or doesn’t talk about it as a possible explanation does

Arturo Espinoza Bocangel  17:20

exactly here that RBA pointed out that there’s a place I fuck towards accounting for around half of the increase in inflation over the year to September 2022. But they didn’t mention anything about really corporations.

Gene Tunny  17:35

Right. Okay. So what I’ll do is so I can be to be objective and to be to be fair, on both sides of the argument, I’ll put links to, to, to what the RBA has been saying to both of those fed studies and also to what The Australia Institute has been, has been saying, I mean, they’re been the most vocal about about this. I mean, their analysis to them suggests this is an analysis of national accounts data. Again, it’s it’s an analysis of correlations of data that’s that they seen these things happening at the same time and drawing a conclusion based on that now, can you make the conclusion that this is due to greedy corporations, or corporations being more greedy than normal? Okay, I mean, we live in a capitalist economy. Okay. So businesses are going to maximise profits. There’s no doubt about that. But look, that’s the system we’re in. But is this something that in times of inflation, does it amplify the inflation or lead to, to more inflation than you you’d otherwise expect? I think that’s the hypothesis, The Australia Institute, based on their correlation, all analysis I call it says just looking at correlations, they would argue that it does. So their analysis suggests to them that 69% of excess inflation, so above the, the Reserve Bank’s target of two and a half percent, since the end of 2019, came from higher unit corporate profit margins, while only 18% of the student labour costs. Right. Okay. And they go on in that report to say that, look, it’s not just the profits in the mining sector, because it was just profits in the mining sector. And whereby, okay, the miners are really profitable. And so there’s a lot more profit in the Australian economy that’s on that’s because of all these export earnings. Right? So it’s not as if they’re making all of these profits by exploiting people in the domestic economy. So that’s where that argument of theirs would fall down. But then they do go on to point out it’s not just mining, that where there’s these excess profits in their view, there’s, you know, higher profits in it. in financial services and banking and in other sectors, so, yeah, check that out. And I think they ask a good question. And it’s good that they’ve made this contribution to the debate, because it forces us to think rigorously about what’s been driving inflation and what’s the cause of inflation. And we’ll get on to that again, in a moment. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  21:03

Now back to the show. One of my old Treasury colleagues, John to in the financial review, John has written an opinion piece, which is very good. John’s good writer. Blaming inflation on greedy business is a populist cop out. And I think what John is saying here, I think this is where a lot of the economists in the Reserve Bank or the Treasury, I think they would agree with John, I think I largely agree with John, and I’ll go into into why in a moment. And John’s main message is that it was the spillover of public sector stimulus that lasted for too long, not price gouging by companies that fueled the inflation outbreak. Did you have a look at that? That article by John?

Arturo Espinoza Bocangel  21:55

Yeah, yes, I rebuilt the conclusion. Yes. He made a good point.

Gene Tunny  22:00

Yeah. And he relied on a study by Chris Murphy, who’s a former Treasury model. I actually work with Chris’s daughter in Treasury, Carol, I believe, if I remember correctly. So Chris, is a well known Australian macro, economist. And he was at KPMG e contact for a while. Now he’s a visiting fellow at ASU. And he’s done something a bit more advanced than what The Australia Institute did. The Australian Institute just looked at the national accounts and inflation data and tried to draw conclusions from that from just basic data analysis. Now, I think the problem in economics is, you can only go so far doing that, if we’re talking about testing hypotheses, what’s the scientific approach to do that, you probably need something a bit more than just the basic data analysis. Now, one of the problems we have in economics, of course, is that you can’t run controlled experiments as you can in the lab. So we’re always trying to come up with clever ways to, to analyse the data, to do econometric modelling of some kind, to work out whether these hypotheses can be maintained, or whether they’re, they’re rejected. That’s what I’d say on that. And what Chris Murphy does is he runs a simulation. He’s got this macro economic model, this econometric model of the Australian economy based on a broad range of macro economic data, and relationships that have some basis in economic theory. And what he does is he simulates the economy, if it was subject to COVID. But there wasn’t all of the arguably excessive monetary and fiscal policy response there was the there was some contraction in GDP. I mean, there’s a quite a substantial contraction in GDP still in that first quarter of COVID. Because people just would have naturally socially distanced anyway, right, even in the absence of policy measures. And we did say that in in some economies, that there was no, there was no way of avoiding the the economic shock from COVID entirely. But if you didn’t have the, all of that stimulus than by his estimates, you would have avoided a lot of the inflation. And I think this is really, really interesting, really interesting modelling. And Chris Murphy has a paper in the economic papers journal, which is a journal that’s actually published by the Queensland branch of the Economic Society was aranea, which I was once the secretary of. No longer though, but you can get that online, I’ll put a link in the show notes, fiscal policy in the COVID, 19. Euro. Really good paper. And what he does in this paper, which I think is excellent, is he just highlights how massively generous the COVID stimulus was, the stimulus during COVID was particularly job keeper, which was just incredibly generous, and he ended up because of the eligibility rules, there are all these people who are they were only employed part time, but they effectively get compensated as if they were full time workers. So there are a lot of people getting access excess money. And there’s an argument that that stopped some of those people from searching for a new job, if they were if they are on job keeper, or if they’ve been supported by job keeper. So, yeah, lots of problems with that, that stimulus and I think we’re, if we had another pandemic, I mean, let’s hope we don’t, I mean, still getting recovering from that last one. I mean, it was just the excessive response was just at it, and just, yeah, incredible. But if we do have it, I think we would have a much better, or a hope, whatever much better economic policy response. But what Chris Murphy found was that the fifth and this is in Australia, the fiscal response to compensate for income losses. In services industries meant that unemployment was around two percentage points lower for three years than otherwise, than it otherwise would have been. And there was over compensation for every $1 of income, the private sector lost under COVID, fiscal policy provided $2 of compensation. And then there was of course, the ultra low interest rates, point 1% cash rate, the hundreds of billions of dollars of monetary stimulus via quantitative easing, all of this additional money in bank accounts, I’ve got some charts that I’ll put in the show notes. So just show how much the Australian money supply is grown. I think since 2020, the amount of money so the stock of money in Australia has increased by nearly a third or around a third or something like that. And think about that. This is part of this whole. And this is something that what I’ve been saying on this show for the last couple of years, I mean, what we’ve got is too, too much money chasing too few goods, if you looked at what happened during the pandemic, and within the fiscal policy and monetary policy, what we saw with the inflation now, no doubt, significant part of it was due to the invasion of Ukraine. But what we end up seeing with inflation is what you would have expected based on the the massive stimulus and particularly the massive monetary growth that we saw. And so therefore, you don’t need this green inflation hypothesis. You can explain a lot of it by the excessive stimulus. And this is what Chris Murphy shows in that paper. Germany thoughts on that, Arturo?

Arturo Espinoza Bocangel  28:09

Whoa, this point, you the last point that you have mentioned is very clear. It made me think, okay, yes. The these re the cooperation argument is not 100%? Sure, shall we, whether if some academics, or you know, researchers will try to understand the drivers behind inflation. When I mentioned, drivers, of course, we include these government expenditure in increments. And also lit, we can include another factors at fame level, like, for example, to, to use markups in order to maximise profits. So that kind of thing is,

Gene Tunny  29:03

yeah, I think you made a good point before. I mean, we really want to have a look at what’s been happening in specific firms. I think we’ll have to wait for studies that really examined what’s happened at that firm level, maybe using that business longitudinal database data? I don’t know. But yeah, clearly, this is a it’s a big issue. And I think it’s one that we need more evidence to resolve. But I guess what I would say is that we shouldn’t jump to the conclusion. I mean, I’m pretty confident that we shouldn’t jump to the conclusion that it’s greed flesh, and that is just because a greedy corporations, I think there’s there’s a lot more. I’m not even sure to what extent that’s a significant factor. In fact, the corporations more greedy than normal. I mean, it’s this idea that it could amplify a shock that is inflationary, possibly, but I’d like to see, yeah, I have to sort of think deeply about what that means. It’ll is and what that mechanism is, I mean, my view is that you don’t need that great inflation hypothesis to explain what’s happened because it’s perfectly understandable if you just think about the the massive, the massive shock that we saw now. So think Chris Murphy, what he found was that if you didn’t have the stimulus, if you just had COVID, then then by the end of 2022, you’d have inflation at around 4.2%. So you would have ended up with some inflation as the economy bounced back after COVID. But what ended up happening, of course, is that inflation went far beyond 4.2%. In Australia, we ended up with 7.8% in Australia. And what Chris Murphy’s modelling shows is that, in his scenario, his his actual forecast scenario, he’s worked out that the excessive macro stimulus drives inflation, three percentage points higher, so three percentage points higher to a peak of 7.2%. Okay, which is in the wall ballpark of where it did get. So in his model, he can you explain it with the stimulus. Now, of course, it’s a macro model and models that we all know the problems of trying to forecast the economy and modelling the, the actual path of the economy with an econometric model with with equations. We’ve got parameters estimated, statistically or using econometric methods there. They have their limitations. But to me what, what Chris Murphy does is, is a better way to think about this sort of try and answer this question than just this basic correlation analysis that’s done, where we go, oh, well, profits are up. inflation’s up. wages aren’t up by much. It looks like it must all be inflation’s. At the same time as we’re having inflation companies are making more money. Therefore, it’s greedy, greedy corporations, I think I don’t really think that’s, that’s the right way to think about it. Having said that, I mean, it’s worth having the conversation and forces us all to think more rigorously about the causes of inflation and what we should do about it. And he thought cetera? No, I think that’s pretty much all I wanted to go over. I’ll put links in the show notes, to all these various papers and reports we talked about. The RBA has put something out on inflation drivers where they look at the different factors and they don’t seem to think much of this whole green inflation, explanation. But look, I think it’s worth covering. I know that, you know, we do have to be mindful of corporate power we have to be mindful of, of monopolies or oligopolies that exploit their market power. There’s no doubt about that. I mean, then that’s why we have things like the a triple C, the Australian Competition and Consumer Commission, or we have the we have the antitrust statutes in the US. And we have whatever the equivalent is in the UK. Did you see in the in the they’re quite muscular in the UK? Did you see the they’re blocking that? Microsoft’s acquisition of Activision Blizzard? Oh, I haven’t seen that. Oh, yeah. That’s quite interesting, because one of the things I’ve covered on this show is this issue of big tech and to what extent we should be concerned about big tech, so might have to come back to that in a in a future episode. I thought that was a really interesting development, because they’re concerned about Microsoft’s already a behemoth, right. Concerned about Microsoft getting getting even more market power in games. Okay, well, thanks so much for your time and for helping me think about this issue of greed, inflation, it’s helpful to talk about these issues with with colleagues. So I can think about really clarify how I’m thinking about it. Am I on the right track? Am I being biassed? Am I too sceptical of this hypothesis, which might actually have some merit. But yeah, I think my view is that we can probably explain inflation most, if not all of the inflation by the excessive fiscal and monetary stimulus. We don’t need this great inflation hypothesis that said, Look, if they can provide convincing evidence that it is a thing then sure let’s let’s look at it a bit more closely. So think that’s where all I’ll end up. Tomorrow. Thanks so much for your time.

Arturo Espinoza Bocangel  34:37

Thank you for having me, as well was my pleasure. Very good.

Gene Tunny  34:43

rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

35:30

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Credits

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Podcast episode

The Invisible Hand: economic, religious, or mystical concept? w/ Dan Sanchez, FEE – EP185

The Foundation for Economic Education’s Dan Sanchez argues that the invisible hand is a legitimate economic concept and not a religious or mystical one, as some critics of economics claim. Dan and show host Gene Tunny discuss the efficient organization of economic activities by the market mechanism in a decentralized way, without the need for a central planner. The conversation turns to TikTok and economic engagement with China. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP185

  • Introduction to this episode [0:06]
  • Dan’s article on the “invisible hand” [2:06]
  • The production of a pencil is like an orchestra without a conductor [5:25]
  • Is the invisible hand the hand of God? [8:34]
  • What is the problem with central planning? [12:27]
  • Central planners don’t like the idea of economic laws because they circumscribe their utopian dreams [15:45]
  • Dan’s views on big tech [19:23]
  • Is there a case for regulation or a ban on TikTok? [23:32]

Links relevant to the conversation

Dan’s bio: https://fee.org/people/dan-sanchez/

Dan’s Twitter handle: @DanSanchezV

Dan’s article on “How Atheist Anti-Capitalists miss the point”:

https://fee.org/articles/how-atheist-anti-capitalists-miss-the-point/

Von Mises book on the economic calculation problem

https://mises.org/library/economic-calculation-socialist-commonwealth

Article about problems with Soviet shoe production:

https://www.econlib.org/archives/2009/09/soviet_shoes.html

Bio of 19th century British free trade advocate Richard Cobden who Dan mentions:

https://en.wikipedia.org/wiki/Richard_Cobden

Transcript:
The Invisible Hand: economic, religious, or mystical concept? w/ Dan Sanchez, FEE – EP185

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dan Sanchez about the invisible hand, the efficient organisation of economic activities by the market mechanism in a decentralised way, without the need for a central planner, the great Scottish Enlightenment economist and philosopher Adam Smith observed, every individual neither intends to promote the public interest, nor knows how much he is promoting it intends only his own security and by directing that industry in such a manner, as its produce may be of the greatest value, the intense only his own gain. And he is in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Is the invisible hand a legitimate economic concept or is it instead of religious or mystical concept as some critics of economics argue? My guest this episode, Dan Sanchez argues vigorously against those critics. Dan is the director of content at the Foundation for Economic Education. The foundation is one of the world’s leading pro free market think tanks, and it’s been operating since 1946. Okay, let’s get into the episode. I hope you enjoy my conversation with Dan. Dan Sanchez, from the Foundation for Economic Education. Welcome to the programme.

Dan Sanchez  02:06

Thanks, Gene. It’s great to be here.

Gene Tunny  02:07

Excellent. Dan, I was keen to get you on the show to chat about an article that you wrote for fi recently in the world in the last few months. So how atheist anti capitalists missed the point why they’re wrong, to sneer at the invisible hand and, and our pencil. To start off with Dan, could you just explain what you were reacting to? So what was the sneering that was being done at the invisible hand? And, and eyepencil, please,

Dan Sanchez  02:40

yeah, well, I tried to make it evergreen, partially because this is a criticism that is levelled at eyepencil and about free market economics in general, a lot. And another thing is that I just didn’t think that the I don’t even remember the author of the book that was in the latest smear, and the latest attack on Leonard Reid’s eyepencil was then I just wanted to sort of make a blanket case against that kind of line of attack. And what the line of attack is, is that is that free market economists believe in the invisible hand, that there’s a line and a pencil that says, Since only God can make a tree, I insist that only God can make me. And therefore free market economics is invalid, because ultimately, it is based on faith instead of reason. And that it relies on some kind of a supernatural divine intervention for the free market to work. So it was that line of attack that I wrote my article to counter attack.

Gene Tunny  03:55

Rod, okay, I didn’t realise there was that line in eyepencil, I’ll have to go back and have a look at it to see the context. eyepencil is a great article that explains how no one no one person knows exactly how to make a pencil. There’s all of these, you know, hundreds of or however many people 1000s of people involved in the supply chain and the production from the growing of the timber, and the mining of the graphite, and the assembly of all the components into into a pencil. And that’s all coordinated by the market system. I mean, what Adam Smith and you know, the, the invisible hand, this is this metaphor from Adam Smith. That’s about how he sees as there’s, it’s almost as if there’s an invisible hand at work in how the market coordinates people and we owe our DNA to the self interest of the butcher and the baker. So yeah, that’s what that’s broadly speaking, correct. isn’t enough characterise that, right?

Dan Sanchez  04:57

Yes, that’s exactly right, Leonard. Reid is actually the founder of the organisation that I work for the Foundation for Economic Education. And he wrote this classic essay I pencil. And really what it is, is it’s a, written from the perspective of a pencil, like the pencil is the narrator. And the pencil is giving his family tree, his ancestry. And the point that he has to make is that, as simple as he is, like a pencil is not a super high tech product. But as simple as it is, its production is vastly complex, really, involving millions and perhaps 10s, and millions and hundreds and millions of people in its production, because you might think that the components are relatively simple, because there’s wood, and then there’s the lead and the eraser, but each one of those components had to be manufactured. And oftentimes, those the capital goods that were used to manufacture that they have to be manufactured, and it just keeps radiating out and out. And when you really trace what it all that goes into the production of a pencil, it is an orchestration of millions of people. But it’s an orchestra without a conductor. And that’s the, that’s the marvel that eyepencil really reveals is that there’s no mastermind, there’s no central planner, a lot of people would like to be central planners, they’d like to centrally plan pencils, and they’d like to centrally plan everything, but it is way too complex for them to be able to do that. And yet it happens every day without a central planner, because of the market price system. And, and that market price system is very orderly. But it’s not order that comes from the mind of any single participant of it, that that it’s an order that emerges out of the interactions of all these people pursuing their own little corners of order. And so there’s a transcendent order that emerges out of that. And so Adam Smith and Leonard Reid characterise that as, as sort of like an invisible hand, because all these wonderful things are coming out of the market, like a pencil, that wasn’t the intention of any single participant of it, a lot of people involved in producing things that go into producing a pencil, don’t even realise that they’re contributing to a pencil. So like someone who is, you know, manufacturing an axle that goes onto a truck, that ships the wood that ends up in the pencil. That person never thinks about his work as contributing to pencils. It’s not his intention, it’s not his order. But the market price system coordinates that all so that he actually does very effectively contributes to a pencil. And so like Adam Smith said, that it’s as if an invisible hand is ordering people’s actions to yield results. That was not any intention of their own. That you could see that that Leonard Reid and Smith and and also Frederick Basia that you could see like the hand of God in that, and that’s where the critics pounce because the critics say, Aha, you’re talking about God so therefore, everything that you’re saying is invalid. But in my article I explain how, how that actually is not a valid criticism.

Gene Tunny  08:57

Broad Okay, so we’re Smith and last year and read with a religious Did they say they compared the market mechanism to the to the hand of God is that what is that correct?

Dan Sanchez  09:09

Yes, they were all they were all Christian. And Leonard Read had that line that I mentioned, Frederick Basquiat in one of his essays warned against, quote, rejecting the order, God has given it, referring to the market and cautioning against social schemers who, who want to reject that order. And so a lot of free market thinkers see that there is something divine in it, that the order of the the world including the social order, is because of God it was created by God. But the thing is, is that even people who maybe are atheists and who who disagree with with Basquiat and read, they have no cause for disagreement with their conclusions, because as I explained in the article, the way that they reach their conclusions, was not through recourse to any kind of divine intervention. And it was not like God exists, therefore, the free market or anything like that, they reach their conclusions through economic reasoning, and through observations about human nature. So when, when Adam Smith explained the invisible hand and the workings of the market, he talked about the division of labour and exchange and prices and incentives and, and the logic of the market, resulting in that. Similarly, when Leonard Reid talks about eyepencil, and the wonders of the market, again, it’s all about about human action and exchange and the prices that result from it and the coordination that results from that same thing with with Bostian. And they think of that order as having been created by God, but, but they don’t say that, like, it relies on continuous divine intervention all the time. And they don’t rest their conclusions on, you know, holy scripture or anything like that. And so, in my article, I compare it to Sir Isaac Newton, Isaac Newton was also Christian, and was also religious, and also saw something divine in the physical order that he was describing. And that, I think there’s a double standard here, because these, these critics, they, they wouldn’t then say that, you know, Isaac, Newton’s physics were invalid because of, of his, you know, religious perspective. Because his optics and His laws of motion and everything that they were derived from using reason and using experiments and using observation, and they don’t have that criticism for him, because they don’t have an axe to grind against physics, they have an axe to grind against capitalism. And so they’re going to level this unfair attack, in this case and not in the other.

Gene Tunny  12:27

Yeah. Yeah. I was just thinking, Dan, I mean, I first came across eyepencil, I think it must have been in one of Milton Friedman’s books, because Friedman might open one of the chapters in Free to Choose talking about it, I can’t remember exactly. And Friedman love that example. I mean, the way Friedman always explained it in terms of the market, it provides us clear signal is that price signal that, and that’s all you need to observe in the market. And if if there’s a shortage of say, timber than the price of timber is going to increase, and that’s going to send a signal to the loggers to, to harvest more, more timber. So, yeah, he talks about that efficient signal. And, you know, 30 or 40 years ago, there were, it was much clearer that that was a better approach than central planning, because we had real life, socialist economies, the centrally planned economies still, that were failing to produce the goods and services, the consumer goods that that people wanted. And I might try and dig up some of those examples of those, you know, just the inefficiency of production, the failures to when you got central planning, and you don’t have the market to tell the factories, what needs to be produced, you have all sorts of bottlenecks and problems in production. So yeah, but we seem to lack that now those it’s not as clear anymore, because we’re not in that. There’s not there aren’t in real life. I mean, maybe there are some in Cuba and North Korea, but we don’t see we don’t hear a lot about them. But we’re very conscious of what was happening in the in Eastern Europe and Soviet Union back in the day. I don’t know if you have any reflections on that at all.

Dan Sanchez  14:12

Yeah, and even in those cases, the Socialist quasi socialist economies aren’t really fully socialist because they have recourse to market prices that are generated from capitalist economies. So the problem about socialism that you can see in eyepencil, in Leonard Reid’s discussion of central planning and my pencil but also in Ludwig von Mises is explanation of the calculation problem is that without market prices, production is just arbitrary that that there’s there’s no way of balancing one production course of action against another course of action because you just don’t have prices and you don’t have the the gun either profit and loss to know whether, you know whether one line of production is any better than another. And so it’s just arbitrary. But but at least if, if you have a socialist economy and the capitalist economy exists elsewhere, at least you can use those prices as a as a rough metric to have some kind of rationality in your production. But in a completely socialist world, it would be utter chaos, like there wouldn’t even be that so it would be even worse.

Gene Tunny  15:34

Yeah, you know, it’s good. You reminded me of that. Sorry, Ludwig von Mises the calculation problem, I’ll have to refresh. My understanding of that. It’s a very good point that that he makes there. Okay, there’s one thing I wanted to dive into with your article you write that those who try to dismiss eyepencil do not want to admit that they or their favourite social schemers cannot outsmart or outdo the transcendent order of the market, those who sneer at the invisible hand won a free hand to remould society as they please. Okay, I largely agree with you what I just want to ask you about your thoughts on, there’s a lot of concerns. Now. I mean, there’s concerns about inequality, and housing, I mean, we’ve got their housing prices are out of control, a lot of young people are concerned about whether they’ll be able to afford a house, there are a lot of particularly the millennials and the Gen z’s. They’ve got a more favourable view of socialism than then older generations. And I’m always conscious, I don’t want to have a not that I’m a boomer. But I don’t want to have that burger mentality. Like there are a lot of people who are so try to see where people are coming from. There are a lot of people who think that the market, this is a problem with the market. This is why we’ve got all of these issues. How do you respond to that? Do you think it is such a transcendent order? If we do have this perceived issue of inequality and lack of housing affordability? How do you respond to the people who are critical of of capitalism, or neoliberalism or whatever you want to call it for delivering these outcomes.

Dan Sanchez  17:24

So a lot of the times what central planners or would be central planners, what they want to do is they want to basically pander and demagogue to people to pretend that they would be able to outdo the market, and provide them with more goods and services than then the market would provide. And so they don’t like the idea of economic law, because it puts a crimp in their plans, because it it shows that there are just some things that can’t be done, just like in the realm of physics that, you know, there’s a law of gravity, a president can’t walk off the presidential palace and expect to be able to fly. Similarly, a president can’t impose price controls, and expect there to not be shortages. It’s like these these economic laws, circumscribe the utopian dreams of these demagogues and the central planners, you know, that relates to housing as well. So for example, rent control, central planners don’t want to believe in economic law, because economic law means that they can’t impose rent control, without creating housing shortages for the very people they pretend to want to be able to provide for. So that’s why they are really averse to any kind of notion of a transcendent order any kind of order that that is beyond what a central planner can can encompass, or some kind of an ingenious social reformer can’t outdo, but they do get away with it to a large degree, they are able to put one over on the people to make them think that they can outdo the market. And so they do manage to do a lot of interventions. But then those interventions create a lot of these shortages. They blame that on the market, and then that buttresses their case for even more intervention if people don’t actually understand economics. And so So yeah, it’s true that there are housing shortages, there’s lack of options for living, housing is unaffordable, but it doesn’t make any sense to lay the blame on the free market. Because when you when you trace what is causing these problems, especially in in certain areas in particular is that you, you see policies like rent control, and you see policies like zoning restrictions and all these anti production policies that that put a strict limit on the production of new houses. And if you have fewer houses, then they’re going to be more expensive. Again, it’s an economic law of supply and demand.

Gene Tunny  20:22

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  20:57

Now back to the show. One of the other concerns I hear expressed from people who aren’t sympathetic to Foundation for Economic Education, is this point about monopoly. There’s a growing concern about monopoly in well, in tech, in particular, surveillance capitalism. How do you think about that? I mean, is that part of the transcendent order? Or is that is that something malignant? There needs to be policy action, perhaps antitrust action against? How do you think about that?

Dan Sanchez  21:29

Yeah, I think a lot of the problems that we’re seeing with big tech, again, can be traced to government intervention, we saw with Twitter files, how much the FBI has been in Twitter’s DNS. And I’m sure if we ever had the YouTube files or the Facebook files, that, you know, we’d see the same results. I think that it is really short sighted, especially for conservatives to want to use the power of government and antitrust policy, to give the government even more power over these big tech companies, and expect that to solve the problem when when, if anything, that’s just going to give the government more leverage to be even more censorious against critics of the government. And so it just seems really, really short sighted to me. And the answer is to free big tech in the tech industry and social media and media in general of government and influence. Because if there wasn’t so much intervention, a lot of these behaviours, they’re doing it because of government pressure. It’s not because of, like a market demand for it. And if that government pressure was was released, I think people like freewheeling conversation and don’t like censorship. And and I think market demand would leave these these big tech companies to either them or their competitors and their successors, to not be abusive in their practices. And a lot of times big tech companies, like incumbent, like already dominant big tech companies, they actually like regulation, because it places a heavier burden on upstarts than it does on them. Yeah, even if you want, you know, giants, like like Facebook and YouTube to go under, again, you know, because of abusive practices. Again, the answer is to get government out of it. So that there’s less regulation, and there’s more room for competition.

Gene Tunny  23:32

Yeah, fair points, has feed on any thinking on tick tock, because it’ll mean tic TOCs, a company that there’s a bit of concern about in terms of privacy and security issues has feed on and you thinking on that? Is that is that a special case where there might be case for regulation, or a ban of some kind?

Dan Sanchez  23:50

Tick tock? Like, really, I think the reason why there’s so much pressure on banning Tiktok. For one thing, again, it’s anti competitive. The biggest supporters of a ban on on Tik Tok are Facebook and YouTube, because basically, they want to crush the competition. But the actual bill that would ban Tiktok doesn’t only ban tick tock it gives the government sweeping powers over monitoring and censoring the internet in general. And really, I think it is a a Trojan horse, on one hand for these big tech companies to to eliminate competition and on the other hand for governments to have even more power regulating speech, because ultimately, the biggest threat to our own civil liberties is not China. It’s the American government. Thankfully, it’s the American government that that is having this constant siege on our liberties. And this is just this is just part of that really.

Gene Tunny  24:56

That’s an interesting perspective. I thought I’d ask you Here’s it’s I mean, one of the things I’ve been trying to figure out through my conversations with people is, is China and how big of a threat is China? And does that mean we need to decouple from them? No, that’s not what we’re talking about today. I’ve had conversations with different people. And I know that the it’s a huge concern that a lot of people are really concerned about national security. But yeah, I think that’s a that’s a good point you make about the legislation and the wider reach that it could have. So I might have a closer look at that. That’s been great. Dan, thanks so much for your time. Are there any other points about your article or what you’ve been thinking about lately, you’d like to get across before we wrap up?

Dan Sanchez  25:44

Yeah, I mean, something that about I pencil that is brought to mind by the whole question of decoupling from China is that, you know, what the eye pencil story is, is a story about this vast division of labour, that is at the root of our prosperity, that millions of people are coordinating through the market system. And because of that vast coordination, that vast division of labour, because of the efficiencies of that, that is why we have hot, such high living standards, that we can have this huge population, but living better than any time in human history. And China is a big part of that. Because China, and having integrated with the global economy, that contribution to the division of labour, That is a big reason why we are as prosperous as we are. It’s also a big reason why the relations with China aren’t even worse. Because when peoples are interconnected through trade and through exchange, then that does create an interdependence. But that’s actually a good thing. Because that is what prevents wars, like once people are completely separate, then the only way that they can benefit from each other is through violence is through war. It’s like, there’s a saying that if if goods don’t cross borders, armies will, and that kind of separation, if anything, it would lead China to become even more totalitarian. Because it would create such a like a crisis situation and in times of crises, like the tyrants get are able to gain even more power. And so one thing that, you know, Leonard Read and people like Richard Richard Cobden talk about is that the more that exchange and the diverse division of labour knits people together, the more peace and cooperation and harmony and prosperity it creates,

Gene Tunny  28:00

here so Richard Cobden, an English radical and liberal politician, manufacturer and campaigner for free trade and peace. Yep. Okay. So very good. I’ll put a link in the show notes. So I remember, I’ve read some of his stuff many years ago, but it was a good, good reminder. So very good. Dan, thanks so much for your time. This is this has been really great. And I loved your thoughtful piece on on Smith, and Bastiat and what the the atheist ad capitalists get wrong. So that was excellent. And yeah, again, thanks again and keep up the great work and yeah, hope to see more of your stuff in the future.

Dan Sanchez  28:40

Thank you, Gene. I really appreciate it. Very good.

Gene Tunny  28:49

Okay, I hope you found that informative and enjoyable. I was really impressed by Dan’s insights into the invisible hand and his passionate defence of the free market. I think the main takeaway of this episode is the efficiency of the market mechanism in organising the production of goods and services. The invisible hand is a beautiful thing. Dan describe the market is bringing about a transcendent order, because the results transcend the intentions and efforts of particular individuals in the economy. As Dan noted, Smith, Bastiat and read demonstrated that transcendent order using economic reasoning and empirical observations about human nature, that demonstration did not rely at all on religious premises. Whether those men saw in that transcendent order something literally divine has no bearing on the validity of their reasoned demonstration of that order. I fully agree with Dan on that point. Dan has certainly given me some ideas for future episodes. It’s probably worth talking about the economic calculation problem posed by von Mises in a future episode. Von Mises argued socialist economies would fail because of the huge computational problems they faced They will have to centrally plan and direct the flows of resources across various industries and the distribution of products to consumers. Something the market mechanism does in an efficient decentralised way. In a future episode, it would also be useful to explore some of the failures of central planning in the former Soviet Union. There are various stories about recurrent shortages of bread and toilet paper and about uncomfortable and unfashionable shoes no one would wear but it would be good to delve into some specific well evidenced examples. I’ll see what I can do. What do you think? What either of those future episodes interests you? Let me know. And please let me know what you think about what either Dan or I had to say this episode. You can email me via contact@economicsexplored.com. Thanks for listening. rato thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

31:33

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Credits

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Categories
Podcast episode

A new Monetary Policy tool to end Inflation and avoid Recession w/ Prof. Larry Marsh, Notre Dame – EP184

In this episode of the Economics Explored podcast, host Gene Tunny interviews Professor Larry Marsh about his proposal for a new monetary policy tool that uses a central bank digital currency (CBDC) to end inflation without causing a recession. They also discuss the disconnect between the financial sector and the real economy. Larry Marsh is Professor Emeritus in the Department of Economics at the University of Notre Dame and author of the book “Optimal Money Flow.” 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP184

  • What is optimal money flow according to Prof. Marsh? [1:28]
  • What is the role of government in controlling the economy? [6:24]
  • A helicopter drop of money [13:58]
  • What is the idea of a Federal Reserve/central bank digital currency (CBDC)? [18:56]
  • Fractional Reserve Banking [23:08
  • Narrow banking as a solution to the banking sector problems [24:55]
  • A good example of an all-employee owned company: Burns & McDonnell, Kansas City, MO [31:31]
  • What Larry describes as a winner-takes-all economy [34:37
  • The invisible hand of the market [37:43]
  • Gene’s wrap up: How the current monetary policy tightening is causing hardship in many economies, it may well be worth experimenting with a new monetary policy tool [43:47]

Links relevant to the conversation

Larry Marsh’s Optimal Money Flow website:

https://optimal-money-flow.website/

Where you can purchase Larry’s Optimal Money Flow book:

https://www.avila.edu/optimal-money-flow/

AEA conference session in which Larry presented his idea for the new monetary policy tool using a CBDC (presentation available for download):

https://www.aeaweb.org/conference/2023/program/1335

Australian ABC News article referring to Nicholas Gruen’s savings policy proposal mentioned by Gene in the episode:

https://www.abc.net.au/news/2023-02-12/raising-interest-rates-reserve-and-bank-and-inflation-management/101952926

Nicholas’s 1999 paper outlining the policy proposal:

https://lateraleconomics.com.au/wp-content/uploads/2014/02/AvoidingBoomandBust.pdf

Links to videos on China a listener sent me in response to EP182 with Dr Jonathan D T Ward: 

Prepare for Armageddon: China’s warning to the world | 60 Minutes Australia

Two Davids & Goliath | David Matas & David Kilgour | TEDxMünchen

America Just KILLED China’s Tech Industry 

Transcript:
A new Monetary Policy tool to end Inflation and avoid Recession w/ Prof. Larry Marsh, Notre Dame – EP184

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning in to the show. In this episode, I chat with Professor Larry Nash about his idea for a new monetary policy tool which uses a central bank digital currency, a cbdc. Larry argues that this new tool could end inflation without causing a recession. Larry is professor emeritus in the Department of Economics at the University of Notre Dame. In the episode, Larry and I also discussed the disconnect he sees between what’s been happening in the financial sector and in what’s often labelled as the real economy or Main Street. Okay, let’s get into the episode. I hope you enjoy my conversation with Professor Larry Marsh. Professor Larry Marsh, welcome to the programme.

Larry Marsh  01:27

Well, thank you, Gene, this is a great honour to be on your programme.

Gene Tunny  01:31

Excellent. Larry, I’m keen to chat with you about your book optimal money flow. And also a proposal that you presented at the American Economic Association meeting earlier this year. Now this is all very topical, given what’s been happening in the US and in Europe, with banks, we’ve got this age old problem of the stability of the banking system that we really haven’t resolved after many centuries. So I think, I think your book and your work looking at the role of money, the role of credit in the economy, I think that’s, I think that’s highly relevant. So to begin with, Larry, could I ask you about your book, optimal money flow? What do you mean by optimal money flow? And what’s your argument in that book, please?

Larry Marsh  02:28

Well, it’s primarily about the role of government in our economy, and that there’s, in order to have a efficiently running free market economy, government plays a critical role in certain realms where they need to be able to match the marginal cost with marginal benefits. And so you got some that are fairly obvious negative externalities, water pollution, air pollution, positive externalities, where you can talk about a vaccine for a highly contagious disease. So if it was not contagious, and it would be up to the individual to pay for the whole thing. But if it’s a contagious disease, then there’s a common property resource aspect to it. And so you have also you have public goods, and then you have things like highways and so forth. But there’s there’s a lot of areas that people have neglected and not fully recognised. Then I do get into the book into the role of the Federal Reserve, and propose a new policy tool to the bigger the fundamental problem is the the financial markets have become more and more separated from the real economy. No, my father was a Wall Street investment banker. So I learned as a little boy, how the markets worked, and how to invest the money and all of that. But the thing is that the real economy, the GDP has been growing on average, over the decades, about 3% In recent decades, whereas the stock market has been growing by 10%. There’s over three times as much. Well, how can it be that these financial markets are growing so much faster than the real economy? And part of it is the back in 1996? I believe it was that our Federal Reserve Chairman, Alan Greenspan, was talking about irrational exuberance. He said, All these people are pouring money into these financial markets and but then instead of doing something about it, he contributed to this and then other fed chairs and fed boards have contributed to pumping money into the financial markets, whatever they thought the economy was a little bit on the weak side. So part of the problem is that so much money has been diverted, from the real economy, from employees and so forth, that they can no longer afford to buy back the value of the goods and service that they’re producing. And so they go up to their eyeballs in debt they get the private debt is just mushrooms tremendously. So there was this large buildup of private debt as more and more money went into the stockpile. And then I kind of discovered this personally, when I invested in a company and kind of forgot about it, and later discovered that I got a 7,000% return on my investment. I thought, wow, I thought why deserve a decent return, but not 7,000%. You know, I thought free free markets and free enterprise is all about incentives and giving people incentives. So hard work pays off, but not for the person doing the hard work hard work, hard work pays off for the shareholder. And so you really want to see people like Steve Jobs at Apple Computer, you know, when he created Apple Computer to get rewarded strongly, all the hard working employees, the company that I had invested in was Adobe. And they were very creative, and imaginative people, but, but I was getting all this money. And what did I do all 84% of the stock market is owned by the 10% richest people. And when you get a certain amount of money, it gets to the point where you’re not quite sure what to do with it, you can only wear one pair of shoes at a time or buy one car at a time, you may have a couple of summer cottages and you know, maybe you have three or four cars. But after a while it gets to be a burden to deal with all these things. And so you basically just find that you have to invest the money somewhere. I mean, you couldn’t just take it home and stuff in your mattress. So it makes sense to reward entrepreneurs and creative people. But because the stock market has been ballooned by so much money going into it, and then Chris Leonard wrote the book, The Lords of easy money about how the Federal Reserve was pumping money. And then Karen Petroff, has written the book the engine of inequality, about how the Fed is pumped so much money into the give the money to the wealthy people through the financial markets, and then trickle down with the idea that it would trickle down to the real economy. And unfortunately, doesn’t trickle down all that well. And it just builds up and the markets just growing up, up and up without the money. And it’s gotten so bad that non financial firms have discovered that they can actually make more money investing in the stock markets and investing in their own business. So instead of creating new products, or enhancing the products already have or improving their productivity, they say, Hey, we can take this money and put it into the stock market and get a better return than just investing in your own business. And this is really hurt productivity in America and in other developed countries as well. And money flows from around the world into New York financial markets. And sometimes it’s detracts from real investment in the real economy. And so, in retrospect, I think maybe I should have bought my book distorted money flow, or money flow. You know, I was trying to say where we should be going. But I probably should have spent more time laying out where we are, and what what needs to be done than just laying out an optimal world as to what the role of government should be in that in that situation.

Gene Tunny  08:06

Okay. So Larry, in your view, what does need to be done? Well,

Larry Marsh  08:11

as far as the Federal Reserve is concerned, I think it’s very important to recognise that there’s two tools that one could use in controlling the economy. The tool that the Federal Reserve uses exclusively is the cost of borrowing tool. But there’s also a return on savings tool, which the Federal Reserve has ignored. Well, of course, part of the reason it’s ignored it because it hasn’t been authorised by Congress to make use. So I can’t really blame Jay Powell and the others in the Federal Reserve Board for not using a tool that they have been authorised to use. But I talked about this in the book, and why they need to have accounts for everyone with a social security number in the United States would get an account with the federal government. And these could be interpreted as part of a central bank, digital currency, to be a true central bank digital currency, you would have to allow anybody in the world, say somebody in India or Australia, who had US dollars, to set up an account with the US Federal Reserve Bank. And so if anybody anywhere in the world could could set up an account, and then transfer money in and out of their account that account when in fact be a digital currency. That’s the kind of the idea behind digital currencies. Now you the alternatives is have a coin based or per token type base, like Bitcoin, but then you would be supporting money laundering and a lot of legal activities. So one of the ideas I had to protect people’s privacy was to have two separate files. So transactions file, where you keep track of all the transactions that take place, and then a personal identification file. There may be a few transactions that need to go on the personal identification file because it’s becomes too obvious who the person is. But basically, you want to have a situation where government agency, government authorities can look through the transaction file all they want. If they find something that looks suspicious, that looks like criminal behaviour, then they go to a judge and get the authorization to access the Personal Identification file. So this would hopefully satisfy some conservatives that were concerned about the government having too much oversight or control over their accounts and what they were doing and so called spying on them. I personally knew that I’m happy to have the government spy on me as long as I can spy on the government, but you know, happy to have the police spy on me as I can, I can spy on the police. So I don’t have a problem with with the privacy issue, but some people do. And so I did propose that as part of this idea. The other idea is to use these accounts, so that you could intervene directly into the real economy, and not have to go through the financial economy. And so if you were able to offer say, if they have a six or 7% inflation, if you’re able to offer 10%, return the 10% savings interest rate, then this, this would target the marginal saver where you don’t know it’s only on the first say $10,000. Or you can even limit it to 5000, you want to target the marginal saver not the wealthy who are just moving their money around, not the poorest of the poor that can afford to save anything. But the marginal saver who’s probably making about 50,000 US dollars a year and could be saving more. Because the whole problem with inflation is you’ve got too much money chasing too few goods, the demand is too strong and the supply is too weak. The problem with the way the Federal Reserve does it now is when they raise the cost of borrowing. Yeah, they do raise the cost of items that require getting a loan, for example, automobiles or housing. But it doesn’t affect the items that don’t require getting a loan. So you’re really just shifting the inflation from the items that require loan to items that don’t require a loan. But where the Fed is able to be effective is through the supply side. Because there’s a lot of businesses that have to borrow. Some are retail businesses that operate in the red most of the year until they get to the holiday season, where they cover their costs and make a profit is farms that may operate some marginal fields where they have to put a lot of money in in the spring, and they don’t get any money until harvest time. So there’s all sorts of businesses that have to pay for their inputs before they ultimately work to the point where they have outputs to sell and get the money. So if you raise the cost of borrowing, this, this puts the brakes on to some degree, it means that the these businesses cut back hours layoff workers and close outlets. And this ultimately suppresses demand because the workers aren’t getting the money, and you can’t spend money you don’t have. Yeah, so ultimately, that’s what slams on the brakes, and causes us to suppress the inflation, but it does so at a great risk of having a recession. Whereas if you offered the 10% on savings, and targeted the marginal saver, and of course, prices are set on the margin, not on the average. So it’s actually the marginal saver that sets the prices and determines the inflation or not. And in times of recession, you can inject money directly into these accounts, the central bank digital currency accounts for everyone with a social security number within the United States. Now, you can offer the 10% savings on the first say $10,000, but only for those that had a social security number. So if you’re in Australia, you wouldn’t get the 10% return on the money in the accounts because you didn’t have the social security number, your social media, because the US would be targeting its own country, you know, the US in terms of inflation or recession? And then presumably, Australia would have its own central bank digital currency could do something similar. In that respect. Yeah,

Gene Tunny  13:58

that it makes the so called helicopter drop of money a bit easier what it is, that’s essentially what it is you’re injecting an additional 10% into all of these accounts in the States.

Larry Marsh  14:10

Yeah, there’ll be different ways of doing this. So if you’re trying to fight inflation, you offer 10%. But if you’re trying to stimulate the economy, you can inject money directly, and just put it in the people’s accounts say, okay, and which, which they’ve done to George W. Bush, they did, they did inject money, you know, gave people the money. So there’s certainly a more direct way of doing it, then doing it through the financial markets during trying to trying to control the real economy through the financial markets, which has not been working very well.

Gene Tunny  14:38

Well, and it certainly, I mean, people are asking a lot of questions about I’ve noticed that so that, I don’t know if you saw the interview that Jon Stewart had with Larry Summers, and I mean, he absolutely ripped apart Larry Summers it was it was quite extraordinary. And it just shows the popular. Just how the Federal Reserve’s going about it. monetary policy, it’s difficult for it to explain and it’s difficult for the, for it to convey to the public why it needs to do this. And you may have seen the other exchange that was at some of the senators with Jay Powell, and he was trying, they were trying to get him to say that he was, you know, he basically wanted unemployment to go up to slow inflation. So it’s a very, it’s very difficult for the central banks to explain what they’re doing. And perhaps Yeah, this could be another tool for them. But Larry could ask about the feasibility of this, what do we know about the responsiveness of savings to interest rate changes to the returns on saving? Well, that’s

Larry Marsh  15:39

a good question. And this, I would agree that I am not very precise on this. And so we would have to do some experimenting to find out what level of interest rate may work. Now we know that when things get too extreme, people will respond. So we know for example, when inflation starts getting faster and faster, people will start spending money faster and faster. And then sometimes they’ll get their paycheck, and they need to spend it within hours in Zimbabwe or, or Venezuela, where you get this horrendous inflation. So we know that people do ultimately respond to financial incentives. It’s just a question of how extreme you have to go. And so we would experiment I’ve said 10%, right off the top of my head without any empirical evidence to support it. So I would be the first one to admit or to agree that there needs to be a great deal of econometric research to determine what the appropriate levels would be, and how effective they would be.

Gene Tunny  16:37

Yeah, yeah, I had to look at what the literature says, doesn’t mean people. consumption spending will be influenced by in savings will be influenced by the way, those interest rates to an extent, but then they’re influenced heavily by your, your level of income. So I might have a look, I might do some digging myself. It’s an interesting proposal, for sure. Can I ask you about the Postal Service? Yes. Can you tell us that story, please.

Larry Marsh  17:09

So I talked about using a central bank digital currency to influence the problem and inflation or the problem where the recession, but one could also do it through the postal bank accounts, which we used to have in the United States under the postal banking act of 1910. So for over 50 years, when I was young, over 50 years, people could go to their local any post office and cast a check or set up a savings account. And Canada also did this. And we continued until 1966, when they terminated this postal savings accounts. And Canada went for a couple more years, and they terminated theirs in 1968. But Canada now in 2022, has reinstituted the postal banking, they they’re focused somewhat on concern for the disadvantaged to get into an automobile accident or a medical emergency or the rent goes up and they go to pawn shops or payday loans, and they get exploited where they they get deep into debt and then can’t get out of debt. So there’s been some political concern for these people in the in the United States with the end in Canada, as to how you could make loans available at a reasonable interest rate small loans, and Canada has now started their their postal banking back and are making these loans available to people who are in a tight situation and don’t have much income and need need some help with the over the short term without having an exorbitant interest rates.

Gene Tunny  18:56

Rod. Okay. So with your your proposal, you’re proposing that people could have accounts, essentially with the Federal Reserve, so you have this CB DC, does that do away with the need to have a bank account or to deposit money into? I don’t know what’s what the I mean, what are the banks had put money in in the states would have been Chase Manhattan? It was at an investment bank. I’m just thinking in Australia,

Larry Marsh  19:27

Bank of America, Bank of America an example. Okay, yeah. So this is a very interesting gene, because there’s been a lot of people have been raising questions about this, and saying, well, maybe there’s a better way to do it. And I would agree that it’d be interesting to have intermediaries to access your fat account so that the referring to it as the Fed account in the central bank, digital currency, United States is the Fed account. And so you could go through your regular bank and they would be paid a fee for allowing you access to your central bank digital currency. So it might be that instead of by going directly to the Fed, you would be operating through PayPal Venmo, you know, digital wallets. And part of the idea behind that is the feeling that the private sector has a tendency more creative than to come up with other financial tools and things that are valuable to consumers. And so rather than trying to exclude the private sector, from the central bank, digital currency, we might even pay them to help carry out some of the work and, and the the access by individuals and, and how to access their account and how to use their financial situation more efficiently in this context.

Gene Tunny  20:45

Yeah, yeah, there may be some benefits in that rather than having the central bank having to manage all of that. So yeah, I can see the logic in that. Larry can ask you about the banking system. So one of the things I’ve talked about in a previous episode, is this idea of narrow banking, which has been one of the proposals to address this fundamental problem that we’ve got with banks that rely on deposits. There’s this mismatch in the the maturities of their assets and liabilities. Have you done any thinking on this? What was called the Chicago Plan, this narrow banking concept? And is that a way that some of these problems could be solved? Could it fit into your framework? Could you tell us about that, please?

Larry Marsh  21:36

Yeah, people don’t realise that. Over 90% of the money in the United States is actually not created by by the Federal Reserve is created by banking system, that that people sometimes have the mistaken belief, and it’ll be called the loanable funds theory that you put money in the bank and the bank loans that money out? Well, that’s not what’s happening. Then other people think, okay, I put $1,000 in the bank, and the bank leaves $100 And they loan out $900? Well, no, that’s not the way it works. either. You put $1,000 in the bank, let’s say you put a 10 $100 bills, okay, so that’s, that’s real money, or whatever you want to call it. And then the bank would that $1,000 can then create $9,000 out of thin air. That because then that, that 1000 is 10%, which is the wonder the quote, so called fractional reserve banking, but it really the the term fractional reserve banking is a little bit misleading. It should be called Creative creation, banking, or something like that. But so part of the problem is that you are, as you point out, if you’re allowing people or banks to create all this money out of thin air, just on the basis of deposits, especially checking deposits or deposits, that can be withdrawn almost immediately, then that makes for a very shaky situation. And not only does it make it for a shaky situation for individual bank that might get into trouble as we’ve seen. But it also creates a situation where when, when the economy is doing well, the economy starts expanding and really looking great, then these banks have a tendency to make lots and lots of loans, because they have all these excess reserves, so they can they exacerbate the situation so that the irrational exuberance carries over into the loan market. And it’s become even worse now that they can securitize these loans. So it used to be that the local banker was very careful in making loans that be pretty certain things would be, and they would know about local conditions, much better than any one out any other banks or outside the local area. And so but nowadays, they can securitize the loans, they can make a loan. And it’s a little bit shaky. Yeah, what the heck, I’ll just sell it off to the markets. And so this securitization has made it even more shaky. And then when the economy starts to slow, or when they think, for example, that the Federal Reserve is trying to slow the economy and might push us into a recession, then they say, Oh, we better cut back on our loans. So they cut back. And that makes things even worse, and especially during an inflation, the banks don’t want your money, when they think the economy is going to be slowing. Because they don’t, they’re not going to use it. And they just have to pay you some interest rate. They’d like to set the savings rate at zero at that point that would freak everyone out. So they’re not going to do that. But they really don’t have use for your money. And but you’re putting money in the bank that just causes them a liability of having to pay you on your account for money they don’t need and don’t want. So that’s why it’s necessary for the government to step in and offer say 10% on savings in order to slow inflation those times because the banks aren’t going to do it.

Gene Tunny  24:55

Okay, and I mean with this. So with narrow banking do Do you think there’s merit in that concept?

Larry Marsh  25:02

Yeah, I think there’s some merit in that, because you could limit it to a savings account. So in other words, don’t allow checking to serve as the basis, but you could use any discounts or you could use certificates of deposit, they’re even more solid. Because you can’t withdraw that is readily. So yeah, you could do narrow banking, where you focused on savings accounts and certificates of deposit and not on checking accounts. So that would certainly reduce the irrational exuberance, if you say, you know, the, the generating getting too far out on the limb for the individual banks and, and exacerbating the problems of the economy, for the the banking system as a whole contributing to problems and for the economy. And so, you know, there are definitely both individual bank problems, and the economy wide problems that come about through this fractious so called fractional reserve banking, which I which, as I said, really should be called very credit creation banking. Yeah. And then narrow banking would help reduce these problems, both for the individual banks and also economy wide. So now banking would certainly be better than what we’re doing now.

Gene Tunny  26:17

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  26:52

Now back to the show. I wanted to ask you, how was your your presentation at the AAA meeting receive Laurie was it was a positive reception?

Larry Marsh  27:08

Well, I think so now, my discussing. You know, there’s an old joke, I don’t know if you know this, the difference between a British discussion and an American discussing the British discuss it, we will say a few nice things about your work and then proceed to tear it to shreds. The American discussion will summarise your work, and then proceed to spend the rest of the time talking about their own research. But but so my discussion did point out, which I think is perfectly legitimate to do so that if you want something to serve as as purely a medium of exchange, you shouldn’t introduce the interest rate, either positive or negative interest rate, you should just make $1 be $1. And you don’t gain anything, you don’t lose anything. It’s just like the dollar bill in your pocket. A US dollar bill in your pocket. So he felt that to be a medium of exchange, you wouldn’t. And I can say well, okay, but then we could do that through the post office as I’ve, as an alternative, instead of saying, well, your central bank, digital currency will earn you 10% interest, I can say, okay, an account with the post office loan you 10% interest, so we can do it in a separate way. So I did run into the idea that maybe there’s different objectives. And you may want to have a central bank digital currency that doesn’t get you involved in the offering the return on savings and do that through the post office instead. Now that’s a possibility.

Gene Tunny  28:41

Rod. Okay. I’ll have to check whether the discussing prepared any remarks or or a PowerPoint, just to see what they are. They’re driving it there. Right. Okay. Larry, you mentioned about the just this disconnect, or this apparent disconnect between what’s been happening in the real economy. So what’s been happening with GDP, and then what’s been happening in the stock market, and then you talked about the disproportionate returns. Do you have any thoughts on what needs to be done there? Do you have any proposals there? I mean, yes. You mentioned the Federal Reserve’s probably

Larry Marsh  29:20

there’s interesting problem in that. Right now. The way our corporate boards work, is the CEOs tend to get other CEOs on their board. So it’s basically the CEO and his golf buddies or their corporate board. And so I’m on your board and you’re on my board and I maximise your compensation, you maximise my compensation, and we’re all concerned with the short term share price. But the problem is, you want an innovative economy, you want a board that’s really knows what’s going on in the company, and the CEO basically gives the board all these reports about what a great job the CEO is doing, you know. And really, you want representation from product development, you want representation. From sales, you want representation from marketing, you want representation from distribution you want to get. So Germany has come up with an approach where they require a certain proportion of the corporate board be elected directly from the rank and file employees. And this gives representation of what’s actually going on in the company. And not some hypothetical theoretical stuff that the CEO comes up with to show the corporate boy, what a great job they’re doing. And so this problem is that the maximising of shareholder value has diverted the attention to the short term share price. And an example of this would be Apple Computer, Apple Inc, as it’s now known for Steve Jobs is a very creative, innovative guy who came up with all these great ideas and then this, and then John Sculley came along and said, You know what, Steve, you need a professional manager, you need someone that knows how to maximise the margin and get the profits up, and let’s get our share price up. And so John Sculley came along and kind of pushed Steve Jobs aside, and took over. And then after a while, they became to realise that Apple was losing his competitive advantage against his Microsoft and other companies. And they said, no, no, no, we need to get Steve Jobs back in here. Because you’ve gotten off on the wrong track, you’re no longer focused on the customer, you’re no longer focused on innovation, creativity. And so we need a system. And I found out here in Kansas City, there’s a company called Burns and McDonnell, and a former CEO of burns. McDonald just wrote a book called create amazing. And what it is burns in McDonald’s started as a small construction company in Kansas City, then it grew to a nationwide us wide construction or an engineering company. And now it’s a worldwide engineering company. Well, it turns out that Burns and McDonnell is all employee owns, when you retire, you have to sell your shares and get the money, but only the employees own the company. So you This is recognising the agency of employees, employees are not just another factor and put like steel or glass or plastic, these these people have agency. And when they work together, and they say, Okay, we benefit when the company benefits. So it’s not just that individuals are motivated, because they’re gonna benefit as an individual, but because their teammates need to do their job. So it’s like being on a football team or you know, on any sort of athletic team, that it’s not just you’re doing your job, you got to be on the case of your compatriots, your colleagues to do their job. And so this is really we’re talking about free enterprise, you talked about incentives, the proper incentive structure, and getting employees involved in the corporate operation, and getting them rewarded for their involvement in the proper operation. Instead of giving that 7,000% return to you know, that Adobe, I invested in Adobe and got that 7,000% return while I was a deadbeat, I’d forgotten that invest in the company. I was like getting this money, please creative entrepreneurs, these these employees, these hard working people that create this new software, they should get the money, not me, I should get some return on my investment, but not 7,000%. That was just too much.

Gene Tunny  33:22

Well, yes, I mean, well, Dan Mitchell, I don’t know if you know, Dan, at all, but Dan is former Cato Institute, on his on his website, he often links to, I think you can make voluntary donations to the US Treasury. But now he puts that as a bit of a joke. I don’t think anyone would like to do that. But what I would like to ask you about Larry is if there are these outsized returns, or returns that people really, you know, they may not have needed those returns to have actually inspired them or induce them to invest or to save or invest? Do you see any role for tax policy? Do you see any tax policy changes? Would they be desirable in the US?

Larry Marsh  34:05

Well, that’s a good question. I was actually inspired and reading my book by a book by George Cooper was recently called Money, bloody revolution. And later, he really issued it as sort of a second round revised edition called fixing economics. And he points out and I remember the chair of the economics department, Sherwin Rosen back in 1981, I believe was wrote an article in American Economic Review called superstars. And he’s basically pointed out and George Cooper picked up on this idea that this there tends to be a winner take all approach in our economy and you know, athletics, it’s pretty obvious entertainment is pretty obvious, but it’s also obvious. I’m trying to think about an Amazon I think the average pay was something like 33 $1,000 That year, and the new CEO, I’m trying to remember his name is now getting $214 million a year. I mean, you know, the question is, you know, is this is this the free enterprise system? But no, and the the interesting book by Steven Clifford called the CEO pay machine. Steven Clifford was on these boards. And he came to realise that this was not free market that competing to get the most capable CEO. This was a rigged system, where the CEOs maximise each other’s compensation. And so, you know, when we talk about free enterprise and incentives, we need to be realistic about what we’re talking about. And not imagine a hypothetical world, a theoretical world where there’s full information and one of the things I talked about in my book is that economics is based on rational independent decision makers. When we’re talking about rational expectations and all this rational list and rational down that on average, people should be rational. And then Dan Ariely wrote the book, predictably irrational, but not only are people irrational, but they’re predictably irrational, why is taken out now, of course, the field of behavioural economics and economics has come about to explore some of these possibilities that people are irrational and predictably irrational. But why it took economists so long to figure this out. But the people in marketing have understood this and exploited this for hundreds of years. To kind of uncivil very slow and facing the reality that we don’t have this perfect information, perfect efficiency in the markets don’t solve all of our problems, we need to be realistic about what the markets can do and what they can’t do. And they work very well, for goods and services up to a point, although in reality, Adam Smith, really there was really two invisible hands, people, people talk about the first invisible hands were businesses compete with one another, to produce better quality products at lower prices. But Adam Smith implicitly had a second invisible hand, and in his second invisible hand, is that businesses conspire with one another against the public to raise prices. So you have the second invisible hand of market power, you have the first play of a competition, but then the second invisible hand of market power, and these invisible hands are in constant struggle with each other. And it’s government it has to be has to play a role in making sure that the invisible hand of competition wins out, and that the head of market power doesn’t corrupt and undermine the system.

Gene Tunny  37:43

Raw and okay, I’ll have to look back. I know that there are I know that famous passage in Adam Smith about how seldom do men have the same trade gather together? And the the conversation does not eventually get on to some conspiracy to fix prices or something like that. Exactly. That’s exactly, yeah. But did he was he? Was he suggesting that was another invisible hand? Was he did he do that explicitly? I’ll ask well, I

Larry Marsh  38:09

don’t think he did that explicitly. No, no. So I’m basically proposing that, you know, but I think others may have proposed that as well. So say there’s really two invisible hands.

Gene Tunny  38:17

Gotcha, gotcha. Because he did actually talk about the invisible hand of the market or the price mechanism. And then your suggested or and others have suggested that there could be this other invisible hand. That’s that’s an interesting concept. But yet he certainly he was, he was concerned about market power. I like that example of what was it Burns and McDonnell. City. So to look at that, it is challenging to find, I mean, I know there are examples of these of a worker cooperatives or cooperatives more generally, in the world, and either asset, some successful examples, but they’re, they’re often special circumstances, or it can be something that’s hard to get, right. But that’s it sounds like they’re doing something right. Or they’ve got a very good culture, they’re in their business that enables them to be successful, and then how to look on their website looks like they’re doing all sorts of incredible things in aerospace and in, in clean energy, etc. So I’ll put a link in the show notes to that operation. Okay. Couple more things. Larry, there was a proposal in Australia here from an economist, Dr. Nicholas grew and which, when you were talking about your, your idea of these accounts with the Fed, and then you could use, you could use this borrowing rate to encourage saving and that can pull you know, that means that there’s less money chasing those few goods and that can pull back on inflation. There was an idea from an economist to Dr. Nicholas grew and he was suggesting that in Australia, we could use the there’s a compulsory superannuation system so what you could do is If there is a inflationary time, you could require more contributions into that. So that’s another. That’s another concept. I don’t know whether you’ve seen that idea at all whether you have any reactions to that. I know I

Larry Marsh  40:14

need to understand that a little better. Okay, I’ll might I

Gene Tunny  40:17

might send on a link to the to that that idea, because probably should have given you a heads up on that.

Larry Marsh  40:25

Very interesting. I’d like to look at that. Yes, absolutely.

Gene Tunny  40:28

Yeah. So because there’s a bit of discussion about this in Australia at the moment, too, because these interest rate increases are starting to affect households. And I think unlike in the US, the large majority of you know, people who borrowed for Home Loans here in Australia, mortgage holders, they’re, they’re on variable rates. So they’re really affected when those interest rates change when they increase and so there are people who are now paying $1,000 or more a month, on their, on their home loans. And that’s really starting to affect budgets. Okay, Larry, before we wrap up any final thoughts on optimal money flow, or how we can make things better?

Larry Marsh  41:16

Well, let me first just say that if one purchases Apple mindset, or directly to Apple University Press, then all $24.95 goes to student scholarships, I pay for the production of the book and the mailing of the book. On the other hand, if you’d prefer to listen to Apple money flow for free, Bupa digital.com, is used by many public libraries. And it’s actually better in my average humble opinion than Libby or some of the other ones where they where the public library just gets a couple of copies of an e book or, or an audio book, where and then then you have to go through a hold period to wait until one becomes available. But in hoopla digital, it’s a rental system. And if 20 People suddenly want this book, big, all 20 Again, so there’s no hold period. So it’s free to listen to through your public library, or your Public Library’s paying for it, and you’re paying for it in your taxes, which is important. And that’s something I also wanted to point out was the public libraries. And public education in general is so important, because our most valuable resources are people. And too often, conservatives overlook the important role that government plays in making sure that we get or as close to equal opportunity as we can. Because they say the most important decision you make in your life is your choice of parents, you want to choose rich, well executed parents, well, you haven’t been able to do that, then the public library and our public education system is designed to give you a fighting chance. So I think that we need to recognise how important it is to make sure that all children and I like to say I think the solution to crime in the inner cities is college, get these kids out of that crime laden area and get them into college, we have a number of colleges now, because of the low birth rates and the fewer people coming to college, who are really trying to help get scholarships, funding for disadvantaged students, and get them out of those prime laden inner cities and get them into nursing, accounting, chemical engineering, anything other than shooting it out in the inner city. So, you know, I like to say the solution to crime is college.

Gene Tunny  43:41

Yeah, yeah. Yeah, absolutely. I think education is incredibly important. Okay. Yeah. First, Larry Marsh, thanks so much for your time, I really enjoyed talking about optimal money flow and learning about your proposals. So I thought that was great. And yeah, really found some of those examples. Valuable, though, particularly burns. And McDonnell, I’ll look into that a bit, a bit more. And you gave some good references there, this idea of the co pay machine, that’s something that I find I’m interested in looking at a bit more, because there’s definitely the potential for co pay to get out of proportion to what is optimal, given there is that principal agent problem in companies? So the fact that the people who run the company are acting as agents of the principals who are the shareholders and so yeah, that’s that’s certainly a problem. Yeah, very good.

Larry Marsh  44:52

If I could mention another book by Lynn stout called the shareholder value myth. And so she’s actually a I’m lawyer who has really investigated this whole concept of shareholder value, and found that there’s a lot of flaws in the way this shareholder value concept has been presented. And she really explains that well, and it’s worth looking at the shareholder value event. So I know your guests probably don’t spend all that time promoting other people’s books. But I found so many books that are so valuable. And I mentioned the Greg graves book create amazing another, which is also on hoopla digital. So it’s easy to access to your public library.

Gene Tunny  45:35

Very good. I’ll definitely put a link to to your book, Larry, and to optimal money flow and also to your AAA presentation, which I thought was was was great. Yeah, lots of lots of good illustrations in it. So well done on that. Very good. Well, Larry, I’m pleased that things are getting warmer there. For you in in Kansas City. And thanks so much for your time. Really appreciate it.

Larry Marsh  46:06

Ron Frank Eugene, you have a wonderful podcast. I was very excited when I’ve learned about it. And you’ve covered some wonderful topics. I’ve been going through your podcasts and learning a lot from your guests. So I encourage people to check out your podcasts and take advantage of all their wonderful information that you’re making available.

Gene Tunny  46:26

Excellent. Thanks. Thanks, Larry. And yeah, have a great day. And I’ll see who knows, maybe I’ll chat with you again soon. Really appreciate it.

Larry Marsh  46:35

We’re okay, great, thanks to.

Gene Tunny  46:41

Okay, have you found that informative and enjoyable? Given all the hardship that the current monetary policy tightening is causing in many economies, it may well be worth experimenting with a new monetary policy tool along the lines suggested by Larry. As I noted in my conversation with him, I’m unsure just how responsive household savings will be to the interest rates on cbdc accounts. But I’d be interested in seeing the results of a pilot study of the concept. That said, I know concerns have been expressed about CBDCs by many people, including libertarians and crypto advocates. For instance, there’s a concern that a cbdc could allow central banks and governments greater control over our lives. I probably need a full episode to explore the pros and cons of cbdc. So I’ll aim to do that in the future. I should note here that a previous guest of the podcast, Nicholas grown an Australian economist that I’ve worked with from time to time, he’s previously proposed that the RBA provides digital bank accounts for Australian so a proposal similar to what Larry is proposing for the US. He’s also offered his own interesting alternative to conventional monetary policy. And this is something that the ABC journalist Gareth Hutchins is written up in a recent story of his and I mentioned that to, to Larry, in my conversation, so I’ll put a link in the show notes to that ABC article. In a 1999 paper for the Business Council of Australia. Nicholas proposed very in the superannuation contribution rate. So that acts as a counter cyclical macro economic policy instrument. I’ll link to that paper in the show notes, and I might try to get Nicholas back onto the show to discuss the idea with me. Overall, I’m not sure about the feasibility, economic and political of various alternatives to the existing monetary policy approach to fight inflation. But given the downsides of the existing approach, I’m open to exploring and testing alternatives. Okay, I’d be interested in your thoughts on this episode. For instance, Are you positive or negative about CBDCs? What do you think? And what do you think about employee owned companies such as burns, and McDonnell and Kansas City? Can they work? Have you seen any good examples of them? Please send me an email with your thoughts, you can reach me via contact at economics explore.com. Recently, I’ve had a listener send me links to several videos on China after he listened to my recent conversation with Dr. Jonathan DT ward. Those videos included some rather troubling evidence which would support Dr. Ward’s arguments. So I’m very grateful to that listener for having sent links to those videos because they’re forcing me to think more deeply about the West’s relationship with China. I’ll include the links in the show notes. Finally, if you enjoyed what Larry had to say this episode, please consider getting a copy of his 2021 book optimal money flow, also linked to in the show notes. Thanks for listening. Right Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com or Smile via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

50:34

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Credits

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Categories
Podcast episode

What are Goldbacks and who’s buying them – e.g. preppers, libertarians, collectors?  w/ Goldback Founder Jeremy Cordon – EP183

The Goldback is a local commodity currency operating in several US states, including Nevada and Utah. The Goldback is described as “the world’s first physical, interchangeable, gold money that is designed to accommodate even small transactions”. Each Goldback is embedded with 1/1,000th of a Troy Oz of 24 karat gold. Show host Gene Tunny is joined in this episode by the Founder and CEO of the Goldback company, Jeremy Cordon. According to Jeremy, “Gold is money.  Everything else is credit.” Among other things, Gene asks Jeremy who’s buying Goldbacks and how widely are they being used? 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP183

  • What is a Goldback? [1:36]
  • The USD value of a Goldback relative to the value of Gold in it [5:20]
  • How can you create your own local currency in the US? Is it legal? [6:44]
  • What are the different types of gold buyers? Why Goldbacks are popular with preppers [11:30]
  • What’s the acceptance of Goldbacks by local businesses? [14:12]
  • Why are Goldbacks better than the old gold standard? [20:56]

Links relevant to the conversation

Goldbacks website:

https://www.goldback.com/

Jeremy’s bio:

https://www.goldback.com/meet-the-team

Related previous podcast episode:

Why fiat money means higher inflation & why a radical Reserve Bank review is needed w/ Darren Brady Nelson – EP179

Transcript:
What are Goldbacks and who’s buying them – e.g. preppers, libertarians, collectors?  w/ Goldback Founder Jeremy Cordon – EP183

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. This is Episode 181 on goldbacks. A local commodity currency operating in several US states including Nevada and Utah. The gold back is described as the world’s first physical interchangeable gold money that is designed to accommodate even small transactions. Each goldback is embedded with 1/1000 of a troy ounce of 24 karat gold. At the end of March 2023, they could be exchanged for a bit over four US dollars. I’m delighted to say that I’m joined this episode by the founder and president of the gold back company, Jeremy Cordon. According to Jeremy, gold is money, everything else is credit. Okay, let’s get into the episode. I hope you enjoy my conversation with Jeremy. Jeremy Corbyn, president of gold back, welcome to the programme. Thanks

Jeremy Cordon  01:36

for having me.

Gene Tunny  01:37

It’s a pleasure, Jeremy, I’m keen to chat with you about gold backs. One of the issues we cover on this show is the fiat money and the issues associated with that. And I did a show a few weeks back on fee it versus commodity standards for money. And I mean, what’s fascinating is that you’ve introduced your own commodity money, it appears with gold back, could you tell me a bit about gold back, please?

Jeremy Cordon  02:04

Sure. Well, just like you said, it is a commodity money. And it might be one of the most successful commodity money’s out there right now. You know, we produced maybe $50 million worth of gold backs that are circulating. And that was true up until the end of 2022. You know, last month, I want to say that we’ve sold between six and $7 million worth of gold backs. So we’re seeing this huge amount of interest and growth. And people that are looking for kind of these inflation proof commodity monies. Yeah, if you haven’t seen one a gold back, it looks about the shape and size of $1 Bill, there’s gold encased in it, it kind of gives it like a like a Willy Wonka ticket look. And they go down from 1000th ounce of gold. So you know, it’s like a $4 Gold product, and they go all the way up to a 50, which has 50 times the amount of gold, it’s a 20th of an ounce. And those are worth about $200 a piece. So people carry these around like bills spend is just like cash, but the gold is in them. And that’s that’s what gives them you know, a lot of their value there.

Gene Tunny  03:12

So in terms of what they’re worth, or what that exchange for in US dollars, is it broadly equivalent with the value of the gold within the notes? Within the goldbacks?

Jeremy Cordon  03:25

Yeah, I’d say that’s about that’s about half the value. You know, because if you melted them down, you know, if you had a giant pile of gold backs, you melted the whole thing down, you got to realise that we’re splitting an ounce of gold into 1000 pieces. And that cost money, right? If you destroy all that, you know, craftsmanship and labour and effort to do that effectively, you know, you’re only going to recover about, you know, half of that value and melt, which is still really good. It used to be far more expensive to break gold down at that level. The other half of the value is just the utility value of having a money that works well and maintains its value, which you know, for fiat currencies, 100% of the value is utility value.

Gene Tunny  04:06

Yeah, yeah. And so where are these being used in exchange.

Jeremy Cordon  04:11

Now when we launched goldbacks, it was about four years ago is 2019. And we started in Utah. Utah’s a very special law that recognises gold and silver as legal tender. And, you know, we figured we couldn’t find a more hospitable, legal environment anywhere in the Western world. Right. So we started in Utah, and I was thinking that the Utah gold back would be a it would be a Utah specific project, and that we probably wouldn’t do any more gold back projects anywhere else. And what we found really quickly is that 90% of goldbacks for Utah were selling outside of the state of Utah. And then I started getting stories, you know, these kind of anecdotal stories not just from all over the US but all over the world, that people were bartering and trading with gold backs for things because go figure the value of a gold back. Is it just because it says Utah, It’s, you know, it’s because the fixed amount of gold. It’s a known quantity. It’s a known value and it’s very usable and bearable, anywhere in the world because gold has value everywhere in the world.

Gene Tunny  05:20

Yeah, exactly. I suppose I guess one thing I’m most interested in is that the value of the gold is about half of the value of the note you were saying so. And that’s how you’ve made like all the goldback company makes the money because you’re selling these notes for more than the cost of production, which makes sense. I mean, obviously, you’ve got to make money out of it. Yeah. So that makes sense.

Jeremy Cordon  05:46

We don’t make half. It’s not like, you know, I mean, the profit margin isn’t as rich as you think.

Gene Tunny  05:51

Yeah, I wasn’t suggesting that. But yeah.

Jeremy Cordon  05:53

Some people think that’s the case like that the one denomination, which is the 1,000th of an ounce, that’s actually manufactured in the loss. It costs more than we can even sell it for to make.

Gene Tunny  06:04

Right, right. Okay. So, Utah, it’s got a special law, and I saw that there are other there are other states where they’re being used. Is that right? Is it New Hampshire, that I read that correct?

Jeremy Cordon  06:16

Yeah, we got New Hampshire and Nevada. Wyoming just came out. We got South Dakota coming out this year.

Gene Tunny  06:23

And the year of relying on specific state laws, because I remember there’s an episode of Riverdale, that Netflix show where Veronica Lodge tries to create her own Riverdale currency. I don’t know if you’ve seen that episode at all. And her father who’s the crime lord of Riverdale, Hiram Lodgy, he has it shut down by the US Treasury, he says, And he said, You can’t do this. You can’t create your own local currency. But you’ve managed to create a local currency here. How can you do that? If the US dollar is legal tender in the US? What does the Treasury say about this?

Jeremy Cordon  06:56

You know, you’re right. There’s federal law that prohibits you from making your own currency in the United States, unless otherwise authorised by state law. So if you don’t have a state law to support your currency project, then you can’t do it. It’s illegal. So you know, Utah was a very obvious first choice for us. We went in there and we said, Okay, we got a state law recognising gold and silver as legal tender, this is gold. So we’re under this umbrella of state law. So you know, because otherwise, if this is a federal project, it’d be illegal. And sure enough, you know, we support a huge network of businesses in the states that you mentioned, that advertise themselves as preferring to take gold back. So these do function and circulate as local currencies within the states. There’s businesses outside of these states that also do it. We don’t include them as part of any of our either they’re not like a supportive business. You know, people happen to barter with these things outside of the states, but it’s not, you know, that’s more because it’s a commodity money or a novelty, or, you know, they’re trying it out, you know, most of the economic activity per capita is happening inside the states, right, where you’ll see 10 times as much activity in Utah, per capita than than Colorado, you know, because Utah has its own series. So now, as far as the state laws, Utah, it’s kind of obvious, you know, it’s the legal tender act for Gold and silver. But when we went to New Hampshire or Nevada, you have to start to question that. So who doesn’t have to have a special law? You know, or does Nevada have a special law. So we actually took a really unique legal approach with the gold back. Now, if you’ve ever used and I’m going to an American law here, not federal but state level, if you’ve ever used a coupon or a gift card, if Walmart makes his own gift cards, you know, they can’t make their own local currency either. Right. If you make a coupon, you can be accused of making a local currency. The law that businesses use when they make you know, these kinds of you know, products is called the Uniform Commercial Code. The Uniform Commercial Code gives you you know, you have to put a cash value on the note or the unit and then it can have a separate value. And every state adopted that law. So gold backs we also plug into that law. And the way it works for us is the US Mint. I think Australia does this as well. They mint a one ounce gold coin, and it stamped with a $50 face value. Right? So we say okay, 1000 gold backs contain one ounce of gold will allow you to redeem 1000 Gold backs for a $50 one ounce gold coin it’s a promise that we can always keep you know, there’s never a question of can I can recover the gold because you can always trade it for another form of gold. You know, and we’ve got 10s of millions of dollars with a gold coins that are part of a contract where you know, if just about every gold back came in today, we could turn them all into gold coins. So at that point, the gold back becomes assumes a coupon for a gold coin that’s made out of gold.

Gene Tunny  10:05

Yeah.

Jeremy Cordon  10:06

Because the gold coin is federal us minted legal tender. You know, it falls neatly under the Uniform Commercial Code, which allows it to circulate and be used as money in any state in the country.

Gene Tunny  10:21

Right, so do you have a background in the law Jeremy has had this sounds like you have to have some legal knowledge to be able to figure this all out and get it up and running.

Jeremy Cordon  10:32

I was a paralegal but my main partner in gold back drafted the Utah legal tender act in 2011. He’s a little older, he’s got more grey hair, you know, he’s in his 60s. And, you know, he ended up being a very important partner to have in gold back. Because, you know, to your point, you’re right, I mean, you know, if you make something like this, you need to have all of your ducks in a row legally, because I didn’t I didn’t do this to you know, get in trouble or go to jail. We wanted to do this 100% right.

Gene Tunny  10:59

Yeah, yeah, absolutely. And who’s buying the gold back? So who’s using it? Is this because you mentioned this 50 million and, okay, I mean, that’s a good start. I mean, the US money supply is, what is it? 30 trillion or something?

Jeremy Cordon  11:14

For sure, yeah, no, it’s it’s a drop in the bucket. Yeah, it’s, it’s a it’s a mosquito compared to a blue whale, right? I mean, it’s not, it’s not very big.

Gene Tunny  11:23

Yeah, I’m not meaning to diss it. I’ll just say it’s at the early stages. So who are the early adopters of it? At the moment? What are their characteristics? Are they libertarians?

Jeremy Cordon  11:33

Yeah. Some of them, you know, I have a few different groups, you know, there’s not one single type. But you know, I mean, you have your true believers, right? You know, they look at Gold backs, they say, my goodness, you fixed money. And this is amazing. And I want to be part of it. And I want to have these, and I want to have in my wallet. And I want to try to spend them, I want to show everybody, but I’d say that that group is a minority of people that own gold backs, you also have people that are, you know, professionals. You know, they’re very, you know, average people and they look at Gold backs, they say, Hey, this is so cool, these are so pretty, the artwork is so incredible, I’d love to just own a set, and they’ll you know, they’ll drop, you know, 400 bucks, and they’ll buy a set of gold backs. And we’ll frame it and stick it on their wall. And they’ll show people because they’re the really gorgeous to look at. And it’s novel, you know, so they’ll go out and they’ll buy a set. And what happens with that second group is, you know, something will happen, like this banking crisis. And they’ll remember, Oh, hey, you know, like, maybe I should have some more of those gold backs, you know, maybe just in case or something, you know, and, you know, we’ll get conversions there or, you know, just stays as a novelty thing. I also get preppers that are, you know, they want to be prepared. And it’s like, okay, you’ve got, you know, your your toilet paper and your, your EMP proof, whatever, and your food storage. And, you know, pretty soon you run out of space for your food storage, you think, Okay, well, you know, all your dollar bills in the event of a hyperinflationary event aren’t worth much. Do you really think you’re going to be bartering with your one ounce gold coins? And can you imagine trying to banter with a one ounce gold coin? I mean, you mean counterfeits, we get off China. You know, it’s like, if you found someone that liked gold and had something worth 2000 bucks, you’d have to convince them it was a real gold coin. You know, so a lot of these folks, a lot of these kind of more preparedness minded individuals, they’re taking gold that they had stashed away for a kind of a just in case scenario. And they’re turning them into piles of gold backs, we’re starting to see more six figure and seven figure purchases of gold backs, as people buy larger orders and get more comfortable with it. So we have that group too. And then the final group is just people that, you know, they’re small buyers, they’re young people, and you know, they just want to buy a few they want to get their toes wet and precious metals, maybe they got one as a tip at a restaurant. Someone told them about it. And so cool, I’m gonna buy a five and a few ones. And they’re just, you know, I’d say that’s the majority of people that are in gold backs are people that are brand new to precious metals, you know, they’re between the ages of 23 and 45. And, you know, for whatever reason, this generation is just really excited about the gold back.

Gene Tunny  14:11

Yeah, that’s good. And where do you manufacture them? Are they made in the USA?

Jeremy Cordon  14:17

They’re all made in the USA.

Gene Tunny  14:18

Right? Very good. Okay. What’s the acceptance of gold backed by local businesses? So if I’m in say, Salt Lake City, and someone, someone gives me a tip in or they pay me and a gold back, can I then take that to the local Starbucks and buy a latte or, I mean, how, how widespread is its acceptance?

Jeremy Cordon  14:39

You know, it’s a lot more than you would think. When we started, I was hoping that I could get maybe 5% or 10% of business owners on board. I think there’s got to be some libertarian business owners that would support this and want to do this. If I could just make a list of them. Because the first question you get is okay, well, that’s cute, and that’s great. You made a commodity currency, but who takes it It like, that’s where the rubber hits the road. Is it a money? Or is it you know, something that belongs on my wall. So, you know, I went out, and I started signing up businesses. And like I said, I was hoping for five to 10%, what I found is that about 30 to 50%, of small business owners were willing to take gold as payment. And that really surprised me, I’m still surprised by it, that number has actually gotten higher now, especially in Utah, since the gold backs been out for four years, it’s a lot more common to have people already know about it. You know, it’s just yeah, how prevalent is.

Gene Tunny  15:36

I guess, you get good word of mouth. And then you must get a lot of shares on social media, if someone gets a gold back as a tip, or payment.

Jeremy Cordon  15:45

they’re, they’re fun to show off, you know, millions of people have seen him. Let’s say you’re in Australia, you know, it’s like, Okay, how many businesses in Australia? Maybe I can’t find the business. You know, like, what am I going to do with these? And like, well, you know, people give them as gifts, you know, they stick them in an envelope for their kids, you know, they use them as allowance, you know, and, you know, garage sales, they have about an 80% success rate for spending gold packs. And then you’re educating people, you’re saying, Hey, this is what commodity money looks like, did you know that our money is not commodity money? You know, it’s, it’s, you know, kind of faith and trust and hopes and dreams. And, you know, I mean, hopefully, that’ll work out for us. But, you know, can you imagine if we did have a commodity money, then we wouldn’t have to, you know, have 10% inflation every year or, you know, I’m gonna, I’m gonna pay you a piece of gold a real piece of 24 karat gold in exchange for that use birdcage. Yeah, 80% of the time. It’s, that sounds amazing. And I love that piece of gold. Because that’s what you’re doing is, you know, you’re you’re trading and spending gold, you know, that this rate of gold is high.

Gene Tunny  16:50

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  16:56

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Gene Tunny  17:25

Now back to the show. So I’d like to ask some questions, Jeremy about how scalable This is? And what growth trajectory you see for it, what competitors there are, I mean, how growth trajectory Do you see at the moment for gold backs?

Jeremy Cordon  17:43

We are on track this year to sell between 50 and $60 million, wroth of gold backs, that would be more gold backs that were produced from 2019 to 2022. The next year, so 2024, we’re looking at doing about 100 million. So that’s twice as many gold, you know, that’s, that’s about equal to all the gold backs produce all the previous years. So you’re kind of seeing this doubling, you know, the further you go into the future, the harder it is to predict. You know, I think we’re looking at a doubling for 2023. Also 2024, it gets a little bit more grey after that, because a lot of it depends on, you know, being able to scale up and seeing how the markets responding and everything else. But that’s, that’s what we’re looking at for growth.

Gene Tunny  18:29

Okay, and what about competitors? Is there anyone else doing something similar?

Jeremy Cordon  18:35

We want there to be so you know, we’re doing this as a private projects, you know, gold backs are starting to sell all over the world, you know, I mean, you can buy them in Europe and Australia, and but what we’re really interested in is foreign central banks. You know, you look at, you know, Zimbabwe, and they are making tiny gold coins for circulation in Zimbabwe. Because at the end of the day, the goal of a central bank is to make a money that people will actually use. That’s what they have to do otherwise your society is going to pull the collapse. There are about a half a dozen foreign central banks right now that are actively have projects designed to get people to circulate gold in their country. You know, one of them is us, Uzbekistan, they’ve been circulating gold there for about a decade. So going into these, you know, we have to build up our manufacturing capacity. But then the goal is to go into these countries and say, Hey, rather than using these tiny little coins are these tiny little bars, that you know, a tiny little bar could be worth 20, 30, 40 bucks. You know, what if you can get it down to $2 worth of gold. And it looks like a bill and you’re not going to lose it in your pocket. And all the gold is recoverable. And it’s serialised by the way, you know, I think there’s a real future for this technology, you know, first with, you know, foreign central banks that have these kind of hyper inflationary environments, but we can use that as a stepping stone to really build up the capacity, so it can become an option for any central bank. And that could be that could be a great solution for humanity and a decade from now, you know, we could be looking at a decade from now and it’s like, okay, well, if nobody trusts the currency, because the currency is falling apart, Oh, guess what? Central banks don’t half of the of the world’s gold reserves. Yeah. Maybe we could put those into circulation because maybe nobody trusts them to, you know, back, you know, $1 with gold, you know, they want to hold the gold, the trust is broken. You know, but this could, ironically, the something that ends up saving central banks in the end. And that’s, and that’s the the company, this is a technology company. You know, we’re really trying to develop a technology that makes gold a better money than it’s ever been. Because, you know, I mean, if, if I were to put on my libertarian hat, you know, libertarians have been saying this for 50 years. Oh, we need to go back to the gold standard. That will excuse me, Mr. Libertarian, you realise that the gold standard was 100 copper pennies to silver dollar and 20 silver dollars to a gold piece? Well, what do you do when 100% of your copper is used in industry? Are you going to take all of your copper out of your power lines and melt them down so you can wear them out as pennies in your pocket? Are you going to take all your silver out of your solar panels, you know, 80% of silver is used in industry, you’re going to you’re going to take all the silver out of your electronics, so you can wear them out as coins in your pocket, are you going to have the government force peg three industrial metals together to Fixed Ratio under penalty of death. Because gold has never been small enough to circulate by itself. That’s been 2600 years, we’ve always had to have tiny little bronze, the widow’s mite. And the Bible, I was a bronze coin, tiny little bronze point. So you’ve always had kind of this copper bronze silver gold system. And the gold back is so revolutionary as a technology. Gold has never been able to be this small. If you had to go back 100 years ago, in the US, it would have the equivalent purchasing power of for wheat pennies. It’s not just replacing silver, it’s replacing copper is a monetary metal.

Gene Tunny  22:12

Okay, so you’re saying if you had this technology, so there have been there are technological improvements in the production that you’re taking advantage of? Is that, is that what you’re saying?

Jeremy Cordon  22:22

No, I’m saying that as a as a money. You know, we’ve never had the technology to me. Gold as a precious metals small enough to buy coffee. You had to use copper or silver, you could never use gold directly as a commodity money to buy coffee. Not a cup of coffee, maybe like a you know, a barge of coffee.

Gene Tunny  22:42

Right what because we couldn’t get it into a form to trade. To exchange?

Jeremy Cordon  22:51

You couldn’t get gold small enough. There wasn’t a, it’s called the small coin problem. You couldn’t have a small enough gold coin to buy little things.

Gene Tunny  22:56

Yeah, gotcha. Yeah, that makes sense. And you’re talking about foreign central banks. And I was interested in the the acceptance of gold backed by the financial system, to what extent will local banks recognise gold backs? Will they recognise or financial institutions? Would they recognise them as collateral? For example, if you wanted to borrow US dollars, for example? You know, there’s

Jeremy Cordon  23:22

private organisations, that’ll they’ll recognise them as collateral, you know, but you’re looking like faulting institutions, right? You know, this is kind of more of the precious metal space in the United States. Yeah, you couldn’t walk into a credit union with a bunch of Walmart gift cards to get alone? You know, it’s not, it’s not really their thing. You know, and it might not be for a long time. You know, I’m hoping that, you know, maybe in 20 years from now, we could see a future where a lot of the cash that we have is replaced with the same technology. You know, maybe they’re not called Gold backs. But you know, if you’re a cash if you’re Australian dollars, you know, we’re made out of gold using the same technology, and we wouldn’t have to worry about inflation anymore. In fact, there’s enough gold now, you talk about scalability, there’s enough gold now owned by central banks today, to replace all of the cash in the world with a technology like gold back, and they could still have fractional reserve deposits and lending and you know, it would, it wouldn’t necessarily, it wouldn’t necessarily break anything.

Gene Tunny  24:26

Do you have a sense of how much of the demand for gold backs is related to transactions? How much is speculative? How much is an investment?

Jeremy Cordon  24:35

It’s a great question. It’s hard to know, because because of the private nature of it, if I pay somebody as a gold back, nobody else knows about it. Right? So it’s not reported to me. It’s not on a blockchain. You know, unless the two people that were parties to the transaction talk about it. It’s unknowable. That said, my guess is that I don’t think they move as fast dollars. You know, and there certainly are a lot lot of buyers that buy and save, you know, which is a valid use of money. But there’s there’s a decent amount of anecdotal evidence out there that, you know, I was at a restaurant the other day that it takes callbacks to have a sticker, you know, outside their restaurant, hey, we accept the gold back. I asked them, I said, you know, how often you actually got how often you guys actually get these? You know, I’m the girl working there says, Well, you know, maybe once a day. So you know, I mean, you’re looking at several 100 transactions a year, where people are spending gold backs in the local community. Now, it’s not a lot. I’m sure it’s less than 1% for them, but it shows that it’s not only being used as a savings or as a novelty item.

Gene Tunny  25:41

Yeah, that’s interesting. So you’ve sold some to Australians? I want to check with some libertarian friends, whether they’ve they’ve bought any do they have any. I think I saw on the website, how that what they look like, are they stamped with? Does it have Utah or the state that it’s the name of the state on the the gold back?

Jeremy Cordon  26:02

Yep. Yeah, we got we got a lot of great images on gold pack.com. You know, you can see them there. And like I said, they’re, they’re very gold, right? You know, it’s like, I don’t know what the currency looks like in Australia. But it’s the background colour of the whole thing is gold. And what you’re actually seeing is the 24 karat gold. So raw, yeah, the way the technology works is you have a piece of polymer, like a giant sheet. And it goes through what’s called a vacuum deposition chamber. You know, some people think a gold back is made out of foil. Really, it’s the same technology that puts gold in microchips in Taiwan, in diabetic test strips, or, or in a layer of a golden sunglasses, right? So the polymer goes to the machine, the machine hits in a vacuum chamber, a target of gold was a laser, the gold falls down onto the polymer, and then it gets sandwiched in with another layer of polymer. So all the gold is contained inside the gold back. And we know exactly how much gold is in it. That’s the idea there.

Gene Tunny  27:06

Okay. Okay. And finally, the value of gold backs in terms of the exchange rate with the US dollar does that is that linked to the gold price does that move? It’s very highly correlated with the gold price?

Jeremy Cordon  27:23

Yes, but we’ve seen it jump a few times. So I’m getting an example. For any commodity for any thing out there. The price is determined by supply and demand. And the gold back as a unit is a little bit separate than the rest of gold in general. Because gold backs are easy to spend and uses money. So I’ll give you an example in 2020. In March, when when COVID really kind of hit the US, every gold back sold out. Every gold back and every store, they were gone in a matter of days. And the only place to buy one was on eBay. And they were $50 a piece. Because you know, supply and demand didn’t happen to all the products out there. It happened to gold backs because I think that people were concerned that the bottom could fall out of the currency and they wanted to have a currency with value.

Gene Tunny  28:14

So you mentioned $50 What were they trading at before COVID?

Jeremy Cordon  28:25

Like $3. So it was quite the spike. And it really surprised me, you know, this is, you know, people are really serious about this. It’s, well, it’s like, you know, you have the best lifeboat on the Titanic. It’s got the motor and then the heated seats. And you know, GPS is the nicest one on the whole Titanic. But you’ve only got 16 spots on it. Yeah, not that hard to throw up the lifeboat but when it’s time to get on the lifeboats, you know, it’s like that the value of those spots goes up because all the other lifeboats you know, if it’s gold coins, you’re bartering with the $2,000 gold coin. That’s your money now like that might sucks. Okay, you know so people you know, we’re starting to see people again that are preppers that have been buying gold for a long time. There’s kind of this gestation period where they find gold back they discover it I think about it, they have it they buy some more and then you know, something clicks in their mind or they say hey, you know what, I own $200,000 worth of gold for a just in case scenario. The only gold that’s useful in my house for a just in case scenario are these gold backs. You know, no, you know, the building one of our retailers they’ll ship and all their gold clients and they’ll trade for gold backs. And you know, blacks they’ve they’ve doubled in price since 2019. And gold bullion gold coins, hasn’t, you know, it’s gone up maybe you know, 60-70% gold backs has actually been outperforming gold bullion and gold coins. And that’s that’s what surprised everybody including myself.

Gene Tunny  29:56

Yeah, yeah. Okay. Any other points you think are important about gold backs, Jeremy? I’m, I’m happy with the responses. So far. I’ve learned a lot. And I think it’s fascinating. Fascinating to have a commodity money out there. So yeah. Any other points that would be good to get across?

Jeremy Cordon  30:16

Yeah, I’ll give you a couple of data points. I’ll let you go. Because I find talking about callbacks all day. But we don’t want to do a five hour podcast, right? I mean, but I’ll tell you this in 2023, we think that gold back is going to produce more individual callbacks, more units of gold than any other producer of gold in the world, including the Perth Mint, including the US Mint, we think there’s going to be more total individual gold backs out there than any other product. So that’s, that’s what we’re looking at for growth. You know, when I say that, it sounds extraordinary. But you know, I tease people like, Do you know who the biggest manufacturer of tires is? In the world? Care to guess?

Gene Tunny  30:58

Oh, is it? I don’t know. Is it Bridgestone? Or is Lego? Lego? Oh, of course, with their with the toys you say is that? Well, they’re tiny?

Jeremy Cordon  31:12

Yeah, it’s not it’s not that different for gold back? Yeah. I mean, you know, if I have a one 1000th of a ounce product, yeah. It doesn’t take me that long to catch up to the big boys in terms of total production numbers. But, you know, I mean, we are taking a bigger piece of the gold market, you know, right now, we’re about a third of 1% of the value of all the gold sales in the US, which is not bad. You know, we’re probably the number one for hyper fractional. And, you know, gold back is also the number one for most successful local currencies in the United States. If you added up all the value of all the other legal local currencies in the United States, the gold back collectively the four different hold back states, it’s bigger. So that’s, that’s exciting, too.

Gene Tunny  31:59

Yeah, I was just trying to do the numbers in my head. So if you’re going to be, you mentioned that 50 to 60 million of gold backs that you could be producing and therefore, and half of the value is the gold. So that’s 30. Say 30 million, and the price of gold, what is it nearly 2000 an ounce or something. So he was just trying to do the numbers, and they had to figure out how much how many ounces of gold, you must be using a year, do, I could put it in the show notes. But is that something you disclose? I’m just interested in that.

Jeremy Cordon  32:32

But we do have a graph on our website that we put out. We update every quarter showing backs are out there. I think last update shows 11.8 million gold backs. Yeah. You know, and if you figure they’re worth about four bucks apiece, you know, you’re looking at right around $50 million worth. Yeah. But like I said in the month of March alone, yeah, we might have done more than 10% of that in one month. And just march, you know, we’ve we’ve seen a huge spike in interest, with all the banking turmoil out there as people are looking for safer places to put their money.

Gene Tunny  33:07

Yeah, yeah. Understandable. Okay. Jeremy Cordon this has been fascinating. I’m gonna look more into it. And yeah, it looks like you’re you could be at the start of something really big. I mean, I guess it’s, you know, you’re doing well, already. If you think about where you are, and I mean, the potential for it. I mean, it’s, you know, it’s even much bigger than that. It’s huge.

Jeremy Cordon  33:30

It’s very early days, right. It’s very early days, you know, and, you know, I really hope that we see greater adoption of the technology, there’s, you know, possibly a global demand, you know, stable inflation proof commodity currency. And, you know, the future I think a lot of it depends on, you know, how are central banks gonna react, how our governments gonna react, you know, people tend to really like them, but, you know, you have these established kind of powers. And I’m hoping they look at this as, you know, technology and an opportunity, as opposed to, you know, an antagonistic competitor, you know, because really, who owns all the gold? It’s not me, you know, it’s that, you know, and if I can make more useful, maybe there’s something there.

Gene Tunny  34:13

Yeah, yeah. Yeah, exactly. Okay. Jeremy Cordon, president of Goldback, thanks so much for appearing on the show are really found that fascinating, and it’s, it’s good to see practical examples of commodity money in the modern world. So it’s terrific. So thanks so much for your time.

Jeremy Cordon  34:35

Yeah, no, I think I think you’ll be really pleased with it. I’ll just send you some Goldbacks. Standalone and then pass them around. Please do you know

Gene Tunny  34:43

Excellent. Okay. Thank you, Jeremy. You have a have a great day. Thank you. Take care. Okay, I hope you found that informative and enjoyable. Jeremy is super passionate about gold backs. And I must say I was impressed by the rate of growth of gold backs in circulation. And I enjoyed learning about the different types of people who have been buying them. And I must say I was surprised that it appears many local businesses have been accepting them as payment. Certainly, it’s an interesting experiment, and one I’ll keep an eye on in coming years. The one reservation I have about gold backs is that you have to pay substantially for the privilege of having gold back money. Given only half the value of a gold back is due to the gold content. One gold back costs over four US dollars and it contains 1/1000 of a troy ounce of gold. Currently, a troy ounce of gold is worth nearly 2000 US dollars, that is around $2 for 1/1000 of an ounce. Of course, if you’re worried about a future hyperinflation or societal collapse, paying $4 for each gold back could be a good deal. As Jeremy has argued, in that scenario, gold backs could end up serving as a widely accepted currency. I don’t think we’re headed for that scenario, but I’m less sure about that than I have been in the past and hence, I can understand why some people may see gold backs as a useful thing to buy. Furthermore, I admit they do look impressive, and there would be some novelty or show of value in owning some gold backs. And yes, I’m I’m actually looking forward to getting my hands on some. Of course, none of this is financial or investment advice. Okay, I’d be interested in your thoughts on gold backs. Do you see value in them? How widespread Do you think the use of gold backs could become? Please send me an email with your thoughts. You can reach me via contact@economicsexplored.com. Thanks for listening. Righto, Thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

37:36

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Credits

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Categories
Podcast episode

Why we’re in the Decisive Decade with China & what the West should do w/ Dr Jonathan D. T. Ward – EP182

Dr Jonathan D. T. Ward discusses his new book “The Decisive Decade: American Grand Strategy for Triumph Over China” with show host Gene Tunny. Dr Ward argues the US should adopt “a two-pronged strategy of economic containment toward China alongside the revitalization and evolution of American industrial and technological power.” Dr. Ward is an internationally recognized expert on Chinese global strategy and U.S.-China competition. He earned his PhD in China-India relations at Oxford and his undergraduate degree at Columbia, where he studied the Russian and Chinese languages. Dr Ward is the founder of the Washington DC-based Atlas Organization, which provides strategic advice on US-China competition to businesses and government agencies. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP182

  • How Dr Ward’s new book The Decisive Decade picks up where his previous book China’s Vision of Victory left off [2:02]
  • What’s the actual concern with China at the moment? [5:20]
  • What does economic containment mean? [9:40]
  • Dr Ward proposes to restructure the world economy in favour of the democracies and against China [14:18]
  • Is China such a threat that we should sacrifice our economic gains from trading with China? [19:25]
  • China’s economic development has allowed it invest large amounts in its military [23:18]
  • Western companies and forced labour supply chains in China [26:51]
  • Dr. Ward’s final observations on China [33:24]

Links relevant to the conversation

Dr Jonathan D T Ward’s bio is available from the Atlas Organization’s website:

https://atlasorganization.com/

Jonathan’s book The Decisive Decade: America’s Grand Strategy for Triumph Over China: 

https://amzn.to/3TQyGoi

This may be the Ben Franklin quote Dr Ward had in mind: “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety”:

https://www.npr.org/2015/03/02/390245038/ben-franklins-famous-liberty-safety-quote-lost-its-context-in-21st-century

Related previous podcast episodes:

China, Taiwan & the Indo-Pacific w/ Dr Greta Nabbs-Keller – EP146 – Economics Explored

How to Defeat the Dictators w/ Charles Dunst, Asia Group – EP180 – Economics Explored 

Transcript:
Why we’re in the Decisive Decade with China & what the West should do w/ Dr Jonathan D T Ward – EP182

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. This is episode 182. On US China tensions. Dr. Jonathan DT Ward joins me this episode to discuss his new book, The decisive decade American grand strategy for triumph over China. Dr. Ward is an internationally recognised expert on Chinese global strategy and US China competition. He earned his PhD in China India relations at Oxford and his undergraduate degree at Columbia, where he studied the Russian and Chinese languages. Dr. Ward is the founder of The Washington DC based Atlas organisation, which provides strategic advice on US China competition to businesses and government agencies. Dr. Ward argues the US should adopt a two pronged strategy of economic containment toward China alongside the revitalization evolution of American industrial and technological power. So the book is a good one to cover on this podcast for sure. Okay, let’s get into the episode. Dr. Jonathan Ward, welcome to the programme. Good to be here. Thank you for having me. Excellent. Jonathan. Today, we’re going to be chatting about your new book, The decisive decade. I’d like to ask first, why is this particular decade decisive?

Jonathan Ward  02:02

Sure. So first of all, Jean, this book picks up where my first book, China’s vision of victory left off. And the first one explained the global grand strategy of the Chinese Communist Party, you know, the military ambitions, the sort of economic ambitions, the history of the party’s view of the world its view of itself as ascending and completing what they call the Great rejuvenation of China of the Chinese nation, which seeks to return them to a place of preeminence in the world, and basically, their vision of the world order and where it’s going. And so the decisive decade picks up, where that left off, which is to explain that, you know, if we wish to stop that vision of victory, if we wish to prevent it, to maintain the rules based order to sort of ensure that the security of the free world coheres. And that the world isn’t simply, the rules aren’t rewritten by the People’s Republic of China, we’re going to have to take actions of our own, and then we have to engage in Grand strategies of our own. And this is written primarily as an American grand strategy, but also one that is very focused on the alliance system, the free world, the democratic world, the democracies, you know, all of that. So how to create a counterpoint a real, whole spectrum counterpoint to Chinese global grand strategy. So the decisive decade is, you know, the title refers to what I talked about in China’s vision of victory, which is essentially this isn’t a contest for the very long term. 2049 is what the communist party thinks of as the symbolic date, but 100 years after the founding of the People’s Republic of China, they will have completed the great rejuvenation of the Chinese nation, they will have completed military modernization the Belton Road, made in China 2025, all of these things track that long term, somewhat symbolic timeframe. But to me, for our side of this game, what matters is the contest for 2030, the fact that this game, I think, will largely be won or lost in the 2020s. And I even saw in a recent article in ABC, Australia, somebody’s talking about, you know, if there were to have to be a military conflict between China and the United States or the Allied Pacific powers that comes in the 2030s, it would be likely that we would lose whereas now, you know, there would be a stalemate? No, this is a peacetime strategy that I’ve written, I should make that clear. It’s a strategy for how to win the long contest without a conflict, how to win it chiefly, through rebuilding our economic advantages, and our military power and returning to peace through strength through deterrence, which we can already see that that entire construct is breaking down in Europe. And the question that’s on the minds of every, you know, major capital in the Allied world is will that also break down in the Pacific? Are we going to see China act in the Pacific alongside its partners, and Moscow in a kind of replay of the early Cold War relationship where they, you know, frankly, expressed to each other that they would divide up, divide and conquer Stalin told now he would focus on Europe and China should focus on Asia and the next thing we got is the Korean War. So we’re in times that requires serious responses ice still believe we can do this through economic power and integrated deterrence. And that’s what my strategy proposes.

Gene Tunny  05:07

Right? Yeah. So you talk about a two prong strategy of economic containment toward China alongside the revitalization? Sorry, the revitalization and evolution of American industrial power. Yep. So you’re keen to ask you about those in a moment. I just want to stick with this issue of what’s the what is the actual concern at the moment, we’ve just had, like all the level of concern, our former prime minister, Paul Keating, here in Australia, the other day made some rather extraordinary statements at the National Press Club and critical of the current government, which is on his side, and also the government while he was in that political party and the government before him, the current government. And I mean, he, he asked, why would China want to threaten Australia? What would be the point they get the iron ore, the coal, the weak? What would be the point of China wanting to occupy Sydney and Melbourne? militarily? What is the real threat? I mean, China wants Taiwan, they’ve they’ve been explicit about that. Do you think they have imperial ambitions? Beyond that? What explicitly are they after? Sure. So

Jonathan Ward  06:18

let’s think about that. I mean, for him to say that this results in the occupation of Sydney or Melbourne, I think, is taking it to a strongman extreme. I think the point here is Australia already has seen what coercion looks like, from the People’s Republic of China. And you saw that very early on, when they you know, shut off trade to Australia, because they were concerned about comments about the COVID origins. And, you know, Australia’s I think ability to act as an independent actor. And this is the subject of, I think, a very robust discussion. And, you know, frankly, a lot of the great research on this comes out of Australia. So, Australia, in many ways, this led aspects of the charge here in terms of calling the the threat of the Communist Party for what it is, but you think about banning Huawei, and the 14 points declaration that the Communist Party of China issued to Australia basically establishes the terms of what it would look like to have a healthy and productively relationship. And I think that was met with revulsion across Australia, the idea that they could be, you know, sort of dictated to by the Communist Party of China. In the meantime, China’s going through with HR McMaster, the former US national security adviser called the largest peacetime buildup, the largest military buildup in modern history. So the naval buildup they’ve undertaken the missile buildup, you know, the Air Force, sort of activity, I mean, they now have the largest and peer forces in the Indo Pacific, the largest Navy in the world, largest ground forces in Asia and Xi Jinping on a very regular basis way before but for, you know, I don’t know, Paul Keating myself, but certainly before his comments, I mean, Xi Jinping himself is speaking on almost a quarterly basis about preparing to fight and win wars now against whom, you know, Air Force manuals from the Chinese military talk about the ability to after seizing Taiwan, the ability to produce famine in Japan, you know, these ambitions, they have, I think, are part of, you know, a concept of dominating Asia. And that does include Australia, and I think for the United States and Australia, when our relationship, economic, military and values based goes back so far, and it’s so deep, when you think about something like the Second World War, where one of the most important pieces of our joint military strategy was to keep America in the Pacific through the California to Australia, you know, oceanic highway and the Japanese were trying to cut that off through the Pacific Islands. So, you know, the military geography of the Pacific is something we’re all familiar with. It’s something that China has studied in depth. I mean, their ambitions towards the island chains, I think are very well understood. And this is why, you know, according my understanding Australian Defence is very, very focused on the challenge from China. And in the meantime, I even, you know, without anticipating being on your podcast, and thank you for welcoming me, one of the first pages of my book includes just as a matter, of course, you know, threats that China has made to different allies, and that includes the threats that they made of quotes, possible nuclear attacks in the future on Australia. I mean, you know, they’ve threatened us with that, too. So it’s, it’s par for the course. But still, I think, I think they’ve made very clear how they feel about their position in the world. And it’s one of my friends in Australian Defence once said to me, when I asked What does China really want from Australia, and she said, it wants to be it wants Australia to be a neutral farm in mind. So if I don’t think that’s the future that that we’re all looking for, is to be sort of fun, you know, dependencies in a economic empire headed by the Chinese Communist Party. On the other hand, that’s certainly what they would like.

Gene Tunny  09:42

Yeah, I’ll have to look up that quote. That’s a that’s an interesting one, a neutral farm and mine. Okay.

Jonathan Ward  09:48

That one’s in China’s vision of victory.

Gene Tunny  09:50

Gotcha. I’ll have a look. That’s your previous book, isn’t it? That’s excellent. Okay. Can I ask? What do you mean by economic containment? And what does that look like?

Jonathan Ward  10:01

Sure. So the way that I see this, I mean the way to win this contest and to to avoid the hot war and to not have it just keep on culminating in a rising China that’s continuing in the military buildup and has its various territorial ambitions. And that’s all just a matter of fact, I mean, their claims against all of their neighbours, the wars, they fought in the 20th century against many of their neighbours, not least of which was the Korean War, which involve both the United States and Australia, in which they saw as central to the what they called the new China, just the rise of China back then, you know, we’re seeing, I think, a replay of some of those ambitions as they threaten papers today. But the bottom line, I think that this is largely, you know, it really comes down to the gap that we once had, as the free world between ourselves and the major dictatorships, and not least of which was the People’s Republic of China, and through economic engagement, and the strategy that we sought to do was to bring them into the world to trade with them to invest in them to establish business ties People to People ties. And that wasn’t the end of it, we did not necessarily expect that that would empower the Chinese Communist Party, we thought that it would lead to liberalisation in a political softening of the of the CCP, perhaps a reduced role and its influence. And really the opposite happened. I mean, China transformed from a largely agrarian society in the 1980s, to an industrial technological superpower, which now has totally changed the military balance in Asia, has created world leading companies has dominated strategic industries like money, intellectual property theft concerns are the subject of an enormous amount of study at this point. And that all culminates for them in economic ambitions of becoming really the centre of the world economy. And, and in doing that, they seek to then bring in a military strategy where they defend their, what they call the ceaseless expansion of their Overseas Interests. So in a way, it’s an old school sort of Imperial strategy, we recognise it very clearly as such, if this were the 19th century, but it’s kind of lost in the language of development and trade in the 21st century. So, you know, bottom line, I mean, they they see themselves as rising to a preeminent position. And then the world economy is doing that through mastery of certain strategic industries. And frankly, they can only get there if we help them. So a lot of the point here is economic containment really is about ceasing to empower to enable and to enrich the Chinese Communist Party in the People’s Republic of China for as long as it has these tendencies and ambitions and, you know, sort of dangers. And I think it’s a very simple thing where, you know, economic containment, as I’ve described it in three parts, it has to do with market access, it has to do with technology transfer, it has to do with access to capital. And as long as we’re providing access to capital access to technology, and then access to our markets, we’re enabling their growth, whereas you start to produce that. And the ascendancy slows down a great deal. And either way, we should remember that decoupling, which is a popular word is a two way street. I mean, Xi Jinping has made very clear through programmes like made in China 2025, that they seek to establish indigenisation of key strategic industries. So it’s not that our companies are over there in order to capture unlimited market share, and they’re essentially over there to transfer technology. That’s been the deal that Western businesses run with the People’s Republic of China for 30 years now. But it’s culminated and Chinese dominance of certain industries and then on the other hand, you know, they really do need access to global capital markets. And that’s where we have a far greater advantage, and they need to be able to sell to the OECD markets. And if you look at their trade composition, I mean, a great deal of it is, you know, let’s say a lot of value added since microelectronics, for example. So some of the industries that we already know, we have to secure I mean, I do not think it creates leverage over an adversary state that is, you know, creating a force structure that’s designed for combat with with us, you know, with America with Australia with Japan, that our supply chains are there, I mean, that doesn’t create leverage over them that creates leverage over us so so we know that we have to pull back certain strategic industries into the meantime, Xi Jinping, dual circulation strategy, means that he would like, in this is how the party is orienting. He would like the world’s supply chains to become more dependent on China at the same time for China to become less dependent on, you know, external supply chains. So so, you know, they’re looking to do this one way. And, and, you know, decoupling is something they’ve initiated in many industries. And then, you know, we’re gonna have to do that too, in certain ways. So so there is a natural restructuring. And the question, in certain ways is who, you know, what is going to be the outcome, ultimately, of that restructuring? And we have to do it in such a way where I think we’re working together, and we’re going to restructure the world economy in the favour of the democracies and not in favour of the People’s Republic of China.

Gene Tunny  14:44

Okay, and how do you propose doing that? What policy measures do you have in mind you have in mind tariffs, do you are you talking about banning certain types of investment into China certain types of trade? What exactly are you proposing?

Jonathan Ward  15:00

Sure, so I think you know, you need to go industry by industry and sector, you know, sort of company by company and look at all the key inputs that really matter. And I think that’s where this goes into a level of detail that will have to be, it’ll be the subject of policymaking in the decade ahead. I mean, what precisely do we want to allow? And what do we not want to allow? I mean, you can imagine, for example, it’s not necessarily strategic for, for McDonald’s to be operational in the People’s Republic of China. I mean, they’re taking their own risks by being there. And let’s not forget, every single company just learned a very big lesson in Russia. I mean, the amount of the corporate Exodus after Russia invaded Ukraine should be the real lesson for companies that are investing in China and building trading relationships, what actually happens, if they do decide to use force, that’s a separate problem. So the business sector, I think, has this issue on their own plates in a different way. But then for the policy world, you know, we’ve already seen much greater action in terms of export controls, you know, the foreign direct product rule is very important to limiting the transfer of technology that could be applied much more widely. Outbound Cepheus, a committee on foreign investment in the US provides a template for looking at strategic industries. And the concern has largely been over inbound investment from China into industries that we consider important, but also outbound because any multinational is going to have to ultimately, you know, allocate capital in order to remain competitive in a China market where their intellectual property has probably already been stolen. And perhaps commercialised. So, you know, the capital, you know, allocations continuing look at something like Tesla, for example, their giga factory in Shanghai is not owned, it is rented on a 50 year basis with a CapEx minimum and a revenue minimum every year. That’s the kind of deal that’s going on in order to syphon capital from multinationals alongside technology transfer today. So, you know, that kind of capital allocation, I think, is bad. I mean, we’re still mainlining hundreds of billions of dollars of capital, just as the United States. The other thing is, you look at large pools of capital, such as pension funds, you know, large index creators and allocators such as BlackRock and State Street have, you know, MSCI China index season, and there are companies in the US that are tied to civil military fusion, to the human rights abuses, and certainly to the Chinese Communist Party, because at this point, the party is basically reversing course, on Deng Xiaoping’s original opening up the private sector, and they’re putting party members on boards and controlling these companies. And all of these companies operate in the interest of their larger strategic programmes. So when we allocate capital, we are helping to finance military modernization, the Belt and Road and a surveillance state that I think is the subject of an enormous amount of documentation. And, frankly, you know, concern if not, we’re across the free world. So I think you start to do that. I mean, you start to cut back from, you know, and civil military fusion, perhaps I should explain, I mean, it’s the party’s initiative to transfer innovation happening in civilian industrial sectors into the military to make sure that the military can, in their words, close the gap with the United States and other Western militaries. So they are taking the economy that we helped them build, and converting it into maximum military power to be directed against us. That’s the thing that you want to break down. So why should we invest in that? Why should we transfer technology to that, and on the subject of exports, I mean, I think it’s really about export diversification. For example, Australia’s trade relationship is largely about selling coal and iron ore and, you know, commodities to China. And then I think Australia is one of the very few countries in the OECD that runs a surplus with China. But what’s important is pretty much true across the OECD, it’s a lot of micro electronics, and, you know, those sorts of sorts of value added goods. So, you know, looking for new supply chains, so that we do not have to, you know, have our exports come in from China. And that’s something we work that out, and we start to cut down their export, you know, based and that changes the structure of their economy. And it takes a lot of the growth out of the equation. And in the meantime, you know, it’s possible to reinvest in our own societies and our own industrial bases. I mean, we can do manufacturing, too, we just haven’t, because of the exigencies of, you know, basically, competitive advantage and competitive advantage, I think, is a fine concept. You know, theoretically but in a political economy, where you’re dealing with an adversary state that, in its own words, is preparing to fight and win wars, including with you and your allies. Perhaps it’s, it makes sense to see what else you can do.

Gene Tunny  19:25

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  20:00

Now back to the show. Yeah, it sounds like you do need a lot of policy intervention to bring this about. And you’re talking about power of measures industrial policy to promote this reshoring or whatever you want to call it. Yeah, I mean, as an economist it, it looks like you’re talking about losing a lot of the potential gains from trade. And I mean, my I’m not sure yet. I mean, I’ll have to read your first book. I do know China is a is a threat. And there is a lot of espionage going on. At the same time, I recognise that a lot of countries engage in espionage. Is China such a threat that we should sacrifice those economic gains? I mean, you’ve made a judgement that they are such a threat that we can forego some of those economic gains? I mean, how do you think about this in in terms of, do you think about it in terms of a cost benefit analysis? Or are the national security concerns primary for you? How do you think about this? How do you weigh everything up?

Jonathan Ward  21:08

Well, I think it’s a little bit of all of that. I mean, on one hand, it’s not my judgement alone, I think this has become pretty commonplace across most allied capitals, the idea that the trading relationship with China or economic engagement is certainly not produce the political outcomes that people saw. And let’s not forget, that was one of the primary reasons for doing it, you can see that for Batum, across the entire discussion in the 90s, ahead of the WTO session, this was not just let’s trade with a dangerous state and hope for the best let’s trade with this state that is an authoritarian state, because we believe it will produce liberalisation, that did not change. So then you have to ask yourself, what are the consequences of that? I mean, the consequences of that is like, sure, I mean, people are making money in Australia, they’re making money in the United States. And it’s why people keep doing it. On the other hand, we’re also on a constant basis, enriching and improving an adversary state that’s declared its intention. So I think, you know, having a full appreciation for what that looks like, through their own eyes, I mean, how the Communist Party of China seeks to, you know, take this well beyond espionage. And that espionage is for a purpose. At the end of the day, they’re reconstructing industries that contribute to national power, and they’re building a military that’s designed for war with the Asia Pacific. So So you know, I think that’s very clearly understood in most capitals at this point. And it’s, it’s, you know, not really a matter of debate, in that sense as to the intentions. It’s just a matter of, you know, they’ve, they’ve told us that we can watch it all happen in front of us. On the other hand, I mean, sure, if you’re, if you’re in the business community, or the trade community, I mean, just looking at, you know, Australian Department of Foreign Affairs and Trade. I mean, one of the first lines on doing business with China, is trade and investment with China is central to Australia’s first to Australia’s future prosperity. So I think this is the contradiction that just lies at the heart of the entire Western world approach to China for the past 40 years was that they used to call it engage, but hedge and the idea was that we would engage economically, but we would hedge militarily, we would build defences against this. And the problem with that is the more you engage economically, the less possible it is to hedge because they’re, they’re reinvesting it into defence. I mean, that’s what they’ve done. They felt, you know, the largest military in the, in the Pacific. And, you know, if they were totally friendly about it, maybe we’d be talking differently, but by the way, they’re not they’ve issued pretty graphic threats to all of our countries at this point. So, you know, so So I think the question is really do the economic gains, you know, in fact, bring security or prosperity. And, to paraphrase Ben Franklin, I mean, those who would trade security for prosperity will probably have neither, in the end. So you know, that’s where I’d be concerned. And I think the real economic activities here, and keep in mind this, it’s going to be industry by industry, at the end of the day, selling raw commodities into China’s industrial base is one form of business, but selling, you know, let’s say equipment that helps them undertake a military buildup or build the surveillance state or any of that, you know, this stuff can be, you know, looked at from the point of view of China’s companies. I mean, you know, the 97 SASAC corporations that make up the bulk of the state owned enterprises, certainly the big ones to the largest ones on the Fortune Global 500. I mean, those are deeply aligned with the state. I mean, they’re owned by the state, and they’re used for strategic programmes. I mean, you take for instance, the islands in the South China Sea, you know, we can debate whether or not that’s a threat, but you know, frankly, I think it’s, it’s generally seen to be one and that was built by China communications construction Corporation. For example, I remember I was at Oxford Business School alongside my PhD and, you know, with with the MBA students, we were doing a leveraged buyout model of an aerospace composite parts company from from from Austria, and it turned out that it was owned by a VIC which is China’s military, aerospace, corporate. Should everyone’s looking at the financials. And I was the only one that said, hey, look, these guys just landed, you know, you know, military aircraft on the islands in the South China Sea this month. Does anyone care about that? That’s the problem with separating pure economics from from political economy or from history is, and as a historian where you have to look at all of this, I think we also have to look at the consequences of blind economic engagement. And that’s the debate we’re all going to be having. I mean, in fairness to Australia, I think your economic rules with relationship with China is relatively clear cut. Whereas, you know, I mean, for us, I mean, our biggest issue is our fortune 1000 is still very deep in the China market, but they’re taking on risks. And I think that’s actually a separate problem, the risks that businesses are taking, and this is something I’ve advised businesses in the US for the past five and a half years on this stuff to help them appreciate the level of risk they’re actually taking on. Because, you know, if you look at the, let’s say, the case studies from what happened after Russia invaded Ukraine, I mean, you know, where does this really go for you, if you’re not de risking, you’re trying to stretch if you’re becoming too dependent? If there’s actually, you know, any kind of conflict, all of that will be lost, as it was in prior periods. We’ve been through this before in history. We’re just going through it again, as they’re blind.

Gene Tunny  26:17

Yeah. I love that. Benjamin Franklin, quote, I think I’ve heard it before, I’m going to have to revisit it and put it in the show notes. I thought that was that was really good. And yeah, highly relevant to the conversation. Just finally, Jonathan, I know, you will have to wrap up soon. You talk about corporates, you write in your book, that American corporate exposure and involvement in China is creating risks and perils to the United States and to global stability. Can you give some specific examples, please? So we know what you’re, you’re driving out there, please?

Jonathan Ward  26:51

Sure. So, you know, one example comes from the Australian strategic policy institute, which I think was one of the first global think tanks to to break ground on the role of Western corporates in, you know, in the forced labour supply chains. And keep in mind this this, you know, the shinjang genocide is something that I believe all of our governments, you know, agree is a genocide. So, so our companies are there, I mean, whether it’s Volkswagen from, from, from Germany, or, you know, Nike in the United States, or Ralph Lauren, or polo, I mean, there’s a pretty big list from SP, and that’s important. So, you know, the participation of our own companies and human rights abuses is something that’s increasingly well documented. But then one of the aspects of this that I highlight that I think is less well appreciated is the role of our companies in civil military fusion, and also in strategic programmes such as the Belt and Road. I mean, I use the example of Caterpillar, which was brought before Congress in the United States at least once because they were marketing themselves as helping China build the Belt and Road and we all kind of understand at this point, the strategic nature of the Belton road and what it seeks to do for, you know, China’s sort of economic hegemony in the region. And to have our multinationals or OEMs, out there building something like that, or to have, for instance, Google, doing artificial intelligence partnerships at Ching Hua University. And then the dean of Ching Hua goes and issues a statement, which talks about how Ching Hua will be a centre for artificial intelligence, human machine combat cooperation for the Central Military Commission of the People’s Republic of China, I mean, again, we are participating in a nation state that is organising itself for, for more in for, you know, human rights atrocities. And all of that is, I think, clearly understood. And, you know, the best example, really, historically was in the 1930s. Many American companies certainly were entangled in the reconstruction of Germany, and you know, with places like Ford and Standard Oil, and IBM most notoriously was, ultimately became, you know, its machines for use in the Holocaust. And Thomas Watson went to Berlin, and I believe 1937, and to speak at the International Chamber of Commerce. And he was given a medal by Adolf Hitler, and the title of his speech was peace through trade. So, you know, we’ve been down this road business. And again, to me, business is not the bad guy here. If business changes course, I mean, arguably, we won the second world war, because all of those great companies ultimately came to the right side of history. And we’re going to need to do that, again. What we didn’t get into today is how the global economic contest is one. This is not simply about containment of China. This is also about hitting the accelerator when we’re about to go through an event in economic history called the Fourth Industrial Revolution. And if the free world can hit that, and accelerate, we’re going to create a gap between ourselves in the authoritarian states, the likes of which we haven’t seen in many years now. And certainly, we gave that gap away. In the post cold war, but if we’re able to do that, if we’re able to accelerate Well, at the same time, ensuring that they do not get onto that track, through engagement with us, we’re going to create, I think, a new economic divergence that will lead to much greater outcomes and resolve some of the geopolitical, you know, dangers on the road ahead. And our companies are gonna have to go out and win a battle for global markets that they barely understand yet, they’re going to be competing against the Chinese state, with enormous quantities of capital in with stolen intellectual property. So you know, that that’s something that, you know, ties right into the strategic competition, I mean, the role of our companies is going to be central to winning or to lose, and if they don’t change course, and in the meantime, they’re taking on risks that I think are increasingly clear, as, for instance, the global focus on Taiwan comes into sharper relief.

Gene Tunny  30:53

Right? Yeah, sorry, I didn’t get around the fourth industrial revolution. But would you have a second just to go? Or just a few minutes to go over what you think those are? The main ways to create that gap? Ah, I mean, he was talking about, essentially, you know, cutting China off from that knowledge from that innovation?

Jonathan Ward  31:12

Well, look, I think if we start to, you know, to restrict engagement along the lines of market access technology and capital, then you’re going to start to see the difference between the democratic systems and, you know, China’s authoritarian, you know, totalitarian system. So we, I think we want to be in a systems competition with them, we don’t want to be in a competition where we’re the r&d base that they produce at scale. I mean, that’s one where we lose on a long enough timeframe. But the the industries themselves have been pretty clearly identified. And I’ll just give you an example. Because I think something that’s worth noting is that, you know, made in China 2025, identified some important industries, and then the chips and science sector in the United States identified another set of industries, that’s almost the same. So you can see that some of the critical industries have already been identified, but from the chips and science Act, to artificial intelligence, machine learning and autonomy, semiconductors, and advanced computer hardware and software, Quantum Information Science and Technology, robotics, automation, advanced manufacturing, advanced communications, technology, and immersive technology, biotechnology, genomic synthetic biology, data storage, advanced energy, advanced materials that go on, but bottom line, it’s going to be these industries of the 2020s and 2030s. It’s also going to be this sort of, you know, Internet of Things and digitization of physical infrastructure. So for instance, I remember being in China, you know, before the pandemic, and, you know, looking at an r&d lab somewhere and you know, Alibaba, smart homes and Huawei smart homes, we’re not going to be using that you’re not going to use them in Australia, and we’re not going to use them in the US. So there’s going to be a natural bifurcation that happens. But then the question is, how do we turn that into productivity and power that has a lot to do with markets, because at the end of the day, the US in a free world and you know, Australia, and everybody we’re, you know, 50 to 60% of global GDP when you add up the free democracies, and we’re 75% of global wealth, which may be even more important. So we have these tremendous advantages. And we’re going to have to restructure the world economy so that it isn’t simply the Communist Party of China does not achieve its vision of victory. And we can do that. There will be costs, but there will also be opportunities, particularly in reintegrating amongst one another.

Gene Tunny  33:24

Okay. Dr. Jonathan Ward, any final observations before we wrap up?

Jonathan Ward  33:29

I think we should leave it there. But thank you for having me. And, you know, great to be with an Australian audience and a huge fan of the country and have many friends.

Gene Tunny  33:38

Excellent. Dr. Johnson would. It’s been great, thank you. Okay, I hope you found that informative and enjoyable. I found it valuable chatting with Jonathan given he has a very different perspective from me on China. While I think we need to proceed cautiously and restrict any technology transfer that could threaten national security, for sure. I’m unsure economic containment is the best approach to China at this stage. As an economist, I have a strong bias towards free trade. That said, I know that China needs to be watched closely. And you may recall, I previously talked with experts about the prospects of an invasion of Taiwan and about the enterprise China model. And I’ll put links to those episodes in the show notes. I acknowledge it’s possible there is a significant threat from China. And I’m very grateful to Jonathan for appearing on the show to talk about his new book. Please consider purchasing a copy of his book find the link in the show notes. Jonathan’s book has received some impressive testimonials, including from former US national security adviser, retired Lieutenant General HR McMaster. Incidentally, McMaster also gave a testimonial for Charles Dunst book, defeating the dictators and you may recall I chatted with Charles about his book in Episode 180. So please check out that episode if you haven’t done so yet. As I’ve noted previously, I think it’s important to cover geopolitics on this show because geopolitical developments can end up having huge economic impacts. As I’m sure you will appreciate, given the impacts that the war in Ukraine has had on fuel prices, among other things. Please let me know what you think about my conversation with Dr. Ward. Do you agree with him that we should adopt an economic containment strategy against China? As always, feel free to email me at contact@economicsexplored.com Thanks for listening. Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

36:26

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Credits

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Podcast episode

Using Coase’s 1937 theory to explain Hutchies doing its own concrete formwork – EP181

Why do firms do some activities “in house” and contract out others? British-American economist Ronald Coase gave a cogent explanation in a classic 1937 paper on the nature of the firm. Show host Gene Tunny explains to his colleague Tim Hughes how Coase’s insights (e.g. the concept of transaction costs) can be applied to understand the actions of an Australian construction firm Hutchinson’s deciding to employ people to do concrete formwork rather than relying on subcontractors. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP181

  • Episode topic: What determines what activities a business does in house? [0:06]
  • What is formwork and why does it matter? [3:29]
  • Hutchinson’s moves to bring formwork in house [8:54]
  • When is it important to have an in-house workforce in your firm [14:42]
  • Why you don’t always contract out [20:00]
  • What’s done in house and what’s outsourced? [25:03]
  • Gig economy platforms (e.g. UpWork) [33:02]
  • A closer look at The nature of the firm by Ronald Coase [40:56]

Links relevant to the conversation

Courier-Mail article on Hutchinson’s decision to do its own formwork:

https://www.couriermail.com.au/business/citybeat/hard-labour-hutchies-plan-to-survive-building-crisis/news-story/e3b8acc34728e49cc04d0c4b88bafc8d

Ronald Coase’s classic article on the nature of the firm:

https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0335.1937.tb00002.x

American Express article on pros and cons of hiring versus outsourcing:

https://www.americanexpress.com/en-us/business/trends-and-insights/articles/pros-cons-hiring-house-vs-outsourcing/

Transcript:
Using Coase’s 1937 theory to explain Hutchies doing its own concrete formwork – EP181

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. This is episode 181 on the boundaries of the firm, what determines how many activities a business does in house rather than relying on suppliers? In this episode, my colleague Tim Hughes and I begin with a real example in the Australian construction industry. And I’ll talk about how it illustrates the principles from a very important paper from 1937. That paper is the nature of the firm written by Ronald Coase, who won the Nobel Prize for Economics in 1991. Okay, let’s get into the episode. Tim, here is good to be chatting with you again, Gene Tunny, good to be here. Excellent. Tim. Tim, I thought today we could chat about the theory of the firm. And this conversation was prompted by some news about one of the major construction companies in Queensland, which is the state of Australia that we’re in. And indeed, I just walked past one of their building sites on Brunswick Street forward to valley a bit earlier before we call it up. And I think they’re 100. I think they’ve had their 100 and 10th anniversary or something like that recently. It’s a big company. Yeah. Huge company that’s passed down through the generations. So yes. But it’s experiencing challenging times as a number of building companies are in the current environment due to rising cost of materials. And also, I think, probably challenges getting the skilled labour that they need. So this is Hutchinson’s? Yeah. Yes. Yeah, that’s right. Didn’t know I’m done. I should have mentioned that upfront, but I didn’t think so. But there we go. Excellent. So it’s definitely Hutchinson’s and I saw this report in the Courier Mail. So that’s the paper here in Brisbane a few days ago. So we’re recording this on Friday, the 10th of March 2023. And there was a report Hutchinson builders reveals plan to hire trainees in house. So if you’re listening internationally, tradies is our word for tradespersons for carpenters, and bricklayers and plumbers, etc. Construction giant Hutchinson builders is taking drastic measures to survive in an increasingly cutthroat industry, forming his own in house team of tradies to keep its high rise projects on schedule. Hutchinson builders, Chairman Scott Hutchinson said a team of 106 concrete form workers had been established from former employees of subcontractors who had gone into liquidation.

Tim Hughes  03:29

Tim, you’ve worked in construction and you have at different times. Yeah, yeah. Are you able to explain what formwork is? Yeah, formwork is basically putting up wooden surrounds, I guess, to then be the boundary for a concrete pour. If you’re doing if, say, for instance, a floor is gonna have formwork around for the edges of where the concrete is. And then you’d have reinforcing etc, throughout. But yeah, basically, it’s, it’s whatever is there to contain the concrete. So that once it’s set, the formwork gets taken away, and you’re left with the structure.

Gene Tunny  04:04

Okay, and so you need this in place. Do you before you pour the concrete? Yeah. Yeah. So this is, so what’s going on here, it appears is that Hutchinson’s is bringing that in house. So rather than sub contracting that out there, making sure they’ve got the people on hand, that they’re employing them permanently, as you know, in their workforce to make sure that they’ve got the skilled labour that they need, when they need it. So that I guess, so they don’t delay a job. So because that’s on the critical path of the job, isn’t it getting there? Getting the formwork done, so then you can get the concrete poured?

Tim Hughes  04:42

Yeah. And one of the typical issues with any building project is that, you know, all the subbies have their different schedules that they’re trying to keep in they always have more than one job. And so, it becomes this issue of, then servicing different jobs at the same time, in general. And so it becomes this catalogue of finger pointing quite often, where somebody doesn’t do something because somebody else hasn’t done something. And so there’s a chain of events or a sequence of events, you know, for instance, you can’t pull the concrete, for example, unless the form where it’s been done, you know, yeah, if you know that has to follow, everything’s sequential, or largely sequential. Certainly, once you’ve got the roof on and everything like that, then there are different things that can happen at the same time. And you might end up with an electrician, Spark is chippies, carpenters, etc, they can work in the at the same time because the roofs on the site is watertight or secure. But there’s always that sequence of events. And it’s a strong like, it’s a confident move. And a smart move from Hutchinson’s from what I can see because they’re secure in the workforce. Because one of the problems at the moment is now trying to make sure that you can line somebody up and be certain that they’re going to be there when you need them. So it’s a confident move, but obviously, with having permanent workforce, then you’re taking that point that you can keep them working, you know, obviously, nobody wants to have somebody on the books and not enough work coming in.

Gene Tunny  06:15

I guess if you’re a big company like that, yeah, then well, I mean, they’re expecting they’re gonna have plenty of work for him and for them, and if they don’t, then they’re willing to bear the cost of that under utilisation, to an extent because there’s such a benefit from having them on hand, because the cost of the alternative is just so high for them, not having the people they’re not having the formwork done, and then the delays to the project, the costs associated with that, and not being able to get the work done and then be able to invoice for it.

Tim Hughes  06:49

Yeah. And it’s obviously been a well thought out move. But it’s good to see I mean, because there are, you know, they’ve done a lot of great work around Brisbane, for instance, certainly in the entertainment industry. And now Scott Hutchinson has been played a big part in keeping, for instance, the Tivoli, which was a den danger of being lost to development knocked down. And the same with the princess Theatre in Berlin, GABA, you know, to beautiful music venues, which historically, there have been some great venues lost in Brisbane, you know, in the 80s. Just being knocked down in the middle of the night, like Cloud lands, for instance. Yeah. You know, so it’s great to see a building company, Scott Hutchinson, I know, he’s led a lot of that with the music venues, it’s great to see them having this confidence. So yeah, yeah. Because well for them.

Gene Tunny  07:37

Yeah. I mean, they’re having to do it because of the conditions in the industry. And I think, I mean, they probably would rather not have to do it, then historically, they haven’t. So we might just go over their justifications for other reasons. And then I want to go on to the micro economics of it. So how would economists think about it? Yeah, sure. Because when I read that article, it made me think of a famous theory put forward by a British American economist, Ronald Coase, who was a Nobel Laureate. So Coase was at University of Chicago, toward the end of his career. 1910 to 2013. He had an incredible life. Yeah, that’s a good clip. 103 year. I think he got 202 102. Yeah, pretty good. Yeah. Yeah. Pretty impressive. He obviously managed stress well, and lived well or lived moderately. Differently, give into temptation.

Tim Hughes  08:39

I know, there’s another story that for sure, it’d be interesting to know. The secrets were

Gene Tunny  08:44

Yeah, I may learn that today. When I was preparing for the podcast. He lives so long. I’ll have to try and find out what it is. There’s got to be a story there. Yeah, absolutely. Okay. So we’ll get on to his theory in a moment. The moves so they’re talking about the Hutchinson’s moves to bring this formwork in house. Yeah. So rather than subcontracting, bring it into the business bringing it into the firm. And the article continues. The moves come as major national building company PBS building group collapsed, leaving at projects unfinished and owing $25 million. Due to the instability of the market, through insolvencies, we have had to sell sorry, we have had to self perform a number of the tradies we would otherwise subcontract out like formwork ceilings and partitions Mr. Hutchinson revealed in the company’s in house newsletter, hutches truth. We have to get subscribed to that, Tim Yeah, for sure. A looming threat to our business was a shortage of formwork contractors to build slabs and columns, which are vital to keep high rise projects on schedule. Okay, so that’s pretty much what we were talking about before.

Tim Hughes  09:57

Yeah, some that’s a good sign, you know? Like, because the last few years have been so interrupted with the whole pandemic and the supply chain being disrupted. The knock on effect is still going on and will do for some time. Now, there’s been a lot of a lot of companies and subbies subcontractors who have gone under, it’s been very, very challenging times.

Gene Tunny  10:21

Yeah, yeah. Now, as I mentioned, this story made me think about this important theory in economics, this very important paper from the 1930s, the nature of the firm in 1937 paper published in economics, which is one of the well, it was a major economic journal, I think, I think it comes out of LSE. I’ll have to check though. So this article, the nature of the firm, and what Coase was trying to do there was to think about, well, how do you define the firm the business? What are the boundaries of the business, because economics tells us that the market is efficient, the market competition brings benefits, there can be benefits from participating in the market and taking advantage of the competition amongst potential suppliers. But we know that their businesses exist. And in businesses, there’ll be some control there’ll be Well, I mean, they’re almost like a command economy inside a business. They’re not run. It’s not as if they’re bidding. In my business, I don’t have to bid all the time for the people working for me to do a particular job. I don’t have to put out a request for for quiet and get them to the bid for the work. Or I’m not having them compete against each other I’ll I will be determining who does what jobs. So there’s a there’s a socialist or a command element within a firm itself rather than a competitive market element. Right. And so the question is, how do you determine the boundaries of a firm? Why do firms exist? What determines what size they are? So? So for example, for a consultancy business? I mean, we talked about hutches before and we talked about the formwork and what they brought in, but they were bringing that in house well, for a consultancy business. consultancy businesses will typically they’ll have employees who do the jobs. But one option is just a subcontract every time so you could just hang out a shingle and you may not even need a physical office and there are some consultancy businesses that will do this. And they will subcontract, you know, a particular expert to help them out on a job as it comes in.

Tim Hughes  12:48

hang out a shingle.

Gene Tunny  12:50

Isn’t that what you say? Don’t know. Actually, if you don’t have an office, you probably don’t hang out a shingle?

Tim Hughes  12:55

I haven’t heard that term before. Okay. I’m not sure if it’s legal. But um, yeah, I get the gist of it. Yeah.

Gene Tunny  13:08

I think you do put out a hang out a shingle. I think that’s what the term is. Do I get the gist of it, though? Yeah. Okay. Very good. It was not the right term. I’ll cut this out. So there’s this issue about what determines the size of the firm, what activities should be done in house where there’s not a reliance on the market mechanism within the within the business, there’s somebody directing things, what should be done in house in a particular business versus what should be done through the market? So it could just be I mean, there could just be one entrepreneur, and then for every job that their business needs to do they just contract out every time they just get someone to supply the services. And then there are things that I’m contracting out in my business. I mean, I’m contracting out the website, design, the website management, or the podcasts. Yeah, the editing. Yeah, podcast editing. Because, I mean, that takes time. And I can’t do it as quickly as someone else. And not as skillfully. So that’s something that I’m happy to contract out. And now because of things like Upwork, and free, what’s the other one? Fiverr it’s so much easier to find people to do stuff to contract out. So the lower cost of contracting now that’s going to mean there should be more of it. So it should mean that yeah, there’s maybe you do have fewer people in your business than otherwise, because you can contract out so much.

Tim Hughes  14:42

Yeah. And I guess because that I mean, it’s part of the gig economy, like Yeah, and it makes a lot of sense. So that’s something we’ve talked about before is, you know, being agile being able to scale up or down quickly, which is something for instance, like there’s a an office at WhatsApp ended just moved to a larger office. So it’s like a, like we share, or we work rather, it’s a workspace. And so it allows you to be agile and sort of move around and go up and down and expand and contract. And I guess that’s we’re not contracting, but not contracting, there’s no going back. But is that thing of like? Obviously, it’s like paying casual rates, etc. So you pay a little bit more when you when you saw something, you know, occasionally, etc. Whereas, like, using hutches, for instance, as an example, that will be paying the guys doing the formwork, a little bit less than they would do for subcontractors, because they’re on the books, you know, and they would have then holidays and all that kind of stuff. I would imagine. I mean, I could be wrong there. But it was suggested in a normal traditional situation, that’s what would be happening.

Gene Tunny  15:50

Yeah. And I think that’s because when you’ve got people on in your firm, to some degree, they will be. I’m just trying to think through this. If they’re a subcontractor, yep, they’ve got all of their overhead costs as well. Yeah, if they’re in your firm, you’re paying the overhead costs yourself. But when you subcontract out, you have to pay for the overhead costs of the subcontractors. And as well as their you know, what they need to do the job. And then there’s also the fact that they’re possibly more specialised, and they’re going to get the job done. Now, they’re really motivated to get the job done if they’re a subcontractor.

Tim Hughes  16:36

Yeah, I mean, I guess that would be a question for Hutchinson’s really like it would be, it’d be great one day too. If I, Scott, I shouldn’t listen to the podcast, and pick his brains. Because, yeah, I wouldn’t know about that. But you can imagine that that would be the case, for sure.

Gene Tunny  16:52

Well, I think that might be one of the motivations for contracting things out. Because you can specify the job, you can have the the scope of work, and you can say, I need this by this demand, and you’re paying more, and there’s an expectation it gets done by that day. And

Tim Hughes  17:11

the responsibility lies with the subcontractor to say that on one of the things, though, as well to consider is having your in house workforce, if you like, would give a lot of confidence, I would imagine to people who are giving up projects, you know, if you’ve if you’ve got a project someone is bidding for, and they’ve got a large in house workforce, that gives a lot of confidence that, you know, that aren’t maybe the issues that may be around with other developers and builders that have to rely on the subcontractors to be available for when they need them. So there’s a level of confidence so that that would, you know, maybe attract or give them a better chance of winning different, different contracts?

Gene Tunny  17:50

Yeah, so certainly in the current market environment where it’s been hard to get those skills, because there’s been a lot of work on and there’s a lot of competition for skilled labour. Yeah, that could make sense. Yeah. Okay, so I should get back to COEs did my explanation of the problem the intellectual issue, the what Coase was trying to address the the question he was trying to answer. Did that make sense about the nature of the firm? Why should you have a business at all? Why should you have a business that employs people rather than just say, a single entrepreneur? No, it didn’t make sense.

Tim Hughes  18:30

Not to me, but I mean, it’s funny, because I did quickly read it beforehand. And for that, for me, it didn’t jump out at me as being one of the things that, for instance, myself, can take on straightaway, I think I’d have to absorb that over a period of time and really take a bit more time. Because I understand the premise of a business, but I don’t fully understand what the nature of the firm is addressing or talking to. But that might have just been me. And my,

Gene Tunny  19:01

I guess it’s a it’s a rather subtle thing, isn’t it? So he’s asking the question, Why did firms exist at all? Okay, let me see if I can find,

Tim Hughes  19:15

I mean, by firms, it’s business, yeah, business, any business or company. And I guess they exist to make money. I mean, that they’re set out to be profitable, and to serve a purpose and solve problems, you know, builders, build places, you know, everybody has a job to do kind of thing. And if you’re going to build a business, the idea would be to be a profitable one, I would imagine.

Gene Tunny  19:39

Yeah, I mean, this is an article that has been very influential, and it was identified as having solved that problem of how do we justify the existence of a business that employs people and has this long term relationship with employees rather than just sub contracting? All the time to get the services that it needs. So to me it, it’s an important article because it it highlights the relevant considerations and it’s all about minimising the transaction costs. So the reason why you don’t just always contract out so why Hutchinson’s for example, why did it actually employ some people? And it’s not just contracting now for everything so Hutchinson’s would have its own project managers, I suppose, or, you know, people in the head office. And so it’s not going to contract out every time to get someone to come in to, I’ll have to be careful here, because I can’t say I’m totally familiar with their business. But say their accounting, I mean, they, they will have a dedicated, Chief Financial Officer. Yep. I’m pretty sure that have that. So each time they they need some financial analysis, or they need the someone to sign off on their books, they won’t just they won’t contract out that every time they won’t go to the market to try and get that done, they’ll probably have someone who does that, that they’ve employed. And they’ve worked out that that’s the least cost way of getting that thing done. Over the longer term, is if they contracted it out, then they’d have to pay a bit more, presumably. And there’s always a cost in trying to engage with the market. So trying to find out who the people are, who could supply the services, what the cost of the services are selecting the best person?

Tim Hughes  21:38

I mean, I guess like for me, I don’t truly understand the question behind it, because I just thought it would be clear that a business grows or bills, deer to be profitable. And so the decisions that you make along that way would be, well, if it’s more profitable to have in house people for this department, it was something rather than something that out, then that would be an economic or financial decision to be more efficient and save money. And so it’s all about, you know, making money at the end of the day. And then obviously, there are there are quantum leaps taken at different times, which might be a bit of a pun, and they either work or they don’t, but they’re the best guess at the time. But it’s all about growing safely to increase profits. I mean, that isn’t at the foundation of any any business in terms of supply and demand. And, you know, the market in that regard. Yeah, exactly. Competition, etc.

Gene Tunny  22:33

Yeah. So I guess what Carlos was trying to do was to provide a solid intellectual foundation for what you were saying there, which is rough, you know, roughly what he’s driving at. It’s about finding the way for the business to be profitable to be most profitable as as it grows. And so yeah, I think, yeah, maybe it’s a case of over analysis. But it has been an important paper in economics. And I mean, yeah, I guess I might have explained it very well. Why it’s an important paper.

Tim Hughes  23:07

That’s the thing. I’m sure there’s more to it, but like, it seems like a clear question, as to I mean, there’s there’s obviously more.

Gene Tunny  23:14

Yeah. So we’re, I guess where it comes from, is that economists talk a lot about supply and demand and the market and the virtues of the, what they call the price mechanism, which is the fact that, well, we don’t need someone who’s responsible for the control of the supply of bread to the City of London, for example, because the market sort of set out, okay, don’t need someone to allocate that. You’ve got people wanting to supply businesses wanting to supply because there’s, there’s a demand there. And so I might read from coasters papers, because I think this, hopefully, this is illuminating, and it resolves this, an economist thinks that the economic system has been coordinated by the price mechanism and society becomes not an organisation, but an organism, the economic system works itself. This does not mean that there is not planning by individuals. These exercise, foresight and choice between alternatives. This is necessarily stuff there has to be order in the system. But this theory assumes that the direction of resources is dependent directly on the price mechanism. Indeed, it is often considered to be an objection to economic planning that it merely tries to do what has already been done by the price mechanism. Yeah, so what the issue is, is, what’s the limit to a firm? I mean, I clearly there’s reason for many firms to have more than just the the entrepreneur or the the owner manager, they will hire people in rather than just contract out each time to get the services that they need. Where’s the limit to that? I mean, why don’t we just have one big Corporation. Yeah, that does everything or one. So I guess that’s what?

Tim Hughes  25:05

So is it like, for instance, whatever widgets you might be selling, at some point, you have your own delivery drivers or Exactly, yeah, you outsource it to the the post service, etc. So at some point there’s a parameter to what’s in house and what’s outsourced or

Gene Tunny  25:23

exactly. That’s what is driving it. Right. Okay. Yeah,

Tim Hughes  25:26

I get that. Because yeah, there’s so there’s a, there’s a limit, or there’s a wall, if you like to, you know, what you do in house? Exactly. Yeah. And that would be, then back to those things we talked about, like, you know, well, is it efficient? Is it profitable, you know, what risk is involved, etc. And I guess that’s when those decisions, come to the fore and drive where that wall is?

Gene Tunny  25:48

Exactly, yeah,

Tim Hughes 25:49

I get it. Yeah.

Gene Tunny  25:52

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  25:58

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Gene Tunny  26:27

Now back to the show. The fundamental concept that Coast introduced, which is then had been widely applied in economics is this idea of transaction cost of the fact that there’s a cost of transacting in the market, right? There’s a cost of trying to find, you know, issuing a request for quiet and you know, sorting through those and and then contracting them in particularly like if you need a lawyer to, to write a contract for you. I mean, that’s an additional cost.

Tim Hughes  26:59

Well, that’s a good point, actually. Because I guess you get to a critical point or a critical mass where you have your own in house legal department. So I guess there are certain sizes of you know, the need for those different services, professional services, whereby at some point, you then have your own department in the company. You know, that your own legal department, for instance? Yeah. Marketing, yeah, marketing department, etc.

Gene Tunny  27:23

Exactly. If you’ve got enough work for them. Yeah.

Tim Hughes  27:27

So I mean, so going back to Hutchinson, for instance. So that’s, and you would have to say, in every instance, it’s a sign of confidence, of expansion or of growth, to have that in house, because that’s obviously a commitment and a cost. That wouldn’t be easily withdrawn, because it’s expensive to, to let people go, you know, there’s a cost with everything. I guess

Gene Tunny  27:50

there’s positive in in that sense that they expect that we’ll be able to keep these people employed doing formwork? Yeah, they’ve got to, they’re confident they’ve got enough work to do that. But I mean, it looks like it’s a defensive measure to me, they wouldn’t be doing this if it weren’t for the the challenging conditions in the industry, the difficulties of finding people the the challenges of, you know, what you don’t know whether the subcontractor, you engage with whether they’ll survive, and no, because they could let you down mid job?

Tim Hughes  28:23

Yeah. So I see what you mean. And I think you’re absolutely right. Like, it wouldn’t necessarily have been done if the certain situations weren’t around, and maybe other people will follow suit.

Gene Tunny  28:34

I mean, how cheese can do it? Because it’s a reasonably big company. So it’s got the, the real, I mean, you need some, some cash on hand to be able to finance this. Yep. And they’re able to do it. Yeah, some other businesses may not be able to, but it could give them a as I think you were suggesting this before it could give them a competitive advantage in the market, because the purchases are the people wanting the work done. They’ll see how Jesus got this capability. And that reduces the risk.

Tim Hughes  29:08

Yeah, I can only imagine via that it gives them an advantage. Going for contract. Yeah. You know, and also, depending on Well, if they’re taking skilled workers from the labour force, and who are fewer to go around for the other potential competitors.

Gene Tunny  29:26

Yes. Mm hmm. Yeah, it could be a cunning plan or something suggesting to

Tim Hughes  29:32

plan would be proud, very good.

Gene Tunny  29:35

Guy. So might, I might read Ronald Coase as explanation. I’ll put a link in the show notes to the nature of the firm, which I think is one of those. Just one of those outstanding

Tim Hughes  29:46

sisters 1937 Yeah, so he was 27 years old. Yeah.

Gene Tunny  29:51

Pretty impressive. Yeah. Yeah. Yeah. And it well, and then he followed it up with another famous paper and economics. So he won the Nobel Got a prize in 1991? For the essentially for this paper and another paper in the early 60s called the Theory of social cost. Both of them were hugely influential. Yeah.

Tim Hughes  30:12

That’d be interesting to do another episode on that paper.

Gene Tunny  30:17

Yeah, we could. Yeah. It’s, it’s about how you manage pollution and things like that. And yeah, so maybe we could talk about that.

Tim Hughes  30:27

Well, that’s topical all the time, but never more so than right now.

Gene Tunny  30:32

It’s a controversial paper, because some critics of it argue that what Carlos was talking about was a very special case. And it’s been interpreted as saying, Well, you don’t have to worry about pollution, because people affected by it will. They’ll do some deal with the people doing the pollution, and it’ll be resolved somehow. So that’s a simplistic way of describing it. But it’s a controversial paper, there’s Coase was, it looks like he was talking about a special case. And it can be interpreted as saying, well, we could just leave things to the market, we don’t necessarily have to have regulation, which wasn’t really what he was saying. So it’s controversial. I think we’ll have to cover that in another episode be interesting to have a look at that. Yeah, it’s another famous paper. Yeah, so 1937 27 years of age. I mean, he might even been 26, when he wrote it. So he did well, he writes, the main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of organising production through the price mechanism is that of discovering what the relevant prices are, these costs may be reduced, but it will not be eliminated by the emergence of specialists who will sell this information, the cost of negotiating and concluding a separate contract for each exchange transaction, which takes place on a market must also be taken into account. And I think that’s, that’s going to be one of the major ones, isn’t it? And, and also the delays in finding people. So I think about why I would want to have a, well, if you think about the choice between, say, a permanent person, a full time person and a casual person, for example, then it’s good to have a permanent person, because they’re on hand, they can deal with a variety of different issues, which, whereas with the casual person, you’re not always sure if they’re available. And if you want to contract out, if you want to get on up work, then the people that you might have used previously might be busy doing something else. And you don’t always know what the other person on the other end is what they’re telling you is that right? I guess without work, there’s an advantage in that platforms like that as a rating, and there’ll be some feedback. But still, if you haven’t worked with them before, it’s hard to know how they’ll, they’ll go.

Tim Hughes  33:02

I mean, the costs of doing business on those sort of platforms is has gone up from what it started out as, but it’s still relatively inexpensive compared to outsourcing locally, certainly, I mean, because one of the benefits of this is you can get work done from anywhere in the world. And that’s one of the technological advances that we have at our disposal for sure. It’s cheaper than it used to be 1520 years ago.

Gene Tunny  33:28

It is. So there’s that arbitrage, again, that geographical arbitrage you can take advantage of you could employ someone to, to do a job that you’d have to pay more for here in Australia in the US, and you might be able to find someone who can who’s really good who can do it. And they might be living in India, or Pakistan or somewhere like that. But generally, I think what you find is that the more skilled, well, the higher the rate they charge, generally, the more productive they are, and you get what you pay for, ultimately, so that geographical arbitrage isn’t as or that opportunity to get lower cost. Labour in other countries is not as great, I don’t think it’s as great an opportunity is, as some might think, oh, at least that’s my that’s my experience,

Tim Hughes  34:20

I guess, with increasing any workforce within the company. The nightmare for any employer is to have people twiddling their thumbs and not earning money for the company. So you have to keep that source of work coming in, you have to and also to make sure that people are working efficiently, you know, because the bigger everywhere becomes then I mean, you know, I haven’t had huge experience in this, but I’ve worked with so many people at different levels of management and you know, it’s clearly not straightforward in the bigger companies as to how the hierarchy works. And there’s always people unhappy with how things are the in those really big companies, but yeah, It seems to be there. They take on a life of their own these big companies with all the departments and the hierarchy. And it’s an interesting human experiment. I think, having these insights into these big companies that, obviously, some do really well, some do do not so well, but they become their own living, breathing thing that is clearly difficult to manage, you know, but at every level, the bigger it gets, it comes with a whole different problems for Yeah, just managing the sheer size of something.

Gene Tunny  35:32

And that’s why they’re often Outsourcing Things or something, sometimes they asked us and they bring back in because they had sorted didn’t work out too well. But in terms of outsourcing, look, cuantas. And, and that’s, that’s possibly a good example of the one of the trade offs there. So quite as, as you remember, when they outsource their baggage handling. And they did that to save money. And I mean, they just had a record profit didn’t know. So obviously,

Tim Hughes  35:59

it was very controversial. And I do have a friend who has a lot to say about this particular thing, because he used to work at quantas. And, and so he has insights that far, closer than anything I know. Yeah. But it did appear certainly, from what I understand that like, that didn’t seem to be a great thing. And I’m just going from what I’ve read in the news with this. And, you know, clearly it’s a skilled job, you know, that could that kind of thing where there’ll be problems all the time with baggage handling, as an example that always be these issues with that will come up and experience in any job. And using that as an example, experience wasn’t there with a new workforce, to be able to sort out the issues as they came up. And you can imagine that with pretty much anything, you know, if you change the workforce, and you don’t have that experience of what can go wrong, and what you do to fix it, there’s going to be issues, and that clearly seems to be the case with the baggage handlers. And as to how fair it was or unfair. You know, there’s plenty of commentary on that. But just losing that experience base yourself was, you know, that’s, that’s a difficult thing to replace, it takes time to build. And it’s, it’s clearly clearly was an issue anyway, at the time.

Gene Tunny  37:13

And I think the people who worked for cuantas, as baggage handlers were better motivated, they had better morale, they cared about the image of cuantas. And so they weren’t just throwing pegs around. Well, we’re human

Tim Hughes  37:24

at the end of the day, yeah, there’s that thing of like, whatever job you have, if, if there’s pride in it, and if, you know, I think when people talk about culture in a in a company, you know, this is, this is the reality of it, you know, you can’t just do broad sweeps here and there, and expect everything to maintain some level of pride in the work, for instance, you know, and all of you know, there are very human things that we all sort of respond to, and taking pride in your work, for instance, will be one of them, no matter what your job is, you know, and so I think, yeah, I guess I don’t know enough about that particular thing. But I know, there’s a lot of commentary that has gone on, and it didn’t appear to be a very popular outcome.

Gene Tunny  38:04

No, no, exactly. And I think that’s why, you know, occasionally I have to try and find an example of a company which is outsourced and then brought something back into the company is don’t know any off the top of my head, but I’m sure it’s occurred, brought something back into the company. Well, because there’s what I’m driving at is that, I mean, you’re talking about companies and they can serve, you know, they can grow and you know, you can end up with all of these different departments. But then when they get into financial trouble, that they might realise, oh, we have to rationalise or we have to do things better, and they’ll outsource various different parts of their business. Yeah. And, you know, the baggage handling was one example. I’m thinking, where’s an example where there’s something that’s been previously in house has been outsourced, and then it’s been brought back in house? If you’re in the audience, and you if you know, of an example, please let us know. I’ll try and dig one up and put it in the show notes. But you know what I’m driving it.

Tim Hughes  39:05

I think every scenario that you can imagine must happen, some of has happened. But yeah, for sure, that would have happened.

Gene Tunny  39:12

Yeah, yeah, definitely. Okay, so we might get toward the end of coasters, or his summary of his argument. And then I’ll just go over a couple other things. Chris writes, we may sum up this section of the argument by saying that the operation of a market costs something and by forming an organisation and allowing some authority and entrepreneur to direct the resources, certain marketing costs are saved. The entrepreneur has to carry out the function at less cost taking into account the fact that he may get factors of production at a lower price than the market transactions which he supersedes because it is always possible to revert to the open market if he fails to do this. That’s just saying that yeah, I mean, you’re only going to hire someone if it ends up being cheaper than going out to the market each time. Yeah, to subcontracted out the question of uncertainty as one, which is often considered to be very relevant to the study of the equilibrium of the firm, it seems improbable that a firm would emerge without the existence of uncertainty. And I think that’s an important point, what is driving out there is uncertainty is one of the major reasons why you have a business, you know, that the Will you hope that people are going to turn up to work. And you know, they’re going to turn up, it provides some certainty, whereas in this is the situation Hatch’s was facing, or has been facing, it’s concerned about the uncertainty of whether it will get the formwork the people with the form working skills to make sure the form work gets done the so that the concrete can get poured, and the building projects can go ahead on shedule.

Tim Hughes  40:56

It’s interesting, actually, because some it’s just formwork is that they’ve taken on just thinking about it a little bit more. And it’s the big guts of the building, you know, concrete pour. From that point, everything else can sort of happen. I mean, there are still things that happened before a concrete pour. But it’s, you know, it allows everything else to sort of go. So it’s one of the first you know, it’s an ongoing thing, depending on the structure of the place, there’s going to be more than one pour. But yeah, it means all those other things can then happen, you know, so for instance, yeah, it’s different than having a whole team of electricians or a whole team of carpenters, chippies, whatever it may be, and I’m sure they’re building companies that do maybe hajis to have some of those guys on board too. But because it’s the formwork, it’s like, yeah, they need that at that very, you know, the putting the skeleton, the bones of the place together so that all the the rest of it can happen. I think

Gene Tunny  41:53

in project management, you would say it’s on the critical path. Yeah, yeah. Yeah, exactly. Okay. So many questions or any thoughts on on that the theory of the firm the the nature of the firm by Ronald Coase,

Tim Hughes  42:08

it’s interesting, I can’t say I fully get it. But that’s what I enjoy about these conversations. I come in as a layman and get exposed to these different things. And it’s always interesting. And I have to add, there was another venue, of course, the first value musical that The Hutchins centre Scott Hutchinson was involved

Gene Tunny  42:27

in service when I saw the Johnny Cash tribute concert. Yeah, it was that textbook and no, that was another one though. It was someone else. It wasn’t textbook, it’s unfortunate textbook.

Tim Hughes  42:37

And yeah, if you get a chance, hello.

Gene Tunny  42:41

Okay, so in the shownotes, so as well as linking to that story about Hutchinson’s and the the nature of the firm by Ronald Coase. I’ll link to a really good article on the American Express website, the pros and cons of hiring in house versus outsourcing. And yeah, I thought it went over a lot of the relevant considerations. Things like one of the best things about having people in house is you get the face to face conversations, you build the relationship, you learn how to work together. So there’s benefits from that. Possibly, you can get a sense of whether people are ethical and honest. I mean, I guess one of the challenges and one of the problems with issues with contracting out is that sometimes you could get ripped off, right? It’s

Tim Hughes  43:29

definitely I mean, it’s an interesting point, like, certainly, I’ve heard from friends in the creative industries like architecture, where a lot of the benefits were lost during the lockdowns and working from home was in the collaboration of different ideas. And that yeah, that sort of thing, where you just sort of organically go and check in with someone and someone else might. I mean, of course, there’s, you know, people can waste time, but with creative industries or creative work, that collaboration is really important to be able to share ideas organically as they come up, and it is different face to face as it would be on the screen, you know, like so. It was it was good seeing the respect and the sort of benefit for those kinds of face to face interactions, you know, which I think people have valued since the pandemic and it’s like yeah, that’s something worth holding on to.

Gene Tunny  44:26

Yeah, for sure. The other pros have in house are in that they talk about intellectual property may be more likely to remain confidential. You don’t have to worry about some supplier coming in and learning about your business and ripping off some of your IP so perhaps that’s an issue. However, there are cons of in house hiring could be well it can be difficult finding the right people. There, there might be others. is no benefits you have to pay them. So medical and dental benefits. So that’s more of an issue in the states where the employers have to cover that. And finding, interviewing and negotiating can take time. And then if someone leaves, you have to find them again. So there can be there’s a cost of onboarding people. Yeah. There’s a cost associated with trying to get people to get suppliers in through the market. There’s also and there’s also a cost of trying to get people to work for you.

Tim Hughes  45:28

I guess it’s building trust as well. I mean, what yeah, of course, isn’t exclusive to it working out if it’s in house, you know, look in the house or outsource to the seller level of trust, that takes time to build up which has value.

Gene Tunny  45:45

Yeah. Pros of outsourcing. Most freelancers are pros at a very targeted discipline. So you can get really good people. Outsourcing can be ideal for short term projects in which talent is only needed for the completion of a one off project. Yeah, so the so I’m going to outsource the design of my website every few years or so there’s no point me having a dedicated web designer. Yeah. In the firm, obviously, not yet. Not yet. Yeah, so cons of outsourcing. Near the IP issue. Fake freelance profiles can exaggerate talent. Yeah, there could be different different styles, you may not be used to how the Freelancer works, or the can the person you outsource to, there may be some cultural differences. For example, there can be communication gaps. And yeah, freelancers can get quite expensive. Yeah. So I think that’s quite a good list of pros and cons of in house hiring and pros and cons of outsourcing. So I’ll put a link in the show notes. Okay, I’ll have to have a another read of the nature of the firm when I get a chance, and maybe I’ll have to come back to it and and try and illuminate it a lot better than that. But I was hoping that, at some, at least some of the core principles are clearer.

Tim Hughes  47:17

Yeah, I certainly have a better understanding of it from my first overview of that, again, but it’s, you know, it’s that thing of like, it’s interesting seeing it put down in a single paper, you know, like, I guess, in many ways, I’ve got to the point where I’ve taken it for granted, that kind of outlining, and, and formed my own opinions as to why it has happened. And so it seems like, you know, I’m sure there’s more to it than what I originally saw, you know, which we wish we got to in the in the conversation, but I’d be very interested in having a chat about the other paper whose it was the theory of social cost. Yeah. And with the pollution and everything, that would be good. Yeah. And also to find out what his health regime is, I mean, he got 102 That’s probably fine. It was a chain smoker and drank lots of whiskey, you know, but if it works, it works.

Gene Tunny  48:10

That’s right. I mean, that’s that’s funny, isn’t it? When they asked the 109 year old woman, what was that? What was the secret fear of longevity? I had a brand new every day.

Tim Hughes  48:20

There’s always some French farmer who lives 114 And he’s a chain smoker with colour wise and he drinks red wine for breakfast. These are outliers in the genetic field. So yeah, all power to them.

Gene Tunny  48:34

Good. Save any any other thoughts or any anything else that’s on your mind?

Tim Hughes  48:38

That probably is gene but I think we should probably leave it at that and I look forward to the next one. Okay, thanks to Jeremy.

Gene Tunny  48:50

Okay, have you found that informative and enjoyable? Ronald Coase, his article on the nature of the firm is one of my favourites in the economics literature. It’s highly readable and incredibly insightful. The paper was probably so good because it was based on extensive fieldwork by coasts is a great 9097 reason interview with coasts in which the story is told about how he wandered around the US Heartland in the 30s talking to business owners about how they organise their firms. Based on that field workers concluded that business people were well aware of the relevant trade offs, trade offs that Tim and I talked about in our conversation. Unfortunately, I’ve been unable to get any insights into how COAs lives so long 102 is an impressive run. If you know anything about rollercoasters health regime, then yes, get in touch and let me know and they’ll share it with other listeners. Also, let me know what you thought about my conversation with Tim. As always, feel free to email me at contact at economics explore.com Thanks for listening. rato thanks for listening to this episode of economics explored you Have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

50:42

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Categories
Podcast episode

Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

The Australian Government has been having trouble getting its proposed Housing Australia Future Fund (HAFF) passed by the Senate. The policy looks odd. With some justification, the Australian Greens have commented: “In its current form the Housing Australia Future Fund (HAFF) legislation will see the housing crisis get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteeing a single cent will be spent on housing.” In their dissenting report on the bill, the Greens’ cited the views of this episode’s guest, Dr Cameron Murray. Cameron is a Post-Doctoral Researcher at the Henry Halloran Trust at the University of Sydney. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About Dr Cameron Murray

Dr Cameron Murray is Post-Doctoral Researcher at Henry Halloran Trust, The University of Sydney. He is an economist specialising in property and urban development, environmental economics, rent-seeking and corruption.

Book: Rigged: How networks of powerful mates rip off everyday Australians

Website: https://fresheconomicthinking.substack.com/  

Twitter: @drcameronmurray 

What’s covered in this bonus episode

  • Cameron’s submission to the Senate Inquiry into the Housing Australia Future Fund Bill [2:39]
  • What’s going on with the Housing Australia Future Fund [5:02]
  • The only reason you can make a premium is if you take risk [8:57]
  • Why you need to separate the funding and the spending [10:36]
  • Why doesn’t the Future Fund just directly invest in new houses? [14:21]
  • How governments are increasingly doing financially tricky things that don’t make sense [19:23]
  • Cameron’s thoughts on the impact of the bill on the level of investment in housing [23:14]
  • What’s going on behind the scenes at Parliament House [26:18]

Links relevant to the conversation

Cameron’s submission to the inquiry into the Housing Australia Future Fund:

https://fresheconomicthinking.substack.com/p/australias-housing-future-fund-my

Direct link to Senate Committee inquiry report:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills/Report

HAFF inquiry home page:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills

Transcript: Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, welcome to this bonus episode on the housing Australia Future Fund. The H A double f or half. It’s Saturday the 25th of March here in Australia and throughout the week, the Australian government has been having trouble getting the half passed by the Senate. That’s probably unsurprising because the policy looks like a bad one. With some justification the Australian Greens have commented in its current form the housing Australia Future Fund legislation will see the housing prices get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteed a single cent will be spent on housing. That paragraphs from the Greens dissenting report on the housing Australia Future Fund bill. In that dissenting report, the greens relied significantly on testimony to the inquiry from my guest this episode, my fellow Brisbane based economist Dr. Cameron Mary Cameron is a postdoctoral researcher at the Henry Halloran trust at the University of Sydney. I recorded this conversation with Ken Friday last week on the 17th of March 2023. I’ll link in the show notes to Cameron’s submission to the inquiry into the half cam submission as a great example of the application of economic logic to an important economic policy issue. Cam sees through the accounting trickery and the financial engineer at behind the fund. He shows how the Australian government has been too clever by half. It’s trying to get credit for doing something about the country’s housing crisis. But what it’s proposing could be next to useless. Right. Let’s get into the episode. Please let me know what you think about what either camera I have to say by emailing me at contact at economics explored.com. I hope you enjoy my conversation with Cam Dr. Cameron Murray, welcome back to the show.

Cameron Murray  02:39

Thanks for having me again, Gene.

Gene Tunny  02:40

Oh, it’s a pleasure, Cameron, I read with much interest your latest post on fresh economic thinking. And it’s about your submission to the Senate inquiry into the housing Australia Future Fund Bill 2023 and other bills. Could you tell us a bit about what that involves? So you’ve written a submission to this inquiry? And you’ve also presented to the inquiry you gave testimony? Did you?

Cameron Murray  03:07

Yeah, that’s right. So this bill was passed their house, the lower house, and now the Senate is reviewing it. And what they’ve done is held this inquiry asked for public submissions, and had people who made submissions come in for a day of expert testimony so that their senators can ask specific people, you know, technical questions, what do you think about this? What about this design element? And so I was part of that on on Wednesday, this week. And yeah, so the bill itself is called the housing Australia future funding bill. And the basic idea is the government has decided to address Australia’s current housing problems. We’ve seen rents rise, we’ve seen rising homelessness, we’ve seen longer queues in public housing waiting lists, they’ve decided the best thing for them to do is take $10 billion from the Treasury and give it to the Future Fund, which is a sort of publicly managed investment fund, and cross their fingers and hope that that fund makes a return that’s higher than their opportunity cost, you know, the cost of the government’s dead and use that margin on the risk to fund something in the future, some unspecified, granting in relation to what in the text of the bill is called supporting housing need. So that’s what it was all about. And, and yeah, I gave some testimony on Wednesday.

Gene Tunny  04:35

So the federal government’s claiming that this is going to help them build I think 30,000 social housing dwellings over the next five years or so. So that’s their that’s the plan. But I think what I like about your submission is it essentially talks about how this is a rather roundabout way of going about it, which doesn’t actually guarantee you’re going to deliver it to you As in,

Cameron Murray  05:00

this is the mad thing. And this is. So let me start by saying, to be clear what they’re doing to build houses is taking $10 billion and buying all sorts of assets in the future funds that are not houses. Right? So that’s what they’re trying to do. And it’s really funny because there’s an actually an episode of Utopia, you know, the comedy show about the bureaucracy in Australia, where Rob switches character, who’s the sane one, amongst the insanity is explaining to a political staffer who says to him, What about an infrastructure? Future Fund? Yeah, don’t you get it, it’s about the future, he says. But spending the money on infrastructure today solves the future, we don’t need a fund. We don’t need a new office, we don’t need these fund managers. And you know, when we watch utopia, we all laugh and think we’re the same guy in the room. But what happened at the Senate inquiry is that I was the only guy and everybody else who laughed at Utopia when they watched it was the crazy guy who thinks that spending money on not houses is the best way to spend money on houses. And so there was this really perverse political slogan that kept creeping in, which was, this is going to secure funding for the future and insulated from future political decisions. And I just sat there going, I don’t, I’ve read this bill, because this funding is riskier, because you’re investing in a risky asset and the current Future Fund loss $2.4 billion last year, and spent half a billion dollars on fund managers to achieve that outcome. So we almost lost $3 billion last year. So it’s possible that we put 10 billion in this fund and have 9 billion next year. And then that’s the way we’re securing the future funding. The legislation is also written such that the future Minister has the discretion of how much from the fund to spend, and on what projects. And it also introduces a cap of 500 million per year that a future minister can withdraw from the fund. So what you’re actually doing is providing a great excuse for a future minister to spend less than 500 million. And in fact, zero if the fund is losing money. So there’s this weird disconnect between the political slogan of securing long term funding insulating it from politics and the reality, which is adding risk to a fund compared to just having 10 billion in the bank or at the Treasury where it is, and not insulating at all, and just still relying on future ministers discretion with no commitments. So that 30,000 dwellings you said, is not enough. There’s no, it’s not written in their rules. It’s written in the guideline as a hypothetical of how much, you know, if all went according to plan, and we would expect this, and I’m like, but there’s like, like many housing strategies and plans that the federal government and state governments have had in the past, there is nothing holding them to account on those promises. So yeah, it’s, it’s a really, really strange one. And I felt like there are about 20 or 30 witnesses or experts at the hearing. Now, only two or three of us actually calling this out the majority of the industry. And the researchers had really, I don’t know, bought the line that this is something that it’s not.

Gene Tunny  08:16

Yeah. So what’s going on, it appears to me is they’re essentially that borrowing, they’re going to be borrowing this money, or it’s going to increase the borrowing requirement by $10 billion, because we’re currently we have been running budget deficits. So it’s going to increase that, that borrowing requirement, we’re going to put that into this the future funds, so we’re essentially borrowing money to then invest in the share market or Enron’s Yeah, well,

Cameron Murray  08:45

if we’ve invested in bonds, we’re borrowing money to buy the bond back off ourselves. If this fund, if this fund is like eight or seven or 8%, government, Australian government treasury, that’s just pure accounting. Yeah, you know, trickery, you know, and that shows it but the whole thing is accounting trickery, right? Because, you know, you’re just recycling the money via the current shareholders of BHP into Telstra and Commonwealth Bank, right, by buying the shares off them and then later selling it back to them. And the only reason you can make a premium with this fund over the over not borrowing it, right, because you still gotta pay interest on the Treasury borrowing. The only reason you can make a premium is if you take risk. Yeah, if you’re taking risk, then it’s not a secure, long term funding thing. You’re just adding risk unnecessarily, and delaying spending money on building houses. And, you know, it took a little bit of explaining to get that through at the hearing. But ultimately, I had, for example, John Corrigan, you know, back me up on that argument, and I think Brendan Coates from the Grattan Institute who is a big supporter, the policy sort of had to concede that Yeah, at the end of the day, you’re adding risk in the hope of increasing the funding. But risk is real, right? We just can’t count on winning In the next few years,

Gene Tunny  10:02

right, so Brennan was buying the government’s line that this is about getting a secure funding source. He, I mean, I know you can’t speak for Brendan, I’m just wondering where he was coming from?

Cameron Murray  10:13

Well, actually, the idea is actually from one of our Grattan Institute report, and they proposed a $20 billion social housing fund. And, and, and, you know, I’m not averse to the government sort of diversifying the capital side, right on its balance sheet. Yeah. And and owning some high risk assets? I don’t, I’m not averse to that, in principle, right. But you’ve got to separate the funding and the spending idea. So the way I try to tell people, if the government’s saying we don’t have the money for it, it means we don’t want to do it. Because look at the submarines look at every other big look at the Olympics, right, no one’s has gotten the Olympic Future Fund, no one’s got a submarine future fun. We spend on what we want. And if someone’s saying where’s the budget, or where’s the funding, you sort of missing the idea, but but even more fundamentally, you know, if you go and raise money in the share market, from new investors for your business, each investor doesn’t say, I’ll give you this money, but you can only spend this money on, you know, cleaning your office and and the other shareholder says, no, no, but I only want you to earmark my money for doing this, right. What we do is we pool that money together and spend it the best way we can on the operations we need to do and it’s the same for the government, you need to separate Well, we’re gonna raise money, the best way we know how, whether that’s different types of taxes or borrowing, and we’re going to spend money the best way we know how and tying two things together is bad. Operationally, it’s just like, it’s bad for my business to promise one shareholder that their money goes to one type of spending, and another shareholder that I’ll only spend yours on new trucks. You know, it doesn’t really make sense it and it’s very hard to break through this kind of weird, I don’t know, budget illusion that we’ve all got that, you know, we must do this. For this, we must raise money in this way for this spending.

Gene Tunny  12:06

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  12:12

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you Frank and fearless economic analysis and advice, we can help you with funding submissions, cost benefit analysis, studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world, you can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  12:41

Now back to the show. I liked how you wrote about this off balance sheet trick or the off balance sheet tricks, the basic idea of the half. So that’s the housing Australia Future Fund is to create an off balance sheet accounting trick whereby the debt associated with the fund and the assets in the fund are considered as a bundle and hence not counted in measures of public debt. So I mean, I haven’t seen exactly how they’ll what the accounting treatment of this will be in the budget, it seems to me what they’re doing is they’re setting this up as a, it’s an SPV, or some sort of public Financial Corporation so they can get it outside of the traditional balance sheet measures. They put in the budget, which is for they have it for general government, but then they also have public non financial corporations, but they don’t have public Financial Corporation. So I’m wondering if that’s what they’re going to categorise it as

Cameron Murray  13:34

I think, yeah, that’s part of the intention. And we actually see those types of budget tricks a lot, I think, New South Wales rail, you know, they tried to shift things off balance sheet, but at the end of the day, you know, we as economists should be looking through that, right. Oh, yeah. And saying, Look, you know, debts debt, but, you know, these are all assets, we can bundle them all together, you know, doesn’t matter where you’ve accounted for them. And the way we’re going to assess whether that debt was, you know, justified or efficient or productive is what, you know, what the investments made in general are, so whether it was on budget or off, you know, it should be the same, right, and you’re borrowing money to buy these assets. Doesn’t matter how you account for it. And that’s the that’s what sort of leads me to my other point is that houses are assets. Yeah. Australia’s property market is the hottest market every property every investor wants to own some. Yeah. So why doesn’t the Future Fund build new houses to expand this pool of property assets in the process, that equity can be on its balance sheet, but instead of, you know, bumping up the prices of BHP shares that you’re going to buy, you actually expand the housing stock in the process, and you can still have your off balance sheet tricks. I actually looked historically and since the Future Fund started in 2006, that’s the current investment fund Australia hands. They’ve made 7.8% average return annually, the average Australian dwelling increased in value by 7.7% per year since 2006. So just the capital value increase of owning a representative sample of Australian property would have got you the same returns as the Future Fund. So it’s not clear to me why we’re recycling this money via other assets, before we build housing assets, we can look at the balance sheets of state, public housing managers. Yeah. And when they value their land and their property portfolios every year, they got to bump it up, you know, 5 million billion. So here 10 billion here, because all this portfolio of properties they own, you know, it’s a valuable asset that rises in value. So So I’ve proposed quietly to a lot of people involved that if you want to have your financial trick and your Future Fund, get the border of the future find to only spend the money, building new dwellings, and then put the equity that you have, yeah, into the fund, you can keep your financial track, but at least you’re you know, keeping the housing construction going. And you’re immediately accumulating a pool of houses that you can allocate to the people who need it at a cheap price.

Gene Tunny  16:13

Yeah. And so is this been driven by the State of the Commonwealth budget, they, they want to make sure that they think they’re gonna get some earnings from this housing Australia Future Fund that can then offset the spending that they’ll have to make on public housing. So they want to get that they’re hoping they can get that. Because if they just go ahead and start building public housing, then they don’t have that revenue to offset that. Is that what they’re thinking?

Cameron Murray  16:39

I think you’re right, I think that’s what the thinking is. But at the end of the day, you know, having those houses supplied to people at a cheap price offsets are the spending on those people already. So the benefit is there, either in the form of the rental, or in the form of the income from the other assets. So, if I was to put on my cynical, political economist hat, I would say the reason this programme has gained so much traction and is probably going to be the law few months, is because it doesn’t change the housing market, it’s going to pass because it doesn’t achieve anything. And that’s what is truly desired. By, you know, the political parties involved is that they want to look like they’re doing something without actually doing it. I’ve had conversations with politicians who’ve told me what’s wrong with the housing market? You know, prices went up, because we dropped the interest rate, that’s good. And rents went up, because incomes went up. That’s good. There’s no market failure here. government shouldn’t do anything. So if that’s what they say to me, how is it then that they passed this bill that’s meant to do something, the only coherent story there is that this bill is to look like you’re doing something, but not doing something because you genuinely think the property market is doing what it’s doing? Well? Yeah, that’s my super cynical. Political Economy hat.

Gene Tunny  18:08

Yeah, you may well be right. I mean, it’s the Sir Humphrey Appleby type of approach where people actually don’t care about whether a problem solved, they just want it look as if something’s being done.

Cameron Murray  18:21

I’ve had a lot of people message me since my testimony to tell me their experiences of this. And I don’t know what I’m going to call this pattern, you know, does it have a name? I’ve tried to call it something like pre compromising. Where you take a good idea, you turn it into a bad idea, but it’s still got the same words in the bill. While so it looks like you’re still doing something. Yeah, you push that. And you’ve totally compromised the content, or the effectiveness, just so you can keep the name because the name is what people will talk about. And it looks like you’re doing something. It’s a what’s it called housing Australia Future Fund? Yeah. Sounds like something important is being done. Right. Yeah. And the more that gets in press headlines, the more we give credibility to the current government, who is trying to, of course tread this line of keeping prices up for people who own property, and pretending they want to keep prices down and rents down to people who don’t own property. And that’s a real interesting political tightrope. That happens a lot in this country.

Gene Tunny  19:23

Yeah, I really liked your submission, Cameron, because I thought it. I mean, it highlights our governments are increasingly doing these sorts of things. And they don’t really make a lot of sense when you think about it, because I remember when I was in Treasury, we had to set up these buildings Australia fund education investment fund, that’s I forget the name of the other one. And it didn’t really make a lot of sense because you’re just taking money and we ended up I think we ended up having to borrow money to put into them, because of the time you know, but the original idea was that there was Yeah, and they were gonna stick them in these funds, but then by the time On had to transfer the money, it was the financial crisis. So the timing wasn’t very good. And then they we see they constrain your ability to get cash. I mean, because you’re saying, Okay, we’re going to lock up all of this money in these funds, even though we don’t need it at the moment. So it can it can constrain your budget flexibility. So I don’t like them for that reason. And the other point that you’re making is your your, if you end up having to borrow to invest in it, well, you’re, you’re borrowing money just invested in the share market. And it’s not necessarily achieving the public policy objectives that you that you want to achieve. So yeah,

Cameron Murray  20:43

that’s exactly the way to put it, you’re gonna borrow 10 million to build houses for people and give it to them below market? Why do you need to recycle that money through the share market? Why don’t you put it through the pokies, there’s also a chance of making more money there, you know, it’s high risk. Why don’t you just take your half million, that half billion that you want to spend each year and spend it for the next 20 years, and just start a construction programme? Like, the really bizarre thing? To me, I read this bill. And in Part Seven H or whatever it is, it says, The Treasury will credit the housing Future Fund with $10 billion. It just doesn’t. And I just think to myself, How does where’s this 10 billion coming from? Aren’t we having this fund to get the money that we don’t have a now you’re saying we have 10 billion? If we have 10 billion? We don’t need the fund? Right? Yeah. And, you know, no one else seems to pick up on that, oh, we just credit with 10 billion. I’m like, why don’t you just build houses, credit them? Credit, the builders is 10 billion. Yeah.

Gene Tunny  21:45

So this is where they’re hoping that by doing it, you know, essentially gambling or well investing with borrowed money, they can get enough of a return on that, to then help fund this additional expenditure. And that’s going to lessen the budgetary impact. So that’s essentially what’s going on. And I just think it’s interesting, because it’s an interesting example of one of these. These things, these clever financial vehicles, the Polly’s and the advisors, I think, in particular, they love it, they think they’re geniuses, but it’s not really solving the problem.

Cameron Murray  22:20

Yeah. And let me just talk you through what I think is the best case scenario. They put money in this fund, sometime in the middle of this year, after we’ve had a big asset market correction, and they they’re near the bottom. In the next 12 months, there’s a real big boom. And in 12 months time, the ministers say, Oh, look, we’ve been making all this money. I’m gonna make this happen. Yeah, that’s the best case. The worst case is, you know, we’ve just seen a bank collapse in the United States, and you know, Swiss government bailout the Credit Suisse bank, the worst case scenario is they put $10 billion into the Future Fund, start accumulating assets in the next six months. And then come September, October, you know, popular time for financial market crashes, the fund loses 10% of its value. And next year, the minister says, oh, we can’t spend anything on public housing, because we just lost a billion dollars on the share market. Yeah, that’s, I don’t know which one’s more probable, but both are potential outcomes. And if the second one happens, you know, I hope the public and the press hold the government to account and say, Hey, this is what you wanted. You were told this is the risk you’re taking. And you still did it anyway. I really hope that opens people’s eyes. If that happens.

Gene Tunny  23:34

Yeah, that’s a good. That’s a good point. So you’re saying that the the level of investment in public housing could end up being dependent upon the returns on this fund

Cameron Murray  23:46

highly likely, implicitly, tells the minister only spend what you make, you know, for funds doing well spend money, if it’s not don’t spend money, the way it sort of described, and it’s got this cap in it as well. I would say there’s a sort of, you know, a built in excuse, yeah. Whereas you kind of want the opposite incentive. You want more public spending on housing during a downturn in the markets, right? You want to smooth out construction cycles. Yeah. Whereas I sort of feel this builds in the opposite political incentive. But the you know, the next 12 months are going to be very interesting if this bill is finally passed. And you know, the markets are very volatile at the moment. And the Future Fund, of course, lost a couple of percent last year, you went down the existing funds. So if that happens again, yeah. Who knows? Yeah.

Gene Tunny  24:40

Just before we wrap up, Cameron, can I ask you what was it like presenting to the committee? I mean, did anyone get it? Did any bells rang? Or what’s the expression? I mean, I imagined some of the Imagine that. There must have been, some of them must be sceptical, or I hope some of the people on this committee worse sceptical. But yeah. What was your impression?

Cameron Murray  25:05

My impression is that this process is a little bit of a charade. So that each political party in the crossbenches can get their sort of own experts on to provide excuses for the political bargain that they want out of this in the Senate. So I think most of the action is happening behind the scenes. And this is just each, each person in the Senate had a chance to call forth their own experts. And so that was done. My impression is that your committee is loaded based on the political party of the day, right. You know, I was cut off from my introduction, when I was saying, you get a few minutes to make introductory remarks. And I was explaining how I can’t believe you’re trying to describe this as a low risk secure, politically insulated funding stream when it seems the exact opposite. Yeah. And they’re like, oh, you know, we only allowed two minutes for these opening remarks get. And, of course, if you if you go and check the footage, everyone bloody rambled for five minutes. So you can sort of see that and, and, you know, I’ve spoken to a variety of Senators offices, as well. And they’ve obviously taken on board what I’ve said, but you don’t see minds being changed. Live during this process. That’s not where it happens. It’s all happening with phone calls and meetings and negotiations amongst each party and independents are

Gene Tunny  26:36

all behind the scenes. Okay. Because I was just wondering, I imagine that the, the greens would probably be pushing the for the government just to build public housing. Right. Yeah. Well, that must be in there. That’s right. So

Cameron Murray  26:50

I think it’s Nick McKim is the green senator from Tassie. And he was, you know, onboard when I started my opening remarks by saying, you realise there’s a scene in the comedy show utopia, right? We started today. That is exactly what you’re doing. But you all laughed with the other side of the joke. And now you’re you are the joke. And so he got a few chuckles But you know, the other the other people didn’t really like it. So yeah, the greens are definitely not keen on these off balance sheet financial tricks at all, which is really puzzling, right? It’s really puzzling to me. I don’t know what the Liberals should be sort of have a similar mind being a bit more honest financially and say, let’s focus on what’s a waste of money and what’s not. Let’s not focus on where you record it in the accounts. So I don’t I don’t know what their views are. But my impression is the Labour Party, you know, they’ve almost got this superannuation brain, or this Future Fund brain like this sort of, yeah, it’s inhibited their ability to go, you know, this is not magic. It’s not a Magic Pudding. It’s just buying different assets.

Gene Tunny  27:57

Yeah, yeah, exactly. So I’ll put a link to your submission in the show notes. I think it’s really good. And you make a good point about how, yeah, I didn’t realise the fees paid by the Future Fund for funds management was so high, but I guess it makes sense, given the amount of funds under

Cameron Murray  28:13

point 2% of the funds under management. That is still half a billion dollars a year, which is of course, again, the maximum that this Future Fund for housing can actually spend on housing subsidies or housing construction. Yeah. So the maximum they can spend is roughly what the average management fee is for the existing Future Fund. Yeah, just to get your orders of magnitude straight of what’s involved.

Gene Tunny  28:40

Okay. And, yes, it has been passed by the lower house, it’s going to it’s being considered by the Senate at the moment, and it’ll probably be passed, I imagine, based on what you were saying,

Cameron Murray  28:51

my understanding is the cross bench has a lot of power in the Senate here to get things changed. My suspicion is that if there are key crossbenchers that take my argument seriously and a couple of other of the submitters as well, they may, for example, put in the legislation a minimum amount of spending out of the fund instead of a maximum to sort of guarantee it. And they may, you know, and that might just be a way of diverting instead of buying bhp shares and Commonwealth Bank, you know, build houses with it and own the equity of those houses with your public housing developer or however you account for that. So that that that may be a realistic change. I don’t think it’s gonna get thrown out or go back to the drawing board.

Gene Tunny  29:38

Right. Okay. Well, again, well done, Cameron. Yeah, excellent submission, lots of very sound, economics and public finance in there. Any final words before we wrap up?

Cameron Murray  29:49

No, I just want to, you know, cross my fingers that the best case scenario turns out if this fun gets passed.

Gene Tunny  29:55

Very good. Okay. Cameron Murray, thanks so much for appearing on the show.

Cameron Murray  29:59

Thanks for having me, Gene.

Gene Tunny  30:02

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

Cameron Murray 30:49

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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