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Podcast episode

Elite Networks: The Hidden Driver of Inequality? w/ Dr. Vuk Vukovic – EP263

Dr Vuk Vukovic, economist and founder of Oraclum Capital, joins Gene Tunny to discuss elite networks, their economic impact, and the future of democracy. Delving into his research, Dr Vukovic examines how political connections affect income inequality and corporate success. He shares his innovative Bayesian approach to predicting financial and political trends, offering a glimpse into his hedge fund’s methods. The episode also tackles the dangers of centralized political power and explores solutions for empowering communities and fostering trust in democratic institutions. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About this episode’s guest Dr Vuk Vukovic

In brief: an academic and practitioner

​Academic…

  • Oxford PhD, LSE Masters, Harvard, Berkeley
  • 5-year university teaching experience
  • Published in top journals, published a book (@Oxford University Press) => Elite Networks
  • Expert member of Parliament committee

Practitioner…

  • Running a hedge fund in NYC, Oraclum Capital (ORCA), based on our scientific innovation in network theory 
  • Before that, founded two companies: market research consultancy & boutique rating agency
  • Macro-based trader & investor for over 10 years (learning by doing: lots of mistakes, lots of helpful lessons).

Timestamps for EP263

  • 0:00 – Gene introduces Vuk and his work on elite networks and Bayesian analysis
  • 3:54 – Vuk explains how they use social network analysis to identify “super forecasters”
  • 7:47 – Vuk discusses the performance of his hedge fund Oraclum Capital
  • 9:29 – Vuk goes into more detail on their social network survey approach
  • 12:54 – Gene and Vuk discuss Vuk’s thesis on how political connections contribute to inequality
  • 20:21 – Discussion of Lina Khan and potential risks of Trump-Musk connections
  • 25:02 – Vuk discusses how corruption and concentrated power can lead to poor economic outcomes
  • 33:30 – Vuk outlines recommendations for decentralizing political power and re-empowering citizens
  • 39:13 – Vuk’s final thoughts on the role of elites and the need for system design to channel their influence positively

Takeaways

  1. Elite Networks Drive Inequality: Dr Vukovic’s research shows that corporate executives with political connections earn significantly higher salaries, fueling income inequality.
  2. Bayesian Analysis Enhances Forecasting: Dr Vukovic argues his approach improves financial and political predictions by weighting opinions based on network diversity and historical accuracy.
  3. Centralization vs. Decentralization: Dr. Vukovic argues for reducing centralized political power to lower inequality and enhance democratic processes.
  4. Democracy’s Resilience: Whilst acknowledging current challenges, Dr Vukovic remains optimistic about democracy’s ability to adapt through trial and error.

Links relevant to the conversation

Info on Dr Vuk Vukovic:

https://www.vukvukovic.org

Elite Networks book:

https://www.amazon.com.au/Elite-Networks-Political-Economy-Inequality/dp/0197774237

Oraclum Capital:

https://oraclumcapital.com/

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Transcript: Elite Networks: The Hidden Driver of Inequality? w/ Dr. Vuk Vukovic – EP263

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. The transcript was then looked over by a human, Tim Hughes from Adept Economics, to see what mischief the otters had been up to and to correct some of the things they might have missed whilst splashing around in the river. 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.

Vuk Vukovic  00:03

So you mentioned Musk before, just to briefly return to that. So the danger here would be that he would use because he’s not elected, right, the Trump administration, Trump is so it would be a danger if Musk uses his political connection to get favorable business decision for his companies, subsidies for Tesla, subsidies for his other companies, or, you know, preventing regulatory inquiries into his businesses. So that will be something that has a potential danger in terms of, you know, exploiting the system to your benefit.

Gene Tunny  00:35

Hello and welcome to the show. This episode, I’ve got a great guest to tell us all about elite networks and his Bayesian approach to analyzing financial markets. It’s Dr Vuk Vukovic, PhD, CEO and founding partner of Oraclum Capital. Vuk, welcome to the program.

Vuk Vukovic  00:57

Thankyou, Gene, thank you for having me. Pleasure to be here.

Gene Tunny  01:01

It’s good to have you on you’ve you’ve been doing some really fascinating work it appears, you’ve got your own hedge fund, and that’s come out of your Bayesian analysis of, I think it’s social networks, isn’t it, and that informs your financial market analysis. Can you tell us a bit about that please?

Vuk Vukovic  01:18

Yeah. So the network analysis is kind of the underlying, let’s say, motivational factor. But there are two different things, right? One was so the book came out as a part of my PhD thesis from Oxford, where I did use sort of network analysis to kind of look at relationships between politics and the corporate world and how it affects certain economic outcomes, in this specific case, the impact of income distributions, right? So I found that people, so corporate executives that are more connected to politicians tend to have much higher salaries than same corporate executives that are not connected to political executives, right? And this causes a very significant increase of, it explains a very large part of the rise of income inequality in the West in the past 40 years. So that was one that was kind of the academic thing, whereas the whole fund was basically that started on a also an academic paper, but it was something completely different for us, of me, me and my two my two partners and my two colleagues back then now partners in the fund looking at specifically how bubbles, social media bubbles, help us better explain and derive better signals from people making predictions right? So we use this with elections, specifically in 2016 with the Brexit referendum and the Trump election in 2016 got both of them really, really accurately. And then again, Biden, later on, Macron and a bunch of other things, and the underlying so again, the underlying factor, the underlying mechanism, is network analysis, but we used it to try to figure out which people are better at making predictions. Right? Because in our surveys, when we do a survey, not every person is valued the same way. Some people are better than others, and we’re using network analysis to figure out which people are better. So for example, if you’re in a cluster and like an echo chamber, then you’re very likely to be biased. Right? Either, think of it, elections, right left wing bubble, right wing bubble. You’re only surrounded by like minded people. You only see one version of reality. You’re own, right? But if you’re more heterogeneous groups, meaning if your friends who you hang out with in social media, if your friends are some of them are left wing, some of them are right with wings, some of them are centrist, then you have a higher probability of being right about an election outcome, right? Doesn’t necessarily mean that you’re right, but you have a higher probability. So what we basically do is we weigh people’s opinions based on the probability of them being more or less accurate. That’s the whole the whole approach,

Gene Tunny  03:54

Right! Okay, and are you scraping this data from Twitter, from or X or various different social media sites?

Vuk Vukovic  04:02

Yeah. So we started on Facebook back in 2015 like in 2016 before, before the whole Cambridge scandal, after that, and Facebook was no longer an option, but so we continued on Twitter and LinkedIn, mostly

Gene Tunny  04:15

LinkedIn, Okay, gotcha. Yeah, that’s interesting. So, I mean, what’s what’s interesting is, potentially, I’m part of your sample, and so are listeners of the podcast around the world. So I think that’s fascinating.

Vuk Vukovic  04:31

Yeah that’s the idea. We want to get it as diversified group as possible, so diverse decentralized opinions. That’s that’s the whole point. I don’t want clusters. I want people from all around, doing different things,

Gene Tunny  04:41

Gotcha, and what’s what’s your acronym? Is it based on Bayesian? Can you tell us a bit about that, please. What’s that stand for?

Vuk Vukovic  04:50

Yeah so we named it the Bayesian Adjusted Social Network Survey. Bayesian adjusted is because we asked people two questions. The first question is, what you think is going to happen? For example, who’s going to win an election, or, in case of markets, where the market is going to be by the end of the week. And the second question is, what do you think other people around you think, what’s going to happen? Now, when you get to that second question, that’s where the Bayesian element kicks in, right? Because we noticed and we did this initially, when we we were trying out this methodology, we tested on students, all three of us, myself and my two partners were academics, right? I have a PhD in economics. My partners have PhDs in physics and computer science, and we test some students by asking them to predict their test scores. And then later we did with elections, again, an experimental setting, right? So we give some some of them a question, some of them we don’t give a question, the second question. And we notice when we give the second question, the question of, What do you think your friends around you are going to do? That kind of encourages you to go back to your previous question and reverse it, or, you know, and be more accurate that way. It’s it forces you. It’s kind of, you know, Bayesian and you have a prior posterior probabilities. You, you adapt, you update them. That’s the whole idea.

Gene Tunny  06:03

That’s fascinating. And as you get into this, how did you identify this topic, and who was your thesis advisor? And I mean this, I mean this is very original work. It’s sort of not the standard sort of thing economists would look at, at least as far as I’m aware. So how did you get involved in it, and who was your advisor on it, please Vuk, I’m interested.

Vuk Vukovic  06:23

Again this was done before. So the whole thing, the network thing, analysis for the Bayes on right, what I mentioned was done before I went to Oxford. That was 2014/15. I went to Oxford, 2016 So, and this was done by myself and my two colleagues. As I mentioned, one is a computer scientist, one is a physicist, and we wanted to publish this as a paper, right? We were aiming to publish it like Nature or Science, but once we saw how good it was, we decided not to publish it, and we decided to monetize it instead, like, let’s make some money out of this. It’s very precise, right? It gives us really, really accurate results for whether it was like testing on students or when we did actual elections, it was really precise. But the thing to answer your question, so my PhD supervisor was Ben Hansel. he was a professor at Oxford. Really great guy. I But the research I’ve done there is a bit different, right, that was focused more on, like, the political outcomes of, you know, corporate and political connections and economic outcomes of corporate and political connections and its impact on inequality. So that was a bit different. That’s where the book came came out from. But again, as I said, like the underlying the common factor is network analysis,

Gene Tunny  07:37

Gotcha and you’re Oraclum Capital. So where’s that based? And I mean, how is it performing? Can you tell us a bit about that, please, before we talk about your book?

Vuk Vukovic  07:47

Absolutely So Oraclum Capital, it’s a hedge fund based in New York, and it’s performing really well. So we opened the fund in February 2023. Before that, I did almost two years of testing it, I had my own account. I took $20,000 of my own money and brought it up to 54 in over a year and a half. And we were doing this in a newsletter. So people were following us, and I was literally posting like screenshots. I bought this and I sold it so as to get like credibility from people. And once that was that happened, so we decided to launch the fund in February, we started with about 2 million AUM, and by now, by November, 2024 we’re up to 25 million, where performance has been about 56% since inception, gross return. So net is about 45 something like that, net return per investors. So pretty, pretty good.

Gene Tunny  08:38

Yeah, yeah, yeah. And again, this is for, like, on your website, this is for accredited investors. So it’s not just for, yeah, for ordinary mums and dads out there. It’s for, you know, people with significant assets.

Vuk Vukovic  08:51

Yeah there’s a minimum, we’re raising the minimum from January 1, $250,000 and yes, you have to have a status of accredited investor. Again, it’s a hedge fund. So it’s not really something that is for the retail and average retail investor, but we are planning down the line to have an ETF potentially, and that would be open to retail crowd. But that’s a, again, that’s a long term plan.

Gene Tunny  09:13

Good one. Yeah, it’s a fascinating approach. So you’re looking at, again, we were talking about it before, looking at what people are thinking in you’re scraping all this data from social networks. You’re trying to identify the people who are good at predicting and what they’re thinking…

Vuk Vukovic  09:29

Yeah and it’s and it’s all about two things, about, like, your consistency, your consistent responses. So since we have the market prediction, and that goes every week, so we’re tracking people’s performance over time, right? And it’s also about your positioning in the network. So we don’t take any data, you said, scraping. We only scrape the connections of your friends, right? And we can see your who your friends are if they also come into the survey. So we take your whole network, but we only see if your your friends, who’s friends with you, if they also come into the survey, right? We don’t have any we don’t collect any other socio economic. Like, we don’t even collect the names of these people, right? We know some of them. We reward. We give them money, right? So every quarter we reward, it’s a competition that we run. So we reward the top 20 with $5,000 for the distributed across top 20 people. We’ll probably be increasing that in the years to come. And and the whole point is, since, so since we reward them. So some of them have uncovered that they are, in fact, day traders, and they’re like trading markets, so we know their names, but this is just because we pay them the prize. Otherwise, a lot of them are even anonymous in the survey, which is fine to us.

Gene Tunny  10:35

Oh right. Okay. So you’ve got a survey, and then you you figure out who in that survey, are the best predictors based on, yeah, I guess there’s their network and also their…

Vuk Vukovic  10:47

The position in the network is number one and the number two is performance over time, right? So maybe your position in the network is like, I place you in a bubble, but you’re actually pretty good, so your performance goes up, so that means we value your opinion more, right? Yeah. And vice versa.

Gene Tunny  11:00

Yeah and one way of thinking about this, it just occurred to me, I don’t know if I’m the I’m on the right track here, but you’re identifying super forecasters, in a way. And I’ve had Warren Hatch on the show from Good Judgment. He’s worked with Phil Tetlock on the Superforecasting stuff, which is just fascinating. I think he’s in New York somewhere. He’s doing, he’s doing great work. You’ve got a you’ve got a different approach. And, yeah, sounds, sounds fascinating.

Vuk Vukovic  11:25

I read Tetlock’s book somewhere over there, right? I’ve read it, and it’s, it’s really good, and I like their approach. What we, so, yes, we do call them superforecasters, but we basically call them also our best observers, right? So people who are best at observing the environment around them. So that’s the kind of the most valuable opinion.

Gene Tunny  11:44

Yeah fascinating. That’s good stuff. Okay, I want to ask about your book Elite Networks, because I think this is an interesting thesis. It’s one that, I mean, I’ve got, yeah, I’ve got some real questions about this, because, I mean, inequality has always been with us, right? And so we understand why a significant amount of inequality exists, because there’s a distribution of talents and skills and resilience or grit across the population. And so we have people who, you know, we’ve got doctors or specialists who work, you know, ridiculous hours and have lots of stress, and so they’re going to be more highly paid. Corporate lawyers as well. But your thesis, it seems to be, is that much of the increase in inequality, if I’m interpreting you right, or a large part of the increase in inequality, particularly among that top 1% like if we look at what’s happening with income and wealth data, we do see particularly in the United States, I guess in the UK, to a lesser extent, and in Australia, to a much lesser extent, we see that top 1% or top point 1% really pulling away. And your, am I right? Your thesis is that much of this is to do with political connections. Can you tell us a bit about that? Please.

Vuk Vukovic  12:54

Mmm, absolutely. So what you mentioned is, so I’m not bothered by, as you said, like the inequality between people based on, like, unique talents and difference, again, some people are on a global market, superstars, right? On a global market, most popular singers, sports persons, etc, it’s a completely different game, right? The demand for them determines their payoffs. But what I’m looking at is, if you look at the distribution within the top 1% or even the top 0.1% which is, as you mentioned, was for the past 40 years, the biggest driver of income inequality. Is this has been shown by the inequality literature almost unequivocally when you look at the distribution within them. So there is this political effect that hasn’t been researched that much, right? So I looked at that specific issue. So he had a database of about a million corporate executives and politicians from the US and the UK. So I was totally focusing on these two countries, because that’s where I had the data from. Not a lot of data exists outside, unfortunately, even though it would be great to see that as well. So I was looking at these people, and I was trying to make the connections between who’s connected to politics among the top corporate, corporate executives. I was only looking at board members, right so C suite and board members. And I found that if you look at within companies, right, if you’re a board member that is connected to a politician, I’ll explain how we measure connections. If you if you’re connected to a politician in the United States, that means you have a salary, an annual salary higher about $150,000 from 2000 from the year 2000 in the year 2016 in the UK, it’s about 90,000 pounds, which is a very significant effect. It’s a lot. It’s a big increase in salary, right, on average. And again, so you’re looking at the tail of the distribution, and you’re looking at differences between them, meaning that some people have a much higher salary because of their political connections. The way I measure political connections is simple. I look at people who used to work together. So if you were, you know, if you’re a corporate executive, they used to work in government, or the people that used to study together. Or, and this is the most fun part, if you belong the same societies, right? So country clubs or like charity organizations or think tanks or stuff like that. Again, it doesn’t necessarily mean that these people are friends, but you can get to each other very quickly, right? So maybe, you know, you and I are not friends, but we belong to the same group, and you know, if I need to get to you and your personal power, I you know, it’s very easy for me to get to you, because we won’t belong to the same group. That’s kind of the idea. And if you have this level of connection, it shows statistically significant that it has an effect on on the increase of top incomes.

Gene Tunny  15:36

Yeah, yeah. It’s an interesting hypothesis, and there’s certainly some evidence of it. I mean, they talk about the revolving door between Goldman Sachs and US Treasury, or something like that, that sort of thing. And in Australia, we seem to have a revolving door between ministers offices and then the government relations positions in the big corporates like Qantas. And that’s become a bit of a scandal over here recently. What I’m interested though, is, you know, there’s correlation and then there’s causation. So how are you confident that this is actually a causal thing, that the political connections are what leads to the higher income or the, you know, the corporate sort of success it was, you know, higher incomes, uh, versus the fact that, I mean, if you’re in a, in a corporate, you’re, you’ve got to deal with government, right? You’ve got no choice, because government wants to get in your business, right? So you, you really have to make those connections. Can you, could you talk about that please?

Vuk Vukovic  16:37

Absolutely, that’s why I’m looking at, that’s why I’m looking at the within firm effect, right? So I’m trying to look at within firms. So you’re comparing two people that are the same level, right? One and the only difference, so there’s, you’re comparing always similar individuals, same amount of experience. So you’re controlling for like things like age, experience, the fact that they both work in the same company that has, you know, a level of connections to politics to whatever extent, and then. But the only difference between the two people you’re comparing is one is politically connected, the other is not, right, and based on it, so that’s your source of exogenous, exogenous variation, shock, right? And so because of this effect, you will see if this person’s political connections has any effect on their salary. And I found it that does, right? So the question that you asked would be, if, okay, obviously, if you look at between firm differences and yes, in some firms you’re going to have much higher salaries, and others, you can see the super the so called superstar firm effects. So obviously, some firms are more connected to politics. Look at big tech, for example, right? So they’re an example of companies that used to be that developed their business models based on economies of scale of innovation, obviously, right? Your Googles, your Amazons, your your Apples, etc. So they have this level of innovation, and this is what built their market share, right? Economies of scale as well. But then at this point, right, at this point, the life cycle of the company from innovators, they’re turning into rent seekers, because now it’s a question of preservation. Right now it’s a question of regulators trying to disrupt their monopoly positions, which, obviously they do have monopoly positions, so regulators trying to disrupt them. So what do they do? They hire former members of government to lobby the government not to do those, the legislations right? That’s how the political process works. So in that particular story, obviously, again, the between firm effect is going to be huge, which is why I look at within firms. So I go to within certain Microsoft or an apple or whatever, right across the basket of several thousand companies, and you’re looking at these connected and non connected individuals to try to see if there’s a if there’s an impact of the political connection. And it turns out it is. So again, causality is obviously difficult to prove, unless you have like, firm experiments. But this is as close as you can get to a experiment, not out of experiments. We could call it a quasi experimental approach. It’s not a real experiment, but it’s something close,

Gene Tunny  19:01

yeah, yeah, that’s interesting. I mean, there are clear, clearly, examples through history of I mean, people who are well connected politically, and that helps them out in business. We’ll have to see what happens with Elon Musk and how long his bromance with the President Trump lasts and what what that does for his business. Yeah, yeah. And then you’ve had like, someone like Donald Rumsfeld who moved between, like he was, he worked for the Nixon and Ford administrations. Maybe he was defense secretary. Then he went to Monsanto, I think, and then back to defense. So then the people like Hank Paulson, who went from Goldman Sachs, the US Treasury. And…

Vuk Vukovic  19:42

Yeah I have him in the book, right? So I have his network is drawn in the book, so you can see these connections, you can visualize them, and it looks amazing, right? I also have, like, (inaudible) saying the same impact, or Bob Rubin, who was Treasury Secretary, and then Clinton, and then went to Citigroup, and then he. He was running Citigroup during the crisis, and then got, you know, he went out of the company, got 100 and something million dollars of a bonus during the financial crisis. So that’s the kind of level, right?

Gene Tunny  20:11

Yeah yeah. Actually, he’d be a really good example now that I think about it.

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Gene Tunny  20:50

Now, back to the show.

I’ve got a couple of questions first, just so I don’t forget it. You mentioned big tech and the abuse of market power that is probably occurring in some cases. What do you think about Lena Khan? Do you have any thoughts on her and what she’s been doing at FTC and the and do you have any insight into what’s going to happen with the Trump administration? I mean, I imagine they’re going to get rid of her, but do you have any thoughts on how she’s been going?

Vuk Vukovic  21:20

No, I haven’t, I haven’t looked at that in particular, but, yeah, I mean, there is, there is a specific danger, because Trump is an example of a person, of an individual who is, you know, embodiment of an elite network himself, right? So this is a mixture of politics and business into one person, right? Where he has a strong business background. He’s obviously using this. I mean, again, the reason he was elected was not because of that. He transcended that, right, this whole pop, he created this whole populist image that people are kind of looking to towards as an agent of change. And that’s all fine, and well, um, but you know, if you, if you’re, the danger would happen if he would use his political power to promote his own businesses, right? Or to kind of prevent the people in government to do their own, to do their jobs in regulating and supervising, etc. Obviously, government itself is corruptible. That’s clear. You know, I’m so my background in academic research was corruption research, right? So I know a lot about the topic, and I’ve done a lot of research on that. So you mentioned Musk before, just to briefly return to that. So the danger here would be that he would use is because he’s not elected, right? The Trump administration, Trump is so it would be a danger if Musk uses his political connection to get favorable business decisions for his companies, subsidies for Tesla, subsidies for his other companies, or, you know, preventing regulatory inquiries into his businesses. So that will be something that’s a potential danger in terms of, you know, exploiting the system to your benefit. You know, hopefully it doesn’t happen. We’ll see. But yeah, if you look at kind of countries where inequality is high, you would see events like this happening, right, where you have a group of like oligarchs around the person of power, donating money or whatever, and getting back very, very concrete. It doesn’t even have to be like necessary corruption itself, but it can also be influence, right, misusing political power.

Gene Tunny  23:19

Right yeah, and on that. Do you have examples in your book of particular countries?

Vuk Vukovic  23:24

Oh yeah, yeah so, so I use, I go for, for example, I typically pick the most, like the autocratic ones, where you have these relationships, like like Ben Ali in Tunisia. That was an example of a person whose whose family directly controlled over 20% of the country right by allowing you know who gets the contract gets to do business in the country. You had a similar situation in Suharto’s Indonesia. You had Putin’s Russia, Fujimori’s Peru, for example, or Tangentopoli affair in Italy, where you had the whole government basically going down on corruption charges. This whole system buying political influence was institutionalized like companies had no other way of doing business unless they would give a bribe, right, a kickback, to the politician. But sometimes, you know this, this thing comes from the directionality. Goes from the politician to the business sector, but often it also goes from the corporates to the political level. The Odebrecht scandal in Brazil and South America is a great example of that. This was covered by the investigation Lava Jato in Brazil, where they found out that this, this huge conglomerate of a company, this construction company throughout South America was responsible for electing presidents, electing mayors, electing parliaments, right, determining political decisions, and by channeling over $800 million in bribes and corruption across the across the continent in order to secure huge, huge deals from the south they were building all the major infrastructure projects throughout Latin America. This company was building that’s a great example.

Gene Tunny  25:02

Yeah, okay, and there is evidence, isn’t there that corruption leads to poorer economic performance over time? Is that correct?

Vuk Vukovic  25:13

Yeah absolutely because it, over time, definitely because it channels the resources from like, more efficient to less efficient means, right? It channels the resources to a certain particular group, and it doesn’t distribute them, right? So this is, this is why you have, especially in developing country, this feeling where you have economic growth but the majority of the population doesn’t benefit from it, right? So only a narrow group benefits from economic growth. And when, whenever this happens, you get popular revolts. This happened in 2014 but you had the uprisings in a lot of countries, from Brazil to Turkey to Bulgaria to Ukraine over exactly that, right? So they had, like, 10 years of 15 years of progress, and the population is still relatively poor, so they’re not seeing the benefits. Otherwise, when you have economic growth, it’s supposed to pull everyone out of poverty, or at least, you know, towards the middle class and towards upper incomes, right? You had this in Western Europe. You had this United States, right? Even though, you know, we can, we can talk about different levels of inequality and different levels of corruption, but when you have high corruption alongside high inequality, then the people feel this most prominently, and that’s where where you have negative social outcomes and potential negative political outcomes. That’s where you vote for populist candidates to deliver change, right? And yeah, that’s why, it can become, it can become dangerous.

Gene Tunny  26:33

Yeah, yeah, absolutely. And I see on your bookshelf behind you, you’ve got a copy of Why Nations Fail. I think it is by Daron Acemoglu, and

Vuk Vukovic  26:41

I have all of their I have Power in Progress, Narrow Corridor, all great books,

Gene Tunny  26:45

Right. And they won the Nobel Prize this year for, yeah, for their work on what they call, I think, extractive institutions. And I think that’s one of the themes of your book, is it? So are you concerned that if this trend continues in advanced economies such as the United States, UK, Australia, that we could end up on a on a path towards, I don’t know, what sort of future are you sort of projecting if this trend continues?

Vuk Vukovic  27:14

Great question. I mean, I’m have to in the long run. I’m always optimistic, right? Because I’m aware of all the all the issues, right? Obviously, I write about them, I research about them, and I definitely agree with the conclusions from the Acemoglu and Robinson books. They were my inspiration throughout my PhD. But if you think about the way I coined, the phrase that I coined in the book is something they call the trial and error democracy, right? So you have in certain times, and this last, it can last for a decade or more, periods of what you can call error, right? Go back to the to the west, in the 60s and the 70s, right? Think of the outcomes that you had just in the United States. Right? You had assassination of the President, Assassination of civil rights leaders. You had the United States losing a war in Vietnam. You had geopolitical shocks with Iran, the revolution with Israel, the wars, right? Huge oil shocks because of that. So geopolitical tensions all around, the Cold War at its peak, right? The Cuban missile crisis, all those issues you had domestically. United States, peak racism, the KKK, all those groups. You had economics, stagflation, right? You had high double digit inflation, low economic growth, unemployment being high. A lot of economists in the West saying it’s matter of time before the Soviet Union overtakes the United States. Never happened. Why did it never happen? Because, you know, a democratic system learns from its mistakes, right? It’s not automatic, okay? So it doesn’t happen. Oh, you know, magically something appears, and we’re all better. No, you need to fight for it, right? So the way that people are fighting for it, because they ask for change, they vote for change, they vote for differences. Right now, you know, the whole Trump election was also something that people were asking for change. They were seeing something is wrong. We need, we need a change in the system. We want something better. Inflation was high, our costs of living went up, our living standards went down. We need, we need a change. So, so again, it’s, we’ll see to which extent this happens. But it’s always a question of, you know, people fighting for a better future. Maybe you need to go for a period of a slump in order to go, I mean, this is, you know, a life cycle, if you think about it, right, nothing ever goes up in a straight line. We can look at the average across the past 200 years of, you know, ever since the industrial revolution, we have amazing progress, but it always goes in cycles, right? You had the 1930s and 1940s you had disasters, right? Disastrous outcomes, the terrible war and the 19th century, you had all these issues and crises and social revolutions, etc. But you know, as we progress, it tends to be less and less, let’s say, dangerous to the system in the sense of destroying it, right? If you look at the mid 19th century or the mid 20th century, you were thinking, Oh, this is the end of capitalism, right? But so far, we’ve lived through 15 ends of capitalism and no end in sight, right? So again, the system is there is a problem, obviously. And you know, it’s a good, good thing that we can talk about this, and we can discuss this in a democratic setting. This is the only way to kind of get a get ahead. In an autocratic setting, you have pseudo stability, right? You think that, ah, you know, look at Russia, look at China. Look at all these countries. They’re great, you know, prosperity, etc. But this, this is pseudo stability, because as soon as you disrupt the leader, the system tends to fall apart. And I think, I mean, China didn’t necessarily have that. I think they are going dangerous in that direction with Xi Jinping. I think that before before him, they had his this level of where you don’t have one person dominating the system, right? You have a collective which is fine, but you know, I’m not that optimistic about I’m more or, less optimistic on China than I am on the west, to be honest, despite all the problems that we see there and that they’re evident, right? The problems were evident. But that’s the thing. You’re always going to see problems in a trial and democracy. You’re never going to see problems in an autocracy until it falls apart, and then all the problems surface. This is like classic Eastern Europe after socialism, right? Everything was fine until all of a sudden nothing was fine.

Gene Tunny  31:22

Yeah, yeah. Gotcha. Okay. Well, sorry you mean in terms of everything was fine until nothing was fine, you mean up until 1989 is that what you mean?

Vuk Vukovic  31:32

Yeah, so, so, I mean, I come from Croatia, so we went through for socialism and right in Yugoslavia, certain level of and you can, you can go most countries, okay, Yugoslavia is a bit different in some aspects. But then, you know, you had a system that was growing really strongly throughout the 60s and 70s, but then in the 80s, complete stagnation. If you look at, and I talk about that in the book, if you look at 10 years, the last 10 years of socialism in 1980s you will see in every socialist country stagnation or even economic decline. So the GDP per capita in 1980 1989 went down in almost every single socialist country of the Eastern Europe, Eastern Bloc. The reason is because the socialist model simply ran out of steam. That was it, right, you could no longer replicate the results that you had in the past. And that created these tensions that eventually brought revolutions different ways in different countries. In Yugoslavia you had the war, in Poland you had the revolution in Romania you had the revolution, in Russia things fall, fall apart, fell apart in a different way. But, yeah, it came to its inevitable end. As I said, everything seemed fine and stable, right? Growing. But then, you know, when you’re inside the system, you see that things are really not a fight, right? They’re brewing.

Gene Tunny  32:44

Yeah, absolutely. I want to ask about just coming back to how we you know, what we do about all of this so in the summary of the book, it it says that this book argues that to lower inequality and prevent incentives of elite network formation we must, first and foremost, lower centralized political power and re-empower the citizens and the community by rebuilding trust and relying on the Democratic trial and error mechanism. So we’re talking about democratic trial and error mechanism. Can I ask, do you have any recommendations, specific recommendations about the types of things that should be done to lower that centralized political power and re-empower the citizens please Vuk?

Vuk Vukovic  33:30

So that’s the last chapter of the book, and that was, that’s the only chapter that’s not empirically backed, in sense that I didn’t do research on it, but it was kind of a natural extension of, you know, the findings of the book, right, the findings of the other parts. So I’m looking at things like, so the logic is, if political power is responsible for inequality, if you lower and decentralize power and give more power back to the communities and to the people, then you essentially lower incentives for the misuse of, you know of elite misuse of power. So my ideas, and I mentioned this in the final part, elites are not something that’s inherently negative, right? Even though I might portray it as such in the book, they always existed. They always will exist. And you have a lot of elites that are actually can be beneficial for societies, like, look at philanthropism, right? It developed a number of things throughout in our cultures. But then again, right? When you when they are incentives to misuse power, when power is highly concentrated within a single individual or a single party, that’s always bad, right? And so you want that. You don’t want the concentration of power. You want the dispersion of power. That’s the element of decentralization. So the way you do this, I mean, it’s, it’s not easy and it’s not simple. There’s no magic bullet here, right? There’s, there’s series of reforms that we can think about like so, you know, increasing transparency of government, right? In making sure that every citizen visits has a insight into every single check that the government ever spends. That’s one thing, right? Free, transparent media Absolutely. Media freedom is essential in that kind of kind of environment, doing things like, you know, I’m talking about introducing KPIs for politics, right? So you have a certain fiscal, budgetary constraints, or debt constraints or monetary policy constraints, and if the government, you know, exceeds those limits to a certain extent, and it has like, let’s say, six or 12 months to fix it, unless it doesn’t. Everyone loses their seat and is no longer viable to run for election. That’s a very strong commitment mechanism. So I’m talking about introducing mechanisms like these that will push incentives, not in the way of exertation of power, but in a way of, you know, making power more distributed, that’s the idea.

Gene Tunny  35:43

Yeah, absolutely. I think it’s a great idea. So there’s an idea from a colleague of mine, Nicholas Gruen, who’s an Australian economist who I work with closely, and he’s been getting a lot of attention internationally for his idea. It’s not his original idea, but he’s one of the leading advocates of it at the moment, for citizens juries, sortition, this idea, which I think is a terrific idea. And Martin Wolf, the FT columnist, he wrote positively about that in his book The Crisis of Democratic Capitalism, which is I think perhaps a companion book to yours. Uh, really, I mean that, you know, you similar, similar themes about, I guess that you know, he’s got observations on inequality and what’s driving that now, I guess this is where, this is the final question.

I want to make sure I understand this. So your hypothesis is that a large part of the inequality we’ve seen is due to these elite networks, connections to politics. How do you, how do you quantify that? Have you done a quantification, so how much of the inc…, the breakdown of the increase in inequality, increase in the share of the point 1% or the change in the genie coefficient, however you want to measure it, what proportion of that is due to the phenomena that you’re studying, versus, say that you know, wider access to markets through the tournament effect, or whatever you call it, through just being able to connect with the wire the whole world via the Internet and skill bias, technological change that David Autor has written about. Have you quantified this at all Vuk?

Vuk Vukovic  37:21

No, yeah. So again, I put a direct number, right? So $150,000 higher salary if you’re connected, compared to if you’re not connected, right? So that’s a very, you know, strong, strong number. And so high ends, a big number, right? But the thing is, so obviously, if you look at so what you mentioned, the tournament effect, the superstar effect. That is fine. That’s going to happen in a globalized world. It’s always going to happen. And there’s no problem with that. And my problem is when it happens as a form of (inaudible) of power. So to quantify in terms of size, I haven’t looked at that specifically, but we can. But I can say that this is if it explains 20% of the variation, it’s a lot, even if that’s much, and I think it’s probably even higher,

Gene Tunny  38:06

Yeah, gotcha, okay, I think that’d, that’d be a good question to ask. Yep, yeah. And there’s quite a bit of like, it’s a it’s an interesting research field, and it’s something I’ve got to be I’ve got to look at more. We’ve got a local there’s an Australian economist, Cameron Murray, who’s done a bit of research for this. He’s got a book called Rigged, which was Game of Mates, which is, you know, interesting idea. So, and, you know, Cameron sort of looked at how decisions regarding property rezoning and all that sort of thing is highly correlated or, you know, is you’re more likely to get a favorable rezoning change of use of your property if you’re politically connected than if you’re not. So there, there’s some interesting evidence there of of the role of politics in all of this so…

Vuk Vukovic  38:55

Absolutely, unfortunately, you know, again, that’s the thing, right? If there’s, if power is too concentrated, you know, you just have to get the one person to change some stuff. You’re going to do that, right? That’s, that’s the idea.

Gene Tunny  39:07

Yeah absolutely. Okay. This has been fascinating conversation. Any final points before we wrap up?

Vuk Vukovic  39:13

I mean, yeah, I think we, we kind of summarized it well. Your questions were great. So, so thanks for that. But yeah. I mean, kind of the main message, the main argument from the book, is like, again, elites are not necessarily bad, right? You they’re like, politicians. You have good politicians, you have bad politicians, right? It’s up to us to try to make the system design mechanisms of the system that can be they can channel their influence into something good rather than something bad. That’s the whole idea. You’re always going to have bad people around, right? My point is, let’s not, you know, let’s not. So even if you need to elect someone who’s bad, or, you know, a psychopath or sociopath whatever, people tend to be calling their, their their elected leaders, and they call them all of them psychopaths or sociopaths, why even give a you know, a sociopath so much power, let’s, let’s not give them, let’s not give them that much power. And it’s not a new thing, right? If you look at countries like, you know, in Scandinavia or Switzerland, power is not concentrated, that’s, that’s the idea.

Gene Tunny  40:14

Right, in Scandinavia, Oh, yep, in Switzerland, with the decentralization, yeah, yeah, gotcha, yeah. Really good point. Okay, Dr Vukovic, that’s been terrific. I’ve really enjoyed the conversation. I will put a link in the show notes to your book. I recommend people get a copy of it. And yeah, this is something I’m going to be having a closer look at in future episodes. So again, thanks so much for your time. I really enjoyed the conversation.

Vuk Vukovic  40:39

So did I it was really good. Thank you very much,

Gene Tunny  40:43

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 speak pipe. 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.

Obsidian  41:30

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

Is DeFi the Future of Finance? Exploring VirtuSwap’s Vision w/ Prof. Evgeny Lyandres – EP262

Explore the mechanics of decentralized finance (DeFi) with Professor Evgeny Lyandres, who breaks down how decentralized exchanges work and how VirtuSwap stands out in providing liquidity for small-cap crypto assets. With insights into the challenges and future of tokenization, this episode offers a clear view of where DeFi may be heading. Evgeny is Professor of Finance and Head of the Blockchain Research Institute at Tel Aviv University. Disclaimer: This podcast episode contains general information only and is not financial or investment advice. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP262

  • Introduction to Decentralized Exchanges and Their Potential (0:00)
  • The Evolution and Functionality of Decentralized Exchanges (6:38)
  • Challenges and Solutions in Decentralized Finance (22:18)
  • The Future of Crypto and Decentralized Finance (43:32)
  • Optimizing Liquidity and the Role of AI in Decentralized Exchanges (55:15)

Links relevant to the conversation

Evgeny’s academic web page:

https://lyandres.sites.tau.ac.il

VirtuSwap website: https://virtuswap.io/ 

Previous episodes on web3, DeFi, crypto or blockchain:

The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

https://economicsexplored.com/2024/10/01/the-future-of-vc-blockchain-web3-and-emerging-markets-w-qin-en-looi-partner-saison-capital-ep256/

Navigating Volatile Crypto Markets & Avoiding Scams w/ Ben Simpson, Collective Shift – EP249  https://economicsexplored.com/2024/08/14/navigating-volatile-crypto-markets-avoiding-scams-w-ben-simpson-collective-shift-ep249/ 

Digital Money Demystified w/ Prof. Tonya Evans – EP216

https://economicsexplored.com/2023/11/30/digital-money-demystified-w-prof-tonya-evans-ep216/

Crypto arbitrage searcher Dave Belvedere on crypto and dApps such as Wizards & Dragons – EP178

https://economicsexplored.com/2023/03/08/crypto-arbitrage-searcher-dave-belvedere-on-crypto-and-dapps-such-as-wizards-dragons-ep178/

Bitcoin & books w/ author & ex-fighter pilot Lars Emmerich – EP157

https://economicsexplored.com/2022/09/18/bitcoin-books-w-author-ex-fighter-pilot-lars-emmerich-ep157/

Takeaways

  1. Tokenization of traditional assets, such as stocks or real estate, is a future possibility for DeFi that could expand its impact well beyond the current crypto market.
  2. Liquidity pools and smart contracts are essential to DeFi, providing a protocol-based framework where trades occur automatically based on programmed rules.
  3. VirtuSwap’s unique pool structure, including virtual liquidity reserves, is designed to address the liquidity challenges for less-traded assets in DeFi.
  4. With the aid of AI-driven systems like Minerva, DeFi platforms can optimize liquidity allocation, potentially offering higher returns for liquidity providers and more efficient trades for users.

Lumo Coffee promotion

10% off Lumo Coffee’s Seriously Healthy Organic Coffee.

Website: https://www.lumocoffee.com/10EXPLORED 

Promo code: 10EXPLORED 

Transcript: Is DeFi the Future of Finance? Exploring VirtuSwap’s Vision w/ Prof. Evgeny Lyandres – EP262

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.

Evgeny Lyandres  00:06

This is basically the reason why I think this market is important, right? It’s not because of its importance right now. I mean, it’s not that, right? It’s because of the potential, which I think is there, right, a potential to kind of revolutionize many of the financial technologies that that we’re familiar with.

Gene Tunny  00:29

Hello and welcome to the show. In this episode, I’m thrilled to welcome Evgeny Lyandres, a Professor of Finance and head of the Blockchain Research Institute at Tel Aviv University. He’s also the co founder of VirtuSwap, a decentralized exchange platform. Evgenys’ expertise lies at the intersection of finance and blockchain technology. Today, we’re diving deep into the world of decentralized finance or defi. We’ll explore how decentralized exchanges work, the challenges of providing liquidity for smaller crypto assets and VirtuSwaps’ unique approach to addressing these challenges.

Special thanks to Lumo Coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants. Economics Explored listeners can enjoy a 10% discount, details are in the show notes. Now let’s jump into the episode. I hope you enjoy it.

Evgeny, welcome to the program.

Evgeny Lyandres  01:34

Great to be here. Thank you very much for having us.

Gene Tunny  01:38

Excellent, of course. So yeah, I’m really interested in, in what you’re up to. I mean, you’ve got a background as a as an academic professor of finance and head of Blockchain Research Institute at Tel Aviv University, and you’re also involved in defi and in blockchain with your own company. So I’d like to ask you about your company, is it VirtuSwap?

Evgeny Lyandres  01:58

Yes.

Gene Tunny  02:00

Okay so what I’ve learned, or the information that was sent to me about it, is that it’s a decentralized exchange platform that gives traders direct liquidity for smaller cap assets. So I think what would be good is just unpack what all of that means. So one, what do you mean by decentralized exchange platform, and then what do you mean by direct liquidity for smaller cap assets? Could you take us through that, please Evgeny?

Evgeny Lyandres  02:34

Of course, of course. So starting with from from afar, to give a little bit of a background, right? So, so obviously, decentralized exchange is an exchange where assets are traded, right? In particular, in our case, it’s crypto assets, right? You know, think about Bitcoin, Ether, stable coins, and, you know, 1000s of other crypto assets. Now, there are two ways that the trading in those assets is conducted. The first and still kind of the predominant way, is trading on centralized exchanges. You know. Think of Binance or Coinbase, or maybe FTX, that you know existed until a year and a half ago, but no longer. A lot of trading happens there, and those exchanges are organized very similarly to, kind of the traditional exchanges of other asset classes, such as stocks, right? So think of, you know, NYSE or NASDAQ, right? It’s basically order book based exchanges. Now there are few issues, few problems with with centralized exchanges, and the problem basically stem from the fact that those are centralized entities in a largely unregulated environment, right? So some centralized exchanges, such as Coinbase, are regulated, right? Most are not, right? And so if you combine those two things together, right? So, a centralized entity in an unregulated environment, right? You know, bad things can happen. I’ll give you a couple of examples, right? So, of course, all of us know about exchanges that go bust, because basically they still, you know, depositors fund right? The FTX is a good example. There are other issues, right? One of them is that a lot of those exchanges engage in significant wash or fake trading, right? So basically, what they’re trying to do is they try to increase the reported trading volume, right? Because that is, you know, increasing their placement in the kind of the ranking the league table of of exchanges, right? So they’re interested in inflating volume, because this is, you know, one metric that investors or traders look at when deciding where to trade, right? Now, this is pretty bad for trader, right? Because if you go in exchange and you see an order book, right? You, you stink, you, it seems deep, right? So you want to place your trade. But the actual liquidity oftentimes is significantly smaller, right? And that basically means that your trade is going to be executed at, you know, far worse terms than you know, what you thought it would be executed, right? So basically, there is a big problem of lack of transparency that is driven by, you know, very strong competition, right? And competition is there just because, you know, the entry costs into this industry are very low. It’s, it costs very little to set up, you know, a centralized exchange. It’s basically kind of, you can use a white label software to just to set up a new one. And as I mentioned, lack of sufficient regulation, right? So the bottom line is, lot of people trade on centralized exchanges, and some of them are fine, right? So, you know, Coinbase is definitely fine. Binance seems to be fine, but not all of them, right? And there’s, you know, quite a lot of academic research on kind of the problems associated with the centralized exchanges. And so defi and in particular, decentralized exchanges, right? Is one way to address, you know, the problems that we mentioned. So let me tell you, you know, briefly, what a decentralized exchange, right? So decentralized exchange is basically a protocol, a computer program that resides on the blockchain, right? Any blockchain that enables smart contracts that basically defines the terms of trade in a very kind of precise, programmatic fashion, right? And that basically means that it’s a collection of basically formulas, right? Say, Well, you know, if you exchange this amount of one asset into another asset, right? You’re going to get precise amount of that other asset the function of some parameters of the you know, of the exchange. Those exchanges are organized using so called liquidity pools, right? And so that brings us to, kind of to the main players, right in this, in this market, right? There are two. The first one is traders, right? So those are people you know, that want to exchange one asset into another. The second, and the crucial type of players in this, in this market, is what’s called liquidity providers, right? So, liquidity providers can be, can be anybody, right? Can be you or me. It’s people who basically supply liquidity two so called liquidity pools with a goal of this liquidity, right, helping conduct trades, right? So let’s say that I want to establish a pool of two tokens, right? You know, whatever they may be. So I’m going to put $1,000 worth of one token and $1,000 worth of another token into the liquidity pool. Now the pool has been established, right? And those tokens right at this point, $1,000 worth of both could be used for trade, right? So you can come to the pool and say, Well, I want to take $10 worth of one token and supply another token into the pool, and the pool basically is going to be set at set up in such a way that you know the terms of trade are going to be defined by the amount of liquidity currently existing in the pool, by the relative prices of those two assets, right. And that basically the ratio of the two assets in the pool right, and the size of your trade. Okay, we can go deeper into, you know, what types of pools there are, but typically, you know, it’s involved in a pretty simple math, pretty simple kind of formulas for defining those exchanges, right? But it’s basically going to be a function of only two things, right, the current composition, the first state of the pool, and the size of the size of the trade and direction of the trade that you want to perform, right? So that is kind of the the basics of decentralized exchange and this type of trading technology that’s very novel, right? And does exist outside of decentralized finance, or outside of blockade based finance right is possible because of kind of the nature of the blockchain, right? That, basically, blockchains allow smart contracts. Smart contracts are, you know, no more than if that condition right, the defining if something happens was was going to be the result, right? And so, so basically, it’s possible, because of the technology of blockchain, right? But in theory, at least, you can even think about this technology being useful for trading other assets, right? So you will any pretty much, right. The financial technology is the same, yeah. So that’s kind of the basic or so decentralization, we’re very happy to go, obviously, deeper into it and, and, of course, we’re going to talk about, you know, what we do in the space. But what is our, what is Virtu of contribution,

Gene Tunny  09:50

you know? Yeah, absolutely, I definitely want to go deeper into it. Yes. So, I mean, what are examples of decentralized. Exchanges. I mean, there’s your decentralized exchange, Virtu swap, and how does it compare? What’s its differentiating factor from other exchanges? It sounds like that you’re focused on smaller cap assets. Can you tell us about that? Please. Evgeny, of course,

Evgeny Lyandres  10:17

of course. So in general, kind of decentralized exchanges started in about 2017 2018 so you know, about seven years ago now, by two protocols. The first one was called bancor. The second was called uniswap, still called uniswap, and both protocols still exist. Uniswap at this point is the most successful and the most famous decentralized exchange protocols currently responsible for, I would say, about half, if not more, of all trades in decentralized exchanges, right? And just to put things in perspective, about a quarter of all trades of crypto assets is done on decentralized exchanges. The other three quarters are done on centralized exchanges. And out of this quarter, uniswap, you know, gets about half of the market share. So this is the predominant kind of decentralized, you know, the biggest and the most successful decentralized exchange, and also an exchange that constantly produces a lot of innovation into this market, right? So let me give you maybe a half a minute kind of history of the evolution of this market, and then we’ll get to what we do, right? So it all started with, you know, with the first version of municipal in around 2017 2018 right? And basically, the idea there was, well, you know, we can exchange assets using this, this, this kind of smart, smart water based technology that we discussed. And in the first version, the exchange work very simply, right? So the exchange could only be done, you know, between ether, right, which is the the token of the Ethereum ecosystem, right, with Bucha, Spain, and any other, what’s called ERC 20 token, which is a, basically a token that that is based according to a certain kind of standard, and within the first version, right, which basically kind of it should you can think of this as a proof of concept, right? The trading was not very the terms of trading were not very attractive, right. So think about a situation where you want to exchange your two tokens, right? You know, think you know, USDC, a stable coin and some other token, wbdc, right, Bitcoin, okay, so what you would have to do, right, is basically do two trades, right? It would need to exchange USDP into, you know, ether, and ether against WBC now. And, you know, doing multiple trades would basically expose you to to multiple costs, right? So let’s first talk about all the costs involved in a trade, right? And then we’ll think about, you know, what does mean to have all those basically doubled or multiplied, right? So generally, three types of costs, you know, for a trader on a decentralizing change. The first one is so called full fee, right? And that is basically a fee that a trader needs to pay to the liquidity providers in the pool, right? Because, you know, you need to somehow incentivize people to provide liquidity, right? Otherwise, you know, nobody’s going to put money in the pool. There needs to be something in it, you know, for the liquidity provider, right? So, and you know, the the fee, basically, is, you know, some small proportion of the trade that is not being exchanged for another asset, but instead is given to the liquidity providers, right? So think about, you know, numbers between five, usually, and between five and 100 basis points. Okay? So 0.05 to 1% that’s the first type of the cost. The second type of the cost is what’s called the price impact. The price impact, right? Is basically due to the fact that the trading function on any exchange is not linear, right? And, you know, you can think about a good analogy, is a typical exchange of assets, right? When there is an order book, right? So the bigger your order is, the deeper you’re going to go into the order book, and the works is going to be the execution price, right? So smaller trades are going to be executed and the marginal the current price, right, the bigger trades are going to be executed at worst price. Same thing happens on decentralized exchanges, right? The typical kind of the most simple and the most famous, actually, formula for conducting the trade and decentralized exchanges is what’s called the constant product formula, right? And basically means x times y equals some constant k, right? So for example, you know, going back to example, to an example, I am. I mentioned before, right? So if I provided $1,000 worth of liquidity in one asset and $1,000 worth of liquidity on the other asset, right? You know, if you divide this $1,000 by the initial prices of those assets, right, that basically defines the quantities of the assets initiative deposited into the pool, right? So let’s say just let’s take the example that I deposited in 500 units of asset a and 200 units of asset B. If you multiply those two numbers, so 500 times 200 so that’s 100,000 right? That defines that constant product, right? And any trade you know in this pool, unless the liquidity changes, right, is going to be based on this product, meaning that if I want to take a given amount of one of the assets in the pool, I need to supply an amount of the other asset, right, such that this product remains constant, and that basically, you know, defines a so called hyperbolic function, right? It’s not linear, right? It’s a convex kind of function of price. What I’m trying to say here is that the second type of the costs of trading in on this centralized exchange is basically what’s called the price impact, right, the effect on the price at which you’re trading, right, as a function of the size of the trading and then, then the third part, the third cost of training, that is basically what’s called the guest cost, right? So this is the transaction cost that need to be paid by the, you know, people, kind of writing blocks on the on the blockchain, right, recording the new blocks and kind of certifying, right? So those are the three costs, three types of costs. Now coming back to this example of trading, you know, stable coin into rev Bitcoin, right, where the intermediate asset is, for example, ether, right? All of those costs, right, the price impact, the pool fee, the gas fee, need to be multiplied by two. And so that was the issue, right. So, so the trading terms were not super attractive, right? So, as a thought experiment, this was a fantastic innovation, right? So this was really a new way to conduct trading, you know, practical terms. It was not great yet. And so then, you know, this ecosystem, you know, started gradually improving and developing. The next kind of step was the second version of the unicorn protocol that’s called v2 okay, that’s that’s what people refer to, usually. And the biggest kind of innovation there was that you didn’t have to necessarily go through ether as an intermediate assets. You could basically construct pools, or establish pools with any two assets, right? With any two ERC 20 tokens, right? And so then you could think of us about a situation where, you know, someone would establish a pool of USDC against Red Bitcoin, right? And people would be able to trade in the school directly, without going through the third assets, obviously, reducing. The point is, this is important, and this is the point I’m going to come back to, right? But it didn’t really solve all the problems, for reason I’m going to describe in half a minute. Since then, you know, this kind of, this setup, right? This technology of decentralization, is have evolved further. The first big innovation was the third version of UNICEF, unusual v3 Right? Which basically allows so called concentrated liquidity, right? So here’s the problem. The problem with, you know, the trading technology that described so far is that, basically, the liquidity that liquidity providers put into the pool, right, is sort of uniformly distributed across all possible exchange rates in the pool between exchange rate between the two assets, you know, from zero to but it turns out that the price impact becomes quite significant for relatively large trades, right? So as a rule of thumb, the price impact which is a loss you know of a trader, you know from the trade, is roughly proportional to the ratio of trade size to the size of the pool, right? So if you want to do a trade which is 1% of the size of the pool, well, you’re going to pay this 1% roughly in terms of price impact, in addition to the pool fee and the guest right? So in practice, you know, in practical terms, you know, large trades are not really admissible, you know, on on decentral exchange, just because they become too expensive. This is also true for centralized changes, right? If you want to take out your 10% of the order book, that’s going to cost you a lot of money as a trade, right? So this idea of concentrated basically said, well, let’s quickly treat it not uniformly, you know, for all exchange rates, because you know, you know, trades that change exchange rates or more exchange rates, quite a lot are not going to happen in reality, right? Let’s concentrate. Trade humidity in the relevant range, right somewhere around the current exchange rate, right? We’re going to support those trades in a really good way, right, with deep liquidity, with the hope that large trades are not going to appear because those large trades are not going to be supported. So that really increased, many cases, the efficiency of liquidity provision by a lot, and improved in the terms of trading, you know, by by a significant amount for traders. And now uniswa is actually coming out with the next version of their protocol, before the fourth version, that is actually going to be quite interesting, because it allows to do many more things. It allows so called hooks. So hooks is basically additional smart contracts attached to the liquidity pool that define certain actions that the pool is going to do before, during or after a trade. Think about a situation, for example, where you know a trade changes the price, the exchange rate between the two assets in such a way that the current consider liquidity is not going to be adequate anymore to support trades, right? So the pool might define reallocation of liquidity in such a way that will support future trades as a result of an existing so before is not really active yet. It’s coming out, I believe this or next month, but this is going to, I believe, spur additional wave of innovation in defi or desks. Let’s go back to virtual swap and what you know we tried to bring to the table, right? So I kind of discussed very briefly the fact that liquidity in on Dex is often is not allocated in an efficient way, right? And this is actually an important point, because this is a big problem that currently, up to this point, actually prevents kind of the access to from from from really achieving a big success, right? Basically, from overtaking centralized exchanges, right? That has not happened yet. The reason is that it is very difficult to provide liquidity, you know, for all necessary trades, right, just because there’s a lot of assets right? Right now, if you go to coin market cap, which is, you know, the biggest aggregator of crypto data, there are 1000s, right, 678, 1000 of different assets, right, that are listed on coin market cap, and there are many more that are not listed. So if think about, you know, trading between one asset, one token, into another. Chances are that, despite the fact that it’s possible to establish any type of liquidity pool, it’s possible to concentrate liquidity. In practice, there are just too many asset combinations, right, for those pools to exist, right? So if there is, you know, 8000 crypto assets, right? You know, if you think about the number of pairs, well, it’s 8000 squared over two. That’s a huge number, right? You’re never going to have, you know, liquidity for, you know, for those trade Now, granted, most of theirs, those potential, theoretical pairs are never traded, right? So you don’t really need liquidity, right? But still, there are a lot of assets which are traded, right, but for which there is no direct liquidity, right, even now, right, with all the available technology, right? Because I know providing liquidity into pool, into the pool is a completed permission that’s connected, right? Anybody can do it, and we can establish a pool. Anybody can add, you know, money to the pool, right? People are only going to do it if it’s worth their while, right? If the returns they’re going to be getting are going to be offsetting the risks that they’re going to take in the day, right? And for many assets, it’s not the case, right? So you know, if there is, you know, some trading expected in a pair of assets. So think you know, whatever chain link against, you know, Matic, right? You know, which is the native token of olivine chain. There are going to be straight some trades like this, but probably not enough to make it worthwhile for liquidity providers to provide sufficient liquidity, right? And so, you know, despite the fact that the theoretical possibility exists in practice, right? People are still going to do two trades, right? They’re going to trade, you know, from chain link to some asset you know, with which you know, the pool of tailor exists, for example, ether or stable coin, USDC, or anything else, right? And then the others trade into the asset that they really want, right? So for the most part, the problem of insufficient liquidity is not solved, right? And it actually cannot really be solved, right, for the reasons we discussed, right? There is just not. There’s too many assets and too too little money in the pool, right? So. So that is basically the problem that, you know, I identified in, I guess, 2021 when I started looking very carefully into this, doing research on decentralized changes, right? It isn’t the problem that they’re trying to solve, right? And that basically what led to to virtual, right? So let me tell you, know, very briefly about our way to address this problem, and, by the way, before the problem, right? Just just the size of the problem, right? So those trades that involve what we call triangular trading, right? So trading, you know, through multiple pools. That’s about 30% of all trades on, you know, most important blockchain, right? Ethereum, Polygon, arbitrary and so forth. Right? About 30% of the trades are of this kind, right? So this is kind of the market that we’re trying to address, right? And, you know, you mentioned initially, kind of smaller coins, right, or smaller assets, right? So this problem is there in smaller assets, right? Because if you want to trade, you know, ether against USDC, you’re going to be fine, right? There’s enough liquidity, enough direct liquidity. That’s not our place, right? Our place is rates that I mentioned, right, which may be smaller asset, right? When I say smaller, it’s basically anything outside of top five, right? So when you go outside of top five or six on a given blockchain, that’s where the problem becomes, becomes acute. So how do we do this, right? So we basically came up with a different architecture, right, different structure of liquidity pools, right? So standard liquidity pools involve two assets. Ours are a little bit more involved. So in addition to the two assets right that we also have, we have so called reserves, right? So think about a pool that is, you know, two main assets, plus you know, some reserves, right? And you know, a good way to think about those preserves initially is basically like, say, deposit boxes that are initially empty, right? So the pool is established in exactly the same way as normal pool, right? So think about a pool of whatever ether and USDC that can accept reserves into those initially empty sale deposit boxes. So let’s say that you want to to buy, you know, ether, right? And to pay with it, with the Matic token, right, with the polygon top. Now, in a normal kind of situation, right, in the normal tax right, you’d have to do those two trades. Right triangle. Virtuous. Of what you can do is you can deposit the asset that you have into the reserve of the pool. Right, ether USDC are going to the to deposit the reserve of Matic polygon into the reserve of, you know, either USDC pool, and you’re going to take from the pool the asset that you want, right, the asset that you need. For example, ether, right? Now, of course, the question is, you know, what is the, what are the terms of trade, right? You know, how much do you need to deposit in order to take even amount of the asset from the pool? Now, you know, this historical trade are defined on purchase of via so called virtual liquidity pools. Right? Virtual liquidity pools are, you know, a result of, basically triangulation, right, of of different pools that exist virtual so they define a pool, sorry, a trading curve, you know, over which the trader can trade, right? Now, this trading curve is not a real trading curve, right? It’s not like, you know, he’s going to deposit the assets in the pool and take some other assets from the pool. This virtual trading basically, is defined by trading into the reserves, right? So you’re going to, you know, deposit your asset to the reserve, and take one of the kind of main, one of the main assets in the for a trader, it doesn’t really matter, right? It’s a seamless experience, right? You as a trader don’t really care whether you trading by reserves or by kind of normal kind of two effort trading, right? What you care about is getting the most, what’s called the mount out, right? The largest amount of the other asset that you want for a given amount of assets that you are trading now, this is not the end of the story, right? So let’s say that you perform this trade, the pool accepted those, those assets into the reserve, right? There is a problem, though, right? The liquidity provider right now is now exposed to the risk of holding some other asset in the pool, and that is not a risk that is desirable, right? So if I provided liquidity into either USDC pool, I’m okay exposing myself to the risk of those two assets, but I might not be. Exposing myself to the risk of others. Now, what do we do? What do we do with it? There are several ways in which we solve this problem. And then after I describe the ways we address this problem, right, I’m going to go to talk a little bit about the advantage of what we’re doing. So first of all, we don’t allow all of the possible assets into into the reserves, right? So every pool comes with a white list of tokens that can go into the reserves, right? Think about, for example, top 100 assets on a given blockchain. So this comes back to your initial point. Right? We solved the problem for smaller assets, not for the smallest ones, because the smallest ones are super risky, right? We don’t want to expose the liquidity provider to this type of risk. But in practical terms, you know, 95% of trading in smaller assets are, you know, it’s taking place in assets you know that are the top 100, right? So, I mean, the other ones are really not that important. Secondly, we basically limit the size of the reserves, right? We basically say that the overall value of all the assets that sit in the reserves, right? And remember, these are assets that are different in the two main assets in the pool, right? So the size of the result reserves overall cannot exceed 2% of the value of the pool. Once it hits 2% the pool basically closes itself to this type of reserve trading, right? And basically limits the amount of reserves, right? So there is some risk, but it’s not very, you know, very big. It’s up to 2% but most importantly, right? The way we, you know this risk is addressed, right? Is by a lever system of exchanging reserves between pools. Right? Think about a scenario where, you know, I have deposited money into ether, USDC pool that now has Matic reserves another pool right is, for example, Matic against ether that has USDC reserves, right, that accumulated the result of some other trade. Okay. Now, whatever this happens, right, those two pools can exchange the reserves between themselves, right, sending Matic to the pool Where it is one of the main assets, and sending USDC into my pool Where it is one of the two main assets. Now this happens without any price impact. This happens without any pool fee, right? It’s just exchange between two pools, just a little bit of gas that needs to be paid. But you know, this is, this is not a large number, usually, and that basically means that every time it’s possible, we kind of try to reduce the number of reserves in all possible pools to the lowest level possible, ideally to zero, right? We don’t want those reserves right. So those reserves are just kind of a place that allows trading, right? We don’t really like them. We’ve done, obviously, tons of simulations at this point. We have real world kind of trading data, those reserves are typically small, right? So, you know, this is not a risk that is that is large in the liquidity providers. But what is that do? It basically eliminates, in many cases, the need for the triangular trading right, and reduces the costs of trading to a single kind of type of cost, right? You still need to pay the pool fee, you still need to pay gas. You still have price impact, but only once, all right, and not multiple times. And so if you think about kind of a more kind of global picture, right, the whole ecosystem of different decentralized exchanges, and there many, there are dozens of Dexs, usually on every blockchain. The way this market is organized is that most often people are going to trade through so called aggregators, right? So think about basically the Expedia right of the dex market, right? Instead of kind of going and buying your air ticket in a particular airline, you’re going to go to Expedia and try to see where it’s cheapest. You know, what is the cheapest? In a way, to go to a particular place, and accurate, there’s a similar thing, right? It basically takes a given trade, it looks up on all the data on different decentralized exchanges, all the pools, you know, all the liquidity, and tries to compute the optimal route for the spring, right? Basically, you know, let’s say you want to swap, you know, $100 worth of stable coin into into it, right? You know, the aggregator is going to go and trade and say, well, $20 are going to be sent to this pool on this decks, and $15 is going to be sent to a different pool in different days, with an objective of maximizing your overall amount out now coming back to virtual spot, since our trading is more efficient, right? Because, you know, we don’t have to pay the multiple costs twice, right, that basically means that a disproportionate, you know, fraction of a trade is going to be sent our way, as opposed to to a. Other kind of to other debts, right? So in a sense, that means that, you know, from the liquidity providers perspective, you know, their liquidity is going to be working over time, right? There’s going to be kind of a bigger kind of bang for the Bucha, right? And that means that, in a sense, every trade carries some fee, proportional fee, the returns to liquidity providers is also going to be larger and kind of the liquidity provision to merge as well. In principle, maybe a better kind of proposition for liquidity providers than providing liquidity on other deaths, right? So that’s kind of the basics of what we do. Gotcha,

Gene Tunny  35:35

okay, geez, there’s a lot, a lot there a few, a few terms I want to go over. So you talk about gas fees. So I remember you defined them. I just just wanted to make sure I heard that right, and I looked it up and checked it is gas. So that’s a new one. I’ll have to have another look at at that. And then you mentioned ERC 20, and that, that means ERC

Evgeny Lyandres  36:01

20 is basically just a technical term for particular crypto assets, right? You know, having certain characteristics, right, that are compatible, you know, with other assets on a given block, right? You know, there’s nothing deep there. It’s just certain conditions that need to be specified, but you need to be kind of fulfilled by an asset to to be classified as ERC 20, right? I don’t want to go deeper into this. It’s just that is not a very kind of interesting part. The gas fee is actually more interesting, right? So, you know, any blockchain right, is basically maintained in decentralized fashion, right? So blockchain has nodes, right? Nodes are basically computers who record, maintain and update the state of the blockchain, right? But those nodes need to be compensated. They’re different and, and, and, you know, those nodes need to agree among themselves about the contents of the blockchain, right? So we need to make sure that blockchain, which is a database, distributed database, you know, is the same across all nodes of the of the block, right? There are multiple ways to achieve this, so called consensus between nodes. You know, of course, you know, everybody heard about proof of work. You know, which is, you know, what Bitcoin uses for proof of state, which is what most other blockchains use at this point. But the point is that, you know, the nodes on on a blockchain, any blockchain, need to be compensated for what they do, right? So you know, you’re not going to kind of run this, you know, Blockchain software for no reason, right? You’re only going to do it if there is something for you and and that’s why, you know, we need to somehow generate some revenue for the for the nodes of the blockchain that maintain it, right? And this revenue typically is generated by those gas fees, which are basically fees attached to, you know, by people who want to perform transactions on a blockchain, right? And those fees, you know, you know, I’m simplifying a lot, but those fees basically are paid by the people making transactions to people who maintain the blockchain. Gotcha, do

Gene Tunny  38:13

you know why it’s called gas? Why is it? I

Evgeny Lyandres  38:16

mean, it’s, it’s like, it’s like, gas in a car, right? That’s more, makes the makes the blockchain go.

Gene Tunny  38:21

Okay, that’s that’s as good as his explanation as any. Is just wondering if there was some particular reason, actually,

Evgeny Lyandres  38:29

in fact, there may be others. This is the one that I heard, and this seems reasonable to me, so I didn’t explore further.

Gene Tunny  38:38

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

Female speaker  38:44

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Gene Tunny  39:13

now back to the show. Okay, so just want to go back to just the what I’ve read about virtue swap, so you get about 50% cost reductions and then 400% higher returns for liquidity providers. So this is what you’re what you’re claiming. Yeah, right, got

Evgeny Lyandres  39:38

it very much depends on the parameters of the, you know, the pool, gotcha, yeah,

Gene Tunny  39:44

it has a TVL of $3 million What do you mean by that? What’s TVL stand for?

Evgeny Lyandres  39:51

Right? So, actually, the number is smaller right now. Some, some rough kind of periods of market. The market is improving right now, so hopefully it’s going to. Bigger, but TBL stands for Total value locked. Total value locked is the amount of liquidity that people provided into the into the protocol, right? So, so you know, any exchange be centralized or decentralized, relies on liquidity, right? And basically assets that some other people have deposited into the into the exchange rate in order to facilitate trading, right? So the bigger the liquidity, the more trades are possible, and the better terms at which trades are possible, right? So, so for every decentralized exchange is striving to increase the liquidity that’s deposited into it,

Gene Tunny  40:47

yeah, gotcha. Okay, so it’s still fairly, I mean, it is a niche product. So you’ve said that you’ve carved out a significant niche, right? Okay, and you’ve partnered with defi leaders like uni Zen, open ocean, odos, lifik, what are those companies doing? What partnerships have you developed?

Evgeny Lyandres  41:09

Right? So most of the names that you mentioned are basically aggregators, right? So we mentioned aggregators is basically the from the starting point of most trades, right, the experience of this office of this market, right? So any decentralized exchange wants to be, wants to eat, to be integrated by by as many aggregators as as possible, right? Because, basically, you know, like an airline, right? The airline wants to be on Expedia. It wants to be on Kayak, it wants to be on Skyscanner, right? Wants to be on every aggregator that people go to to kind of search for for air tickets, right? Any decks wants to be part of, and all aggregators that people go to submit their trades, right? So at this point, we are, in fact, have been. We have been integrated by most of the of the important aggregators. So I’m quite, quite happy about that. And you know, this is not trivial, right? Because integration takes time, right? So you know, the aggregator needs to basically go over the smart contracts of of the decks, right, and make sure they’re compatible with what they’re doing. Right? Our smart contracts are quite different from those of existing or other desks, right? We are not a so called fork of another protocol, right? We just didn’t just take another product code and make some small tweaks to, right? You know, we wrote everything from scratch which make, makes aggregation heavier endeavor, you know, from the or integrations and heavier endeavor from the aggregator sentiment, right? So I’m quite happy that we have been aggregated by by several, well, all basically important aggregators, right? And so that’s where the majority of trade and virtue are coming from, right? So, you know, we have our own website, our own trading app, our own UI, UX. People can go there and trade. Most people do that, you know, otherwise, right? They go to an aggregator, and the aggregator computes, you know, which part of the trade it makes sense to do on versions of, right? And we get, you know, those bits and pieces of trades immediately.

Gene Tunny  43:25

Yeah, gotcha. Okay, that makes sense, yeah. So it sounds like you’ve, you’ve found a real niche there and in the market. And, yeah, I mean, it’s, it all sounds. I mean, I think I was five years too old to have got into crypto, perhaps, but yeah, I really haven’t got into it in a big way, but I have a lot of guests. I’m having, increasingly, having guests come on the show talk about crypto and web three. It’s all, all very, all very fascinating. So it’s something I’ve still got to learn a lot more about. Can I ask you, where do you think all of this is going? Because you mentioned the huge number of coins there are out there. I mean, a lot of these coins. I mean, you have to wonder about the future of them. I mean, where’s, what’s the future of crypto? Where do you think this is all headed? I mean, will crypto become, you know, will people start using it as a currency, as a medium of exchange? Will all of these coins survive? What’s the future look like? What do you see is the future of crypto of yeah, please tell me. I’m fascinated. I’d like to know what the, what’s the, what’s the use case for all of this?

Evgeny Lyandres  44:40

Yes. So then this is a bunch of very loaded question in one. So let me try to kind of, you know, to the extent possible. So, so crypto, obviously is a new industry, right? And up to not too long ago, it was a real kind of wild west, right? So you might remember the time. Time, a few years back, of initial coin offerings, or ICOs, right? Where basically projects were raising money for something that they intended to do in the future, and there were tons of scams in this market. I mean, this market was very far from clean, coming back to the lack of regulation. Right now, ICOs are dead at this point, but the market is still not very well regulated, right? So different countries approach regulation of crypto in very different ways. You know, I’m sure that, you know, with the with the outcome the US election, we’re going to have big changes in the regulation, in the US of the crypto market, to predict in what way, but I’m sure that there’s, I mean, it’s going to be easier to do to the business, you know, in crypto, that I think that’s that’s pretty clear, but regulation is still still not there, right? And so there are several uses in of crypto in general, right? So you mentioned payments, right? So payment is kind of the first thing that the people thought about and that basically, if you read the Bitcoin white paper, right, it basically says that, you know, Bitcoin was supposed to become a medium of exchange, right? For many reasons, it didn’t happen. One big reason is that just the throughput of this, of this system, is very low, right? So you can only do very few Bitcoin transaction in every second, right? So it’s incomparable. Orders of magnitude is smaller than, you know, transaction Visa or MasterCard or suite or whatever. So they didn’t happen. But it doesn’t mean that it’s not possible, right? So, you know, it is definitely possible to transact in crypto. Stable coins are very convenient for it. Central Bank digital currencies that many central banks you know around the world are working on are going to, in principle, replace kind of traditional, traditional money. So that’s, that’s good, that’s what. That’s one kind of use case, clear use case of crypto is used, you know, just for Allah says about this use case, right, even now, right? So, crypto is used a lot in places where it’s hard to do business or make transactions in fiat currencies, right? So think about kind of countries or organizations under sanctions, right? You know, think, think about places with capital controls, right? So crypto is useful, or, you know, is a potential replacement for for fiat money, whether it’s good or bad. I mean, that’s that’s irrelevant. It’s but it’s definitely possible. The second use of crypto is, basically, you know, a as a fuel behind different types of finance applications, right? So pretty much any protocol in decentralized finance, right? So let’s take uniswap as an example. Since we mentioned that before, has its own token, right, its own currency, its own asset that the use that is used for incentivizing people towards a certain behavior, right? So think about a protocol. Well, we do it in virtual right? We basically want to try to influence where the liquidity providers are putting their liquidity right. Because, you know, we have developed, you know, a system of optimization of liquidity, right? And, you know, we think that we know better than a typical liquidity provider where the money is going to be, you know, bring the biggest, you know, benefit about right now, we did not force people to do anything. It’s their money, right? They’re going to put their money where they want to, but we can try to influence them, and the way we influence them, and, you know, many other protocols do it as well, right? It’s basically trying to give them extra rewards for doing certain things, right? In our case, you know, if I want a person or people to, you know, to put their liquidity in a particular place, well, I’m going to say, Well, if you do this, I’m going to give you something extra, right? This extra is going to be the token of my own protocol, right? So, in addition to the fees that people are going to generate, you know, as a result of liquidity provision, they’re also going to get something extra, which is the protocol token, right? So, and you know, protocol tokens, as most, most defi protocols, have their own tokens, right? And you know that is mainly used for for this purpose, and that basically defines kind of the valuation of this token, right? Is derived from the utility of the protocol, right? So uniswap token is very valuable because a lot of people trade via virtue purchase or generates a lot of fees, you know, for the liquidity providers, right? And that’s why uniswap tokens currently worth, you know, several billion dollars. Other tokens are worse less, right? It all kind of depends on, on, on whether and to what extent the protocol gives utility to to its users. Most tokens that are currently traded or, you know, registered on coin Mar. Cap are worthless, if you ask me, right? So, you know, I expect that many of them, the vast majority of them, probably including different mean points, are eventually going to go down to zero, right? So, you know, mean points is a definition of an asset that does not have any, you know, inherent utility, right? It’s, you know, it’s price, basically, is a function of the temporal demand that that exists, right? You know, there is nothing, nothing kind of behind it now. So if you think about the 1000s of assets that are currently, you know, out there in my prediction is most of them are going to go down, to go down to zero. And I don’t think many people are going to argue with that, but I think what’s really important, right? And it’s probably more important than, than the than the use cases that we discussed, is the possibility to to tokenize real world assets, right? So think about a Tesla stock, right? A Tesla stock is currently trading on, I believe, NASDAQ, but it’s trading in one place, okay? And in order to trade, you have to go to a particular exchange, okay, and play by the exchanges rules, right, including be limited to the liquidity on that particular exchange. Now think about a situation where Tesla stock is tokenized, and what it means is is the following, I buy a certain number of Tesla stocks, right? I put it in some custody, right, of the reputable custodian, right? And I issue Tesla tokens, right? Tesla tokens that are compatible with, you know, trading, or, you know, any activity on a blockchain, right? Those tokens are going to be one to one backed by Tesla stocks, you know, sit somewhere in a safe deposit box right now. Those social tokens, you know, can be traded on dexes, okay, they can be traded with all the advantages of the sophisticated kind of trading technologies that we discussed, right? And future technologies that are going to be not to be developed, right? Because this, this market is developing very fast and kind of and progressing very fast, right? If you think this possible, definitely right. What is currently not really possible, right, is this whole issue of custody, right? So regulation, right, is not there yet to, kind of to define, you know, what a sufficient kind of efficiently secured custody is, right, in order to allow this type of activity, right? I know the lawyer, right. I don’t know how the optimal regulation should look like, but imagine for a second that there is regulation that allows and makes this activity relatively easy, right? Once this is possible, the sky is the limit, right? So, so basically, think of any asset, you know, stocks, bonds, real estate, precious metals, you know, energy, anything can be tokenized, right? And this is the point where I think this defy decentralized finance. Markets, including decentralized exchanges, are basically going to explode. Because right now, this market is limited to a very particular, very niche type of assets, which is crypto. Crypto is still, you know, a tiny asset plus relative to stocks and bonds, right? So currently, the market cap of all of crypto is $2.7 trillion if you think about stocks, global stocks, about 100 trillion dollars, slightly more bonds, similar numbers. So, so crypto is small, right? But once you kind of allow trading in other assets, right, stocks, Bond, real estate, right? That could increase the importance of this market, but by at least two orders of banking, right? And so, so this is basically the reason why I think this market is important, right? It’s not because of its importance, right? Now, I mean, it’s not there, right? It’s because of the potential, which, I think is there, right? And potential to kind of revolutionize many of the financial technologies that that we’re familiar with,

Gene Tunny  54:13

yeah? Look, I think that’s a very good answer. No. That’s yeah, I actually see the potential there, particularly if you can have like that can give like you could have people getting tokens here for Australian government bonds, for example, that are typically not there’s no retail Australian government bond offering at the moment, but this is a way that you could get, you could get that exposure With the tokenization. I think that’s yeah. That’s fascinating, yeah. The whole regulation side of things is yeah, that that needs to be sorted out. I know that in Australia, the Treasury is supposed to have been looking at it, but it’s just taking them forever to come up with a regulatory framework. Which is, you. Which is rather disappointing, right? Okay, well, I’ll have to have a, I’ll have to have a closer look at all of that. Yeah, it looks like we’re coming up to time. I mean, yes, lots of fascinating things to talk about. I mean, I’ve got a lot, a lot to learn. There were some really, there’s some really technical concepts in there, and it looks like what you’ve done is a very clever way to to solve this, this problem of these thin markets, to actually make sure there’s enough liquidity there. So I think that’s for these trades that’s very good. Is there anything? Anything else we should cover before we wrap up? Kenny

Evgeny Lyandres  55:42

talked about, kind of the whole market. We talked a little bit about Virtu sock. I do want to mention that kind of this, this financial technology is sort of not the only thing we’re doing right. Another kind of aspect or facet of our productivity is, is basically trying to optimize liquidity allocation, right? Basically trying to make liquidity as useful as possible, right? You know, in the presence of the financial technologies we’ve discussed, right? So, you know, I briefly mentioned this, right? We have this, the system that you know, the fancy word, word for it right now is AI agent, right? It’s basically an AI based system that, you know, take some data from outside and make some decisions. So in our case, it our, our AI agent is called Minerva, and Minerva basically has two, two sides to it, right? So it first takes lots of data, right, concurrent, constantly updated data from, you know, from the markets, and tries to predict the distribution of future trades. Right? For example, Tunny speak, right? And, you know, we want to know right, how many trades are going to be, you know, Bitcoin against USDC, and you know any other pair that you can think of, right? So we build this distribution of expected trades, right? And then, you know, you know, conditional this distribution, we say, well, let’s say that, you know, we have a certain number of of tokens that we can give out to our liquidity providers as an incentive for what they’re doing. Let’s say that our liquidity providers require a certain rate of return on different pools, right? We also have estimates of that. What is the best way to distribute liquidity across pools in order to maximize some sort of objective function, right? And this objective hash function can be either the overall returns liquidity providers or overall volume of trading for versions, or, you know, some combination of the two or more, something else. Okay, so the system basically tells us, you know how to distribute our rewards and our token right to liquidity providers to maximize something. And this basically the combination of the financial technology and this data science, right? Is what brings to the up to 400% increased returns to liquidity provider, right? So it’s not just financial technology, it’s also basically pretty sophisticated, I think optimization that we do to further improve, you know, the what liquidity providers earn,

Gene Tunny  58:28

right? Okay, okay, so, Minerva, I like it. That’s excellent. Oh no, we better wrap up there. Kenny, that’s this buddy for me to absorb already. And I think, yeah, I think your explanation of the potential for for crypto, with tokenization, I think that’s, yeah, I think that’s that’s worth considering. So I’ve got to think about that some more. Again. Thanks so much for your time. It’s great that you could, you could join me and, yeah, really value your insights and and learning, it’s good for me to learn and get exposure to this, and I think it’ll be of great interest to listeners. So again. Afghani, thanks so much for your time. I really appreciate it.

Evgeny Lyandres  59:12

Thank you very much for the kind words and for having me. And yeah, it was a great chat, I

Gene Tunny  59:16

think, very good. Thanks. Evgeny, all right.

Evgeny Lyandres  59:19

Thank you very much,

Gene Tunny  59:22

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 economics explored.com or a voicemail via speak pipe. 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. You.

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Podcast episode

Trump 2.0 w/ Top Wisconsin Door Knocker & Economist Darren Brady Nelson – EP261

Economist and returning guest Darren Brady Nelson shares insights from his time as the top door-knocker for the Trump campaign in the battleground state of Wisconsin. He explains why Trump’s messages on inflation, immigration, and cultural issues resonated with voters. He breaks down Trump’s economic vision for the second term, including plans for Elon Musk to lead a government reorganisation. Show host Gene Tunny and Darren discuss the prospects for repairing the US budget and the possible economic implications of Trump’s fiscal and trade policies. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

Here is a clip from the video recording on Elon Musk Reimagining Government:

Timestamps for EP261

  • Introduction (0:00)
  • Darren’s experience as Trump’s top doorknocker in Wisconsin (3:00)
  • Why Trump won (11:40)
  • Illegal immigration (15:05)
  • Trump and monetary policy (27:30)
  • Elon Musk and government efficiency (33:00)
  • Trump and trade (48:15)
  • Final Thoughts (57:00)

Links relevant to the conversation

Bio for Darren Brady Nelson available here:

https://economicsexplored.com/regular-guests/

Statistics on illegal immigration in the US:

https://cmsny.org/us-undocumented-population-increased-in-july-2023-warren-090624/

https://lamborn.house.gov/issues/illegal-immigration

Stanford University briefing on China’s Use of Unofficial Trade Barriers in the U.S.-China Trade War:

https://sccei.fsi.stanford.edu/china-briefs/chinas-use-unofficial-trade-barriers-us-china-trade-war

Relevant previous episodes:

Is Uncle Sam Running a Ponzi Scheme with the National Debt? w/ Dr Dan Mitchell – EP235 – https://economicsexplored.com/2024/04/17/is-uncle-sam-running-a-ponzi-scheme-with-the-national-debt-w-dr-dan-mitchell-ep235/

US infrastructure: lessons from Australia, with Darren Brady Nelson – https://dashboard.simplecast.com/accounts/a4c530a8-52a1-4290-95a3-19c00e80602c/shows/a3789cf6-a26b-464a-ab7f-551db331ee09/episodes/6134a946-eab5-4a0c-bbe3-dfae5a6bf200/ 

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Transcript: Trump 2.0 w/ Top Wisconsin Door Knocker & Economist Darren Brady Nelson – EP261

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  00:05

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. Darren Brady Nelson, welcome back to the program.

Darren Brady Nelson  00:38

Thank you. Good to see you again.

Gene Tunny  00:39

Good to see you again, Darren, you’ve been busy these these last few weeks, so you’ve been campaigning in Wisconsin and keen to chat with you about the result, obviously, the Trump victory. And yeah, there’s been a lot of commentary about it. Lots of people surprised. I mean, you’re someone who probably isn’t surprised. But to begin with, I’d like to ask, yeah, what

Darren Brady Nelson  01:07

was your How did you guess that I wasn’t surprised? Yeah,

Gene Tunny  01:11

with your Make America Great Again. Cab, very good. So what was the experience like for you? What was it like working for the campaign? Can you tell us about that place.

Darren Brady Nelson  01:22

Yeah, well, as as you know, you know, and I guess anybody who’s watched this show before and seen me, I’m an economist like you, so, you know, the past couple of months, though, I’ve just been, you know, just a grassroots door knocker, you know, I can tell you more about how that happened, but so that’s what I’ve been doing in Milwaukee behind me. That’s kind of what the the little sort of setting in the background is, is a view of Milwaukee. I am actually in Milwaukee. It’s not just a computer hologram in the back. And, yeah, that’s, you know, what I’ve been doing for the past two months, you know, trying to do my part and help Trump win Wisconsin. As you may or may not know, you know, whoever actually gets one more vote in the state of Wisconsin wins all the electoral votes for Wisconsin. And that’s the way it works for most states, except for, you know, I think Maine and Nebraska are almost that, but not quite that they have, you know, kind of they split up the state, their states a little bit. So, you know, no one, you know, sometimes you see this commentary where, you know, be it CNN or Fox, and they’ll, they’ll break it down by like, county or something like that. You know, that’s interesting, and that’s kind of useful information, but it’s not actually no one wins Milwaukee County or anything like that as such. So, but you know, you know, the more obviously votes you can get out for Trump in Milwaukee County, the better. Helps the state total. And that’s what I’ve been doing. And interesting enough, you know, I actually finished as the number one door knocker in Wisconsin. I knocked on more doors than anybody else in the state on behalf of Trump. I don’t, can’t speak for Kamala side, but for Trump’s side anyway. Okay,

Gene Tunny  03:01

did you have an unfair advantage because you’re in downtown Milwaukee, you’re in a high density area?

Darren Brady Nelson  03:08

No, actually, I had the opposite. I had the disadvantage because everywhere that was actually within walking distance from me was was secured apartment blocks I couldn’t get into, right? Yeah, so full of, you know, sort of high rise hipsters. So look, I got to thank, you know, some of my colleagues who, and actually some church friends too, who actually would drive me out to what they call walkbooks. And both sides kind of do a very similar approach. We have an app. We have, like, you know, 100 or 100, 150 doors to knock on that day, and the app just leads us to those doors. So both sides are trying to target our voters. We’re trying to target mainly low propensity voters. So like, you know, someone who is a republic, who’s voted at some stage right, for president or something as a Republican, but they don’t do it all the time, right? So they’re not necessarily lazy, although sometimes they can be. So we just try to get out, you know, our party’s voters, but the databases aren’t great for either parties. And you get, you get a lot from the other side. You get a lot of under, you know, at least some undecided people. So it certainly makes for an interesting, you know, time when you get out there and you you think, or you hope, you’re knocking on a Republicans door, but you get a dirt Democrat, or you get it undecided, which is kind of interesting, yeah, yeah,

Gene Tunny  04:31

okay. Like to Yeah. Before we go on to how, I’m interested in how some of those conversations when, but first we you, were you employed by a Super PAC? Was it a super PAC that employed you? I mean, I, I’m not fully familiar with the system over there. Could you tell us about that, please?

Darren Brady Nelson  04:48

Yeah, both, both parties really rely on these packs, the political action committees, so they’re under the tax law. You know they’re different from, say, a c3 which is a three. Think Tank, you know, where you get a tax exemption all that there are c4 so C threes can’t be political. I mean, there’s some wiggle room. But, you know, you don’t see the Heritage Foundation or or Cato saying, you know, vote for candidate A, you know, sort of thing c4 is, can literally do that. So, so I was working for kind of an unusual arrangement. I was working jointly for 2c fours at the same time, which was turning point action, which is ultimately run by Charlie Kirk and America pack, which is ultimately run by Elon Musk,

Gene Tunny  05:36

right. Okay, so, I mean, you know, clearly Elon Musk has had a huge influence on the campaign, and will have a huge influence on the administration, it appears, at this stage, unless he has some falling out with Trump, which isn’t beyond the realms of possibility. This is the mood, just hypothesis. We can talk about that a bit later, and what Musk has role in the administration could be but so what

Darren Brady Nelson  06:01

was, to be honest, though, the people who fell out where Trump were kind of like backstabbers and people who weren’t really Trump’s in the first place, there might have been the odd exception, but, you know, and I think there was, you know, like, Well, that’s true. I’d say 8020 was people that shouldn’t even been this administration in the first

Gene Tunny  06:20

place. Yeah, yeah, that’s probably right, if you think about what Trump’s views are, and where he comes from, and the types of like he got sort of traditional repub people you’d see in, say, the Bush administration, like, either the Bucha administrations, right? And that probably didn’t suit Trump, whereas, yeah, Musk is, yeah.

Darren Brady Nelson  06:40

Well, to be honest, people in the Bush administration, one cert, the when, you know, wouldn’t actually be go, well, in a Reagan Administration either. So put that context in there. So it wasn’t just Trump, you know, the Neo cons, those sort of, Oh yeah,

Gene Tunny  06:53

yeah, yeah, very, yeah. Good point. Okay. And what would, how did the conversations on the ground go. I mean, you mentioned that where you were in Milwaukee, or parts of Milwaukee there, you know, it’s more for one of a better term, hipster, more like inner city, you know, new farm here in Brisbane, or, yep, so how did it or fortitude Valley? How did it go? How did you how did those conversations go? Were people generally receptive? Like we get the impression over here that there’s a, you know, there’s huge conflict over politics in the States, and people are just aggressive. No one wants to talk with people from the other side. How did it how did you feel on the ground? How did it all go?

Darren Brady Nelson  07:37

Look, that’s actually largely correct, sadly. But put it into other contexts. I was going throughout Milwaukee County, which is, you know, more than just walkie city. And even within Milwaukee city, the hipster areas don’t account for most of the city. So there’s, there’s heaps of, you know, working class and middle class sort of areas where you’re, you know, the more working class it got, the more trumpet got, right, and the more middle class, but then starting to get away from the city, also, the more trumpet got. But what surprise, you know, that wasn’t obviously surprising, although it’s still kind of to some extent surprised me, particularly amongst migrant groups. Boy, they were just like, even, on average, more Trumpy, you know, than than you know, like a white suburbanite would be, or, you know, I didn’t really go in the rural areas, so you know, that would probably be even more sort of Trump again. But what all you know, what surprised me was, you know, even some of these hipster neighborhoods, or these, you know, quite avant garde sort of suburbs, you know, you mentioned, kind of like fortitude Valley. But I guess you could have mentioned a new farm, but you could have mentioned, oh, what’s the place we went to dinner in? What’s that, you know, in South Yeah, West End. You know, there’s kind of West End type suburbs here, obviously, in Milwaukee as well. So there you wouldn’t, obviously get a lot of Trump, but then you would, but there would be some, you know, like there was, you know, to me, I went in thinking, I’m not going to meet one person, you know, that’s going to be going for Trump in a suburb like that. And you’d actually see the huge Trump signs here and there, and those sort of sub suburbs, which surprised me. And so the conversations, you know, there was certainly, you know, look, overall, the Democrats I came across, you know, were at least somewhat polite, which to say that there was somewhat polite. So my stick was basically, you know, we were getting out the vote for Trump. So we weren’t even getting out the vote for Republican Senate, Senate candidates or Congress candidates, much less state level stuff, right? So we were very laser focused on Trump. That was all our mandate was. There are other groups who are doing something broader. Sure. So my shtick was basically, you know, I knock on a door. Someone answers, you know, I smile. I politely say, Hello, I’m getting out the vote for Trump. Are you considering voting for Trump? That’s it. That was my whole shtick. And usually, even before I got to the end of that, I could almost see in their eyes. They were like, you know, kind of light up, like happy, or whether, you know, sort of staying, or anger was it was in their eyes, I usually got from the Democrats, kind of, at least a kind of semi polite disdain. They would often say, Absolutely not. They make they may have some pleasantries at the end, like goodbye, or they might just simply slam the door, right, yeah. But sadly, I got some, like, really mean Democrats who just would basically swear at me, yell at me, tell me getting off their property just in the wake of my point stick right? And I had like, a little badge, you know, with Trump, blah, blah, blah, and, you know, speaking to, you know, people out there who are Trump supporters in Milwaukee, it doesn’t actually go both ways. It doesn’t actually go both ways. You know, like at least 8020 when a Democrat comes up to Trump’s house, they don’t get that sort of level of hate and vitriol and return, they might kind of laugh at them, like, really? Kamala, you serious? You think? You know, there might be maybe an impolite sort of, like ribbing of them, or something like that, but it doesn’t actually go both ways. So the division shouldn’t be portrayed as though it’s equal 5050, it’s not rod

Gene Tunny  11:39

Okay, okay, I’d like to ask you about why you think Trump won, because it’s come as a great Well, I mean, it wasn’t a surprise to you, a surprise to me, and I think to many around the world, because, I mean, we got the impression that he’s upset so many constituencies as concerns about reproductive rights or access to abortion there. There are concerns about what he means for, you know, various different different groups in the community. There are concerns about just his, you know, perceived, you know, instability, I suppose, concerns he’s the fact he’s been convicted, the fact that he allegedly launched a insurgency on January 6. So you know, all of these concerns about about Trump. And so a lot of people are thinking, how on earth could he get reelected? But he was. And so the the hypotheses that have been advanced, that I’ve seen are the major issues are inflation, incumbency, the fact that the Democrats have been in and things haven’t been you know, people perceive that things haven’t been going well. I mean, there’s, there’s clearly a lot of signs of that, and then also concerns over cultural issues, about this concern about wokeness and dei What’s your take on what were the issues that really changed the situation and really meant that Trump had quite an emphatic victory after all?

Darren Brady Nelson  13:11

Look, yeah, those concerns have been basically trumped up on one side. Basically, there’s plenty of evidence to suggest all those issues you mentioned are at best, exaggerated and exaggerated, obviously for political purposes. As you know, the media is not neutral. You know, you know, be something different if there this was a world of neutral truth seeking media. And then, you know, if those, if the media was talking about those as, Oh, these are my concerns, that would probably have more weight. But as we saw it, over the course of the, you know, the the first Trump administration, I think the whole sort of, you know, the whole elitist Industrial Complex has been exposed. I think for what they are, they’re not neutral, they’re not truth seekers. They have an agenda. This guy is a big threat to them. So to get back to your kind of more tangible points, yeah, I think, you know, look, a lot of you know, sort of Trump supporters don’t buy any of that stuff you just mentioned, right? And the people in the middle are focusing on those kind of, like, bread and butter issues, you know, like, yeah, inflation has been terrible under the Biden administration, and Harris has been there the entire time, so she’s in a comment, so I’m, you know, running on as though, like, you’re going to be some change. How do you how do you do that? Like, she goes, like, you know, as you know, that famous, you know, line of hers where, you know, what would you change? And she couldn’t think of anything. So what? Okay, so you support everything Biden did, but then you’re a change so that, you know, that doesn’t add up, obviously, for people who are kind of on the fence, and interesting enough, I was surprised how many people were on the fence. You know, it just in my campaigning. It’s like, I kind of figured there’d be next to no one on the fence, either you kind of loved Trump or you hated him. And sure that. That was also my experience as well. So you’re right, cost of living, you didn’t mention illegal immigration.

Gene Tunny  15:08

That’s right, yeah, yeah, yeah, that’s the one I forgot it correct, yep,

Darren Brady Nelson  15:12

big, big issue, just for law and order, but also for things like housing prices and all that sort of stuff, too, and jobs and, you know, sort of coming in and undercutting what Americans could actually legally do, you know, like they can’t even work for those the rates that some of the legals were working for so and, you know, law and order more broadly, and the whole sort of cultural issues, but, but also how the cultural issues actually tangibly impact, you know, the people’s ability to have jobs, you know, the DEI stuff, you know you’re not meritocracy flies out the window sort of thing. And you know, so that those are all but huge issues. And the wars you know, like, you know under the Democrats, that you know, there’s just they’re either fueling the Ukraine, Russia war, which I think, or at best, they’re just not, they’re very incompetent at doing anything to, you know, what’s resolved this somehow, you know. And you know, the Hamas stuff and Hezbollah stuff took took off under their regime, in part because, you know, Iran was on its knees, you know, at the end of the Trump administration. And they just basically threw a bunch of money at them to revival, you know. So revive them for, you know, around the you know, cause trouble, not just in Israel, but, you know, as you probably well know, the Arab states are not very happy with with that, either. So you know, which is, you know, why, obviously, at the end of the end of the Trump administration was able to get the Abraham accords. You know, even if the Arabs are in love with Israel, they were, at least, you know, realizing, if nothing else, there’s a bigger threat from Iran, and from their perspective, yeah,

Gene Tunny  16:54

gotcha Okay. On immigration, I’ve heard some, some incredible numbers. I don’t know whether they’re even plausible, but are they saying there’s something like here, Trump was claiming this up to 20 million illegal immigrants in the US and and there’s going to be he’s aiming to deport a lot of the illegal immigrants. Do you think that’s even plausible, that sort of level of immigrants? Do you know, I mean, how, like, you’re mentioning that that was an issue. How do you see it on the ground? What are the impacts of it? Do you what sort of level of illegal immigration do you think is, is credible?

Darren Brady Nelson  17:31

Um, look, you know, I don’t, I don’t know for sure, the numbers, they are big though, you know, they’re that. They’re, you know, it’s not like on a level that hasn’t been seen in the US ever, you know, and it was intentional. It’s not as simple, like, oh, Kamala just dropped the ball. So anyway, putting, you know, they’ve lost their out, whether it was intentional or unintentional, the numbers are huge and they has tangible effects. I mean, our friend Tim one off has seen it personally in Denver, because that’s one of the places where, you know, if you like, sanctuary cities, where they’ve, you know, and it’s caused all sorts of law and order, sort of chaos, you know, also the drugs that come come in with it, as well, heaps of child trafficking, and then again, just the tangible stuff, like, Well, you know, you know. So we have all the these governments that make it very difficult, you know, for new housing to be built, just like in Australia. Yeah, they know. You have new people, okay, let’s say they were all fine citizens. We still have, we’re going to stick them all right. So you have all sorts of problems. And, you know, look, I, you know, from what I heard, like, I went to Trump’s rally in Milwaukee, you know, I think it was, yeah, last Friday or Saturday, I can’t remember. And the focus for deportations is going to first and foremost be the people who’ve been committing crimes in the country. And that’s very tangible to do something about that. Yeah, the numbers are big. But, you know, ice is actually quite big. They just haven’t been allowed to do their job, right? So and so they have a lot of intelligence on who these people are, where they are. I think Trump will soften his stance on the law abiding people the company. I don’t think they’re gonna give them immunity and just let them stay. But they might be come up with some arrangement, you know, that’s not like actual full on deportation, you know, they might be able to get, you know, you know, maybe there is some solution where they can maybe physically stay in the country, but, you know, but they’ll have to be a process, you know, behind it, you know, before they can actually be allowed to legally stay, maybe they could do a deal with Mexico. Because, you know, Mexico has been, you know, basically part of the problem. They’re not Mexicans coming in, but they’re the ones who’ve actually allowed them to all kind of come into the southern border. So, you know, Mexico has really got to, they’ll be under pressure to at least come up with an arrangement. You know, be it Australian Christmas Island type of arrangement or whatnot. So I think there’ll be a, certainly, a softer stance on, you know, basically law abiding illegal immigrants, but with the ones who’ve committed crimes, it’s going to be harsh, and it should be, yes, yeah,

Gene Tunny  20:18

I’ve just looked up some some stats. And yeah, it looks like it is a large number. So there’s a a report or a on the the web page of Congressman Doug lamborn from Fifth Congressional District. He’s quite quieting a figure of 17 million illegal immigrants in the US. There was a something from the Center for migration studies of New York, that it had 11.7 so a lower figure. But I mean, yeah, it’s clearly, yeah, it’s over. Looks like it’s over 10,000,010 to 20 million is probably a reasonable estimate. So yeah, really, yeah, obviously, very significant. And what does that mean for the the economic impact of it? Is it the case that the American economy does rely to a significant extent on, I mean, immigrants and illegal immigrants, people working in in agriculture or in domestic service? Do you have any thoughts on that? Darren,

Darren Brady Nelson  21:19

look, well, that, you know, that’s kind of the allegation, if you like, that, that, you know, one of the reasons, you know, the corporates, if you like, go woke, is to cover their their love of having as cheap a labor as they can kind of get a hold of, you know, inside the country, or through deals with China, where, you know, obviously in China, There’s some people who are literally slave labor there. So look, you know, that’s kind of not my area of expertise as such. But, yeah, I mean, you have those sort of numbers coming in, you know, and that’s going to sort of like, certainly put some downward pressure on at least certain categories of wages that may have not been pushed down if they didn’t come in. And, you know, which is obviously, of concern, obviously, if there’s jobs that could have been had, because the Biden administration is not, has not been a, you know, if you like, a pro market sort of government, right? So, you know, sure they’re happy to help their their corporate buddies out, but they’re not so sort of people like open up the economy to more competition and economic growth in general. So, you know, so there’s, you know, people are competing for, you know, less jobs than there would be, I suppose, if then we saw, for instance, you know, under the Trump administration, where things really did take off and people didn’t have jobs before. You know, who you know, for instance, like African Americans, who may have normally had, you know, been on welfare also, and had these jobs, you know. So I think that’s going to return as well. You know, you mentioned some of these concerns, as though, like, you know that just, it’s just completely false, as though, like, you know, Trump supporters are just a whole bunch of angry white men. That’s not at all. And I see the statistics now make it blatantly clear, you know, he really, unlike the Democrats, he really did have, if you like, a multi racial, multi cultural, multi background, multi income coalition, more, far more than the Democrats. The Democrats taking out Joe Biden is like a party on the decline. You know, they’re increasingly, you know, just some rich white ladies and and some welfare blacks, basically, and even. And they’re losing the welfare blacks, thankfully. You know, as we we’ve saw, you know, Hispanics are totally moving in the direction of Trump, as are all you know, most migrant groups, be it Indians and and Muslims too. You know, we saw that. Obviously, you know, Trump went to Michigan and spoke to Muslims. You know, the Harris campaign didn’t, and I saw that in my travels around Milwaukee when I went into these, you know, migrant neighborhoods of you know, particularly Hispanics, Indians and Muslims. Also throw in the Eastern Europeans to as you would guess, if they came from former communist countries, they were like the most rabid Trump supporters that I met along my sort of campaign trail. So it was interesting to see, you know, what kind of what I thought, you know, as an economist and a policy person, you know, dovetailing pretty well with what I saw on the ground, and actually on the ground, actually reinforcing things, if you like, even more so than I thought,

Gene Tunny  24:36

just on I want to get to Trump’s economic policies. You mentioned that you didn’t think the Biden administration was doing enough on competition policy or something along those lines. But what about Lena Khan at the FTC? Isn’t there a concern about is there a concern about her future under under the Trump administration? Because if anyone’s do it seems to be. Doing positive things in the Biden administration as her, she seems to be going after big tech. She seems to have an agenda to promote competition. Do you have any thoughts on that? Darren,

Darren Brady Nelson  25:11

none her specifically, I must admit, I haven’t really been following her. I guess I mentioned competition in the context of, you know, like the discussions we’ve had in the past on national competition policy Australia. So not like, you know, using, using the sort of, like the American equivalent of the ACCC with a big stick. I personally don’t think that’s a you know, that really makes no great difference in terms of actual, you know, like, broad sense competition in the economy. It’s basically getting government out of the way. And I think, you know, Trump doesn’t have like, a, like a, literally, a policy on competition, you know, look, I would love to, obviously, you know, get a job administration and maybe do something on that front, because I think there’s a lot of stuff, but, but it’s, it’s, it’s mainly like, you know, back in the 1990s to the early 2000s it’s government getting out of the way. It’s not government going in with a big stick to target this company or that company. I mean, okay, fine, I guess you got those laws. What’s at least use them in a more because in the US, they tend to be just politically driven. You know, they tend to go after a company that’s kind of lost political favor more so than under some legitimate, you know, sort of like anti trust reasons. So look, I don’t have any particular strong feelings on that person, and you know what should happen under the Trump administration. So I think brought more broadly, as you know, Trump may not have as an explicit a policy to get government out of the way, as like Reagan did, for instance, or even, you know, maybe even Bill Clinton eventually, you know, with his sort of joint partnership at times with Newt Gingrich, were doing that sort of stuff, even if, you know, Bill maybe wasn’t necessarily fully on board with the philosophy he certainly, you know, helped put in place those sort of policies in the in the 90s, as Reagan did in the 80s. But there’ll be some quite good people with Trump, I think, who will be looking to do that? Obviously, you know, trying to cut government spending, hopefully with Elon Musk, and, you know, an efficiency commission or efficiency department, certainly lowering taxes of various sorts. And they certainly recognize, you know, sometimes, you know, Trump’s kind of like, not as clear sometimes on, you know what monetary policy is, but, but I think you know, certainly he recognizes, you know, the Feds printed a lot of money, you know, since, in particular, since 2020, and actually, unlike, say, some of the other central banks haven’t ratcheted back as much as some of the other Western countries have. You know, they’ve done it some, but not as you know, you know, particularly m zero, for instance, they, you know, they’ve, you know, ratchet that back some, to some extent. You mean the money, do you Yeah, sorry, sorry, yeah, money supply, m zero in particular, which is kind of the, you know, the more very central bank oriented calculation, as you know, you know, whereas you start bringing in, yet, the banks and stuff, you start going to, you know, M, 123, so, you know. But if you look at what they’ve unwound compared to, like what Volcker had to do in the 80s, it’s, you know. Whoa, you know, you know. So in the meantime, they better get some pretty growth, pro growth, greater private sector policies, which can, you know, that can also offset a lot of that. And thus, you know, I guess there might be less reason or need to unwind some that money supply, although they will have to deal with to some extent. And you know, there’ll be a fight, I think, you know, because Trump definitely wants a new head of the Federal Reserve, and the current person said he’s not going to resign. So, yeah, that should be an interesting battle. I don’t really, don’t know how that’s going to play out exactly. I mean, that’s not very good. I mean, you know, if the new president because that the chairman is definitely a political appointee, everybody knows that. So, you know that’s, that’s, it’s not good, you know, it’s pretty bad form, or worse. You know, for the chairman to say, blatantly, I’m not gonna, I’m not gonna leave, even though the new president doesn’t want me.

Gene Tunny  29:30

So it’s interesting what you’re saying. I mean, yeah, clearly they have to unwind. I mean, you know, keep shrinking the the Fed balance sheet. Now that is a quantitative tightening, so to speak. That’s what I think, how they’re describing it. Now, I thought the impression I got is that the concerns are that Trump would want to interfere. He’d want to interfere with the Federal Reserve and and more likely. And then under Trump, we would have easier monetary policy, wouldn’t we, because Trump would want to keep interest rates low, to keep the you know, to promote economic growth. So isn’t the concern under Trump that we would end up with higher inflation and hence higher interest rates?

Darren Brady Nelson  30:18

Um, but look, that concern, to some extent, is, I think, legitimate, because, you know, Trump hasn’t been, you know, he’s not Ron Paul, right? He’s taking, like, a pretty clear stance on on money printing and sound money and all that. He’s sometimes kind of been there, and other times he’s kind of easy money. But look, you know, it depends on what the demand for money is. So if the economy takes off, you can kind of, to some extent, not have to unwind the money supply to the same extent or tighten things up. You know, I would dismiss every President has a big influence on on money, a bigger influence on monetary policy then, you know, people really quite realize all the you know, they’re like I said they’re the chairs are political appointees. Yellen was not going to be doing something vastly different from what the presidents that she were was under wanted, right? I mean, you know, they’re nominally independent, but they’re, it’s semi independent, right? So I don’t think Trump’s any different from from Biden or Obama or anybody else. He’s not going to come in and be something, oh, wow. That’s different. You know, he’s going to try to influence the Federal Reserve they all have, right? They’ve all had done that wrong. But I think with, you know, I think you know the big difference, you know whether he’s kind of not going to be, if he’s going to be not that different on monetary policy from from the Biden administration, he’s going to be vastly different on, on his his pro growth policy, he’s going to, he’s, obviously, he’s gonna be expecting the private sector to be the one who drives growth, where the Biden administration explains the government to grow, and okay, you can kind of get away with that in the GDP statistics, because government’s such a huge chunk of those statistics. But it’s smoke and mirrors. You know, government doesn’t create its own wealth. You know. So, whereas, you know, and also, if you want to say, inflation, will see what happened in the first administration with Trump, you know, CPI didn’t grow very much at all. So I expect that to be the case under Trump as well. Yeah,

Gene Tunny  32:36

look, I agree with you that if, if the economy is, if your measured GDP is only growing because you’re, you’re undertaking activities in the public sector that are, you know, are inefficient or really of low value, then that’s not good for your living standards. I agree with that, and not good for your the productivity or economy. I think that’s a that’s a fair point. Can I ask about fiscal policy. I’d like to move on to that, because you made the good point about how you know Elon Musk is going to be involved in some sort of efficiency commission. I mean, I think this is one of the, this is one of the positive things that could come out of the Trump administration, if Elon Musk can reimagine what government looks like, right? I mean, this is quite incredible, right? Like to have someone who’s who doesn’t have that sort of standard model of what government does, or what the political constraints are that say I have because of an ex Treasury man in Australia, so I’ve got an idea of what’s achievable, what’s not how the government works. He’s just gonna, he could come in and just completely, you know, reimagine things. I mean, it could be the biggest reorganization of the US government since FDR, I mean, in the other direction. But so what are your thoughts on what Musk could do and what he should do?

Darren Brady Nelson  33:55

Yeah, look, I totally agree with you. You know, basically, you know, the way you set this up, you know, like, that’s, that’s, you know, in some ways, that is the most exciting prospect, you know, to bring in, you know, I guess a guy who’s considered a business genius. We know, business and government are not exactly the same thing, but there’s, there’s overlaps, there’s things that can be learned, obviously. I mean, Trump’s a business person, obviously. And, you know, I think overall, his first first term, except for, you know, when COVID and BLM and all that hit, it was a great success, you know, up until then, certainly economically, you know, putting aside, you know, you know, the other stuff. So that is very exciting. I would love to, you know, be a part of that, if I can somehow be a part of that. You know, obviously you work to me on, you know, when we first did that CPI minus x for the state of Maine, and then I kind of took that idea and applied it to the federal government on behalf of the Heartland Institute. So, you know, there’s a report or a plan, there’s really something. You know, if, if I can somehow get that in front of an Elon Musk or Trump’s people, doesn’t mean that’s the way you have to do it. But, you know, that’s just, you know, at least part of the toolbox. You know, I’m happy if, like, you know, Elon’s got an even better idea, or if he’s maybe comes in, like the president of Argentina almost, although, you know, maybe even maybe that’s a bit, you know, sort of a bridge too far, perhaps for a Western country, if you like, or for the US. But I think you know if anything big is going to happen, as you said, you know, like something huge, like, sadly, FDR, did in the opposite direction, because most of the federal government of right now, was set up under FDR, yeah. And, you know, including all the agencies that even the federal government doesn’t know exist, you know, because that was the big surprise when I did my Heartland reports. Like the Treasury, the US Treasury, doesn’t know all the agencies. Like, how can they not know how many agencies there are? Yeah, and who they I mean, we obviously know the big ones, like the top 20 or something like that, yes, but there’s all these. And when was facing that’s most of the the budget, obviously, is, is the ones they do know, obviously. But there are all these other little ones too, you know, which is just a little bit of a worry. Now, you know they’re not going to be, for the most part material. It’s not like you’re going to find, well, 50% of the federal government’s in this agency I’ve never heard of. You know that? You know, it’s not that bad, but, yeah, but you know, at least the Australian Government knows the agencies they have, you know. So that’s kind of a good start. So Elon, you know, someone like me or whoever can at least be a help to Elon going like, you know, I’m not going to slow you down. I want to cut the government like you do, but be aware that even the Treasury doesn’t necessarily know all the agencies are there. So you kind of know you need to know that as part of the process. So, you know, there’s going to be some hurdles putting aside, you know, all the weird sort of processes and protocols in the Senate and stuff, you know, on budget but, but now they control, you know, the Republicans control the House, they’re on board with the Trump agenda. They control the Senate. They’re going to have to push out Mitch McConnell, basically, and then get someone in the Senate who’s going to also facilitate what, you know, Elon might want to do, yeah. I mean, there’s obviously, you know, in the US, you know, there’s obviously, there literally, is a separation of powers, you know, obviously, you know, in Australia, the Prime Minister is the head of the executive. He’s also the head of the legislature at the exact same time. Yeah. So things, whereas you know that, you know, the Congress is in charge of the purse strings.

Gene Tunny  37:36

So the G the GOP has got control of the Congress, has it? Is that correct?

Darren Brady Nelson  37:40

Yeah, you know. And they got, they really got, not just in charge of the Senate, they, you know, they really did way better than I guess a lot of people expected. So they’ve, they’re totally in control of the Senate. They’re still in control. I think they’ve that. I could be wrong, but I think they increase their lead in the house as well. So they’re, yeah, it’s definitely in control of both houses, you know, they’ll need to, you know, push McConnell out the door gracefully, or not so gracefully, and then, you know, Congress needs to work, obviously, very closely with the Trump administration. Hopefully, you know, Elon Musk will be in charge of, you know, I think he wants to call it the Department of government efficiency for whatever reason, because he had that doggy. I’m not sure if it’s doggy or Doge, but so look, I’m sure he’s not gonna, like literally be running stuff on a day, but although maybe I could be wrong, maybe he will take time off to literally, you know, put his energy into this, you know, whether you know, I end up working for him or not. I hope he gets a good team, you know, can help him out. And certainly no one who’s going to try to get in the way and constantly say, You can’t do this. I can’t do that.

Gene Tunny  38:58

Yeah, well, you can send him a note and say that you’re is you were his number one door knocker in Wisconsin, weren’t you?

39:06

Yeah? Well, yeah, I was absolutely

Gene Tunny  39:08

and you got a lot of good, well, you got some, yeah, you got, you got some good ideas in terms of forcing them to make efficiency gains each year. So I mean that we can have a discussion. We had another discussion, another time about exactly how you’d make that work. I mean, there’s a, and you mentioned that, you know not, you don’t necessarily. I mean, your models one, there are other models that the idea is to have some type of, yeah, it gets some type of mechanism. Or that just works against the general tendency of government to keep expanding, right? To just keep growing with population and inflation. So I think that’s a that’s worth considering. I want to ask about before we wrap up, there are a couple of things I want to ask you about the deficit, and then we should just chat about trade and what Trump means for trade. How likely is it that Trump’s going to get the budget under control? Because. A the budget, the US budget, is currently in a structural deficit. Is it? I mean, is it a trillion dollar deficit? I don’t know the exact figure, but it’s massive. And you know, one of the figures Niall Ferguson is talking about. Now, I saw him at the ARC conference here in Sydney, and he was talking about how interest expenses on US debt are projected to exceed defense spending, right? And Trump’s want to he’s going to have a big tax cut. How? What are the prospects for him actually getting this under control the budget and limiting the growth of debt? Do you have any thoughts

Darren Brady Nelson  40:35

on that? I mean, you know, besides breaking my CPI minus x, which actually eventually takes debt down to zero and and gives, you know, over, this is over the course of 12 years, by the way, so that was like, it’s be assuming that Trump’s in for four years, and then Vance can actually be in for eight, you know. You know, obviously, that’s maybe stretching things a bit, but, but, you know, and then allows people, you know, he could get the just using my CPI minus x, and I think Elon Scott probably, I’m guessing, something even more heroic than what you know, I was doing with a CPI minus x, but simply under CPI minus x, which is focused on spending. Obviously, you know, I’m going to circle back eventually, but that would get rid of all debt. And, you know, some economists obviously go, Look, you should have some debt, and that’s fine, but you just like, theoretically, you could get rid of all the debt and also get back every average taxpayer every year, 19 grand. So that’s not bad. So you could do both at the same time. And I think so whatever happens on that front again, I’ll come back to really, you know what your question was, but you’ll need to, as you go along, not be obsessed with just getting debt and like, give no relief to taxpayers. You need to combine the two together somehow. But of course, now to get back to your question, it’s going to be what say Elon Musk or someone could do, because spending is the problem. Spending no problem. So if you can get spending under control in a big way, not just kind of play around at the edges, like they have often done over the years, like, Oh, we’ve slightly reduced the growth of spending. No, no, you got to. Can’t just reduce the growth of spending. You got to reduce the actual spending, right? And defense isn’t the problem. Really. Defense is like 10% of the budget, right? You know, we start adding up. You know, both social and corporate welfare. That’s where the biggest problems are. And then you throw in as as Trump called it many times, the green scam. That’s also a huge pile of money as well. So that’s, that’s where the work needs to be done. And and then just throwing the fact that, you know governments, in particular, it seems federal or national governments tends towards a lot of waste, right? Just a lot of a lot of fat, a lot of unnecessary, even if they’re doing something that you think is a core thing they should do, they often do it really badly and inefficiently, right? So there’s that too. So, so it’s basically spending, spending, spending, spending, and then also, you know, particularly in the 2020s but maybe also, to some extent, since 2008 that’s, that’s really what the Central Banks has been printing a lot more money for, really, is to for government at the end of the day, going through the the kind of, I think, somewhat pretend process of, you know, bond markets and whatever else fine, but ultimately, they’re just printing money for government, right? So, and particularly, you know, since 2020, onwards, and like I said, the the US Federal Government hasn’t ratcheted back that that kind of printing as much as some of the other Western governments have, right.

Gene Tunny  43:44

So just on the I think you make a good point about spending being the issue. And I’ve chatted with Dan Mitchell, who you know we both know. You know Dan. Well, you introduced me to Dan, I think, and Dan worked on that thing for me, you had

Darren Brady Nelson  44:00

actually introduce me to Dan, to the economic society that

Gene Tunny  44:04

may be the case. Oh, when John Humphries brought Dan over for the Oh, Wow, incredible. Oh, very good. Well, anyhow, what I remember Dan telling me once on one of the interviews I did, that there was a situation where, if you look in Europe, they increase, they brought in the value added taxes. And you’d think that having the all this additional tax would improve their fiscal situation, but 20 years after they introduced it, they’ve actually got more debt or something like that. Or maybe, you know, decades after they’ve introduced it, it didn’t improve their fiscal situation one bit. So I thought that was a fair point. So yeah, it’s definitely, you’ve got to keep the spending under control. I mean, you make the point about the social security, corporate welfare, etc. Now, the issue with the the entitlement program, so to speak, is that, I mean, they’re, they’re legislated, okay, people have entitlements. So it’s, I’m struggling to see how you apply. Your CP, CPI minus x, whereas you’re essentially saying government agencies have to apply this percentage reduction in in spending each year, which would be great if they could do it however, that it comes up against the issue that a lot of this stuff is legislated, so you need to have Congress make changes, don’t you to achieve what you’re after?

Darren Brady Nelson  45:21

Yeah, you’re right. And I think, like, Social Security in particular will just have to be tackled separately, right? And I’m not sure if we ever talked about this, but I think, I think Australia has got a great model, you know, like, what, what they did in the night. I mean, it’s not perfect, the superannuation system, but it’s like, light years better than the US Social Security system, right? So, yeah, I think there’s, you know, I think Australia is, like, an ideal model, at least, you know, a jumping off point to where you could reform Social Security and maybe that. I think that might have to be something different, you know, that might have to work hand in hand with, you know, Elon Musk’s outfit, but it should be something separate. And there’s some, I can’t remember the fellow’s name, but there’s a guy at the American Enterprise Institute in the US who’s also a big fan the Australian superannuation system. And by the way, Dan Mitchell, who you mentioned, yeah, did his PhD on Australian superannuation and how that could be, yeah, you know. So, you know, be awesome to bring Dan, you know, and maybe the guy from AI to kind of tackle superannuation separately, tackle social security separately. There’s a lot of other entitlements too in the US federal government system, but Social Security will have to be tackled separately, and obviously in a more sensitive manner, and in a way where you obviously grandfather people in who you know you can’t, it’s too late for them to you got to make it so no one’s worse off. You know, whatever there is, over time, it’ll probably take, you know, a more gradual reform than than you know you could with sort of other government related expenditures. So that had to be just tackled separately, I think. But I think Australia offers a great model for that, as I think it also does. It wasn’t much of a campaign thing for either side. But, you know, infrastructure, I think Australia also, particularly, you know, under national competition policy was a great model as well. And I wrote a Heartland paper on that in 2020 you know how that could work in the US? You know us being a federal system as well, you could put something similar as Australia did,

Gene Tunny  47:32

yeah, yeah. I’ll put a link in the show notes to that chat. We had a chat on infrastructure, but also spoke with Dan about his book, The Greatest Ponzi scheme on Earth, where we had a chat about superannuation as well. And you’re right, our system in Australia is not perfect. There are lots of debates over how we can improve it, and whether tax concessions for Super are too generous, whether people should be allowed to access their super for housing. I think they should. But there are other people who think that, Oh no, it’s the best thing is to leave it into it, let people leave their like, lock it up until they retire. I’m not sure about that. So there’s a big debate about some of the parameters of it. Right before we go, Darren, I should ask you about trade, because this is one area where there could be some big changes. I mean, Trump’s been threatening. Is it a 60% tariff on China, 10% increase in tariffs across the board, or something like that? Was it 20% what’s the potential for, I mean, this to be to have an adverse impact on us consumers. What’s the potential for a global trade war. How do you think about what Trump’s impact on the economy via trade policy is going to be?

Darren Brady Nelson  48:48

Yeah, look, that’s, that’s gonna be, that’s gonna be a tricky one, you know? So I’ll start out with, I’m not sure if you ended up having him on your show. Did you have Mark Calabria on your show? Not

Gene Tunny  48:57

yet. I haven’t managed to line him up. Yep, yep, yeah. Okay. Well, look,

Darren Brady Nelson  49:02

you know, if you do, I’m just going to kind of, hopefully I’m not giving away trade secrets. Hopefully he’ll talk about this too, if you can get him on. Is he, you know, he was the chief economist for Mike Pence during the first Trump administration. Then it towards the end, you know, he was appointed as, you know, headed, I can’t remember, because there’s multiple financial regulators of various sort. He’s one of the financial regulators, but, but the point was, he had been a number of meetings in the oval of office over the course of the four years. And, you know, unlike, say, Dan Mitchell, who, you know he he thinks Trump is, like, you know, philosophically a protectionist, right Mark, who also was a colleague from Cato with Dan, had the opposite view. He goes, Look, Trump’s not philosophically a protectionist. And I think bears it out like when that one time when he challenged when the g7 were upset with him about his tariffs. He goes. Right? Let’s all get together. Let’s lower, or even get rid of all our tariffs, you know, between us. You know, the in the g7 um, because there’s lots of terrorists that are, you know, allies are putting on each other, right? So it’s not just China, places like that. So I think for I understand Trump, it’s a strategic sort of approach to eventually get, if you like, less tariffs, but also not just tariffs, but, you know, just kind of overall, if you like, you know, trade agreements that aren’t slanted and massively so towards one partner, like, you know, like the ones that seem to be slanted towards China, and that would include all regulatory barriers and all the other stuff. And you know, the Chinese, even more so than the Japanese, once upon a time, are like masters of non tariff barriers to trade, right? So, you know, to sort of attack that sort of stuff. And I think if you kind of take, like a cost benefit or discounted cash flow approach, it can make sense, because it’s not like we’re in a world where there’s no tariffs, and also Trump throws these tariffs on, right? Not in that world. You know, we’re, sadly, in a world with with, not only plenty of tariffs, way too many sort of, if you like, non tariff barriers, as well. So I think, you know, I understand Trump. It’s a strategic way of getting a better deal out of a China or Europe or even Canada, you know, like I, you know, as a free market oriented economist, yeah, my natural instinct is, obviously, I don’t love tariffs or other barriers to trade, but at the same time, you know, I’m kind of skeptical of, you know, you need to at least take, you know, Ricardo model of comparative advantage with a grain of salt in a sense of the logic is sound, except for the fact that nations are not equivalent to individuals or businesses or even industries. You know, they’re not exact. They’re political entities. That what? That’s what makes them very different from comparing them to these other entities. So the model has a certain amount of usefulness, but you can take it too far if you forget that nation states are political entities, and they’re not they’re not like you know, businesses are humans freely trading with each other. They’re just different. They’re just different. They have different incentive structures. And you can take the traction a bit too far. So I’m very given, you know, how badly I think the WTO etc has performed compared to maybe their earlier years under, you know, GATT and all that sort of stuff there. I’m very open to bilateral trade agreements, because I think a lot of these trade agreements were terrible, you know, I’ve looked at the the Trans Pacific Partnership. It’s, you know, 8000 pages of, not so great, right? You know, first of all, why is it 8000 pages, you know, like, that’s just, yeah, yeah. That’s what a free trade agreement, you know, used to look like once upon a time. You know, they used to, it’s too much given favors your buddies, basically. So that, to me, they’re just putting in place a lot of, you know, barriers to trade. I mean, for every one they take out, they may be putting in two new ones. So, so look, I’m kind of, you know, more optimistic. I suppose you know, I’m wary of tariffs. But you know, if ultimately, we can then get, you know, to a point where we get China, or whoever, even Canada at the trading table, to like, hey, all right, let’s, let’s, let’s start to sensibly and in a more equitable way, lower tariffs, lower non tariff barriers to trade over whatever sort of time frame, then I think you might have to use that because, you know, China does not play fair at all. When you’re dealing with with businesses in China, you’re always dealing with the government. Yeah,

Gene Tunny  53:53

yeah. I’ve chatted with some people on my show about that, that enterprise China model, or China Inc, yeah, absolutely, with the non tariff barriers, you’re talking about things like, uh, quotas or inspections or, you know, just require, difficult requirements, difficult regulatory hurdles to get over to, to get into the market. There’s a, I found a briefing on Stanford Center on China’s economy institutions that I’ll, I’ll put a link to in the show notes, just for listeners who are interested in learning more about

Darren Brady Nelson  54:23

dei and climate stuff alone. The West, you know, China’s not doing it. China’s not doing it. Brazil’s not going to do it. Obviously, we’re not really having a whole lot of trade with Russia at the moment, but they wouldn’t be doing it. India. The BRICS, obviously, the BRICS nations, you know, having all these onerous regulations that you know only kind of you know, certain corporate elites in the West can meet, but no one else can. You know that you know, particularly small and medium sized businesses who aren’t benefiting from this stuff are often hurt by these things. So I think you know that’s going to. Of massively changed too, in the US is, you know, the DEI stuff is going to be it, you know, if it doesn’t like, literally, be go away completely. It’s, it’s going to be hugely de emphasized as our, you know, climate things as well. All right,

Gene Tunny  55:15

okay. Tara, this has been a fascinating conversation. Yeah, it’s good to catch up and, yeah, get your perspectives. I mean, again, like I said, I was, I was surprised. I mean, I guess I always thought there could be a possibility of Trump winning, but I didn’t think that was the most likely scenario, and now that he has won, yeah, we have to think about what those implications are for us. Economy, global economy. There are some pessimistic projections, forecasts out there from various economists like Warwick, McKibben. Warwick’s done some modeling of what the adverse impacts are on US consumers, on the US economy, on global growth. But then, at the moment, it looks like the markets aren’t seeing that. The markets have responded rather favorably to Trump with increases in the various stock market indices. And, I mean, we’ve got Bitcoin going up, I think I saw so I think actually, crypto is one thing we didn’t chat about. But I think there are a lot of people are excited about what Trump could mean for crypto. I don’t know. I’ll have to talk to I’ll have to try and cover that on another episode. So yeah, it looks like the market is is relatively positive. And one theory I heard is that might have been on Bloomberg or or CNBC, that Goldman Sachs has a view that, like it is just a negotiating position that the whole threat of the 60% tariff will it won’t quite be that at the most it end up being 20% or something, so would have a lesser, a smaller impact. So I think that’s their their view there. They seem less concerned about what the the possibility of a trade war than than others might be.

Darren Brady Nelson  57:03

But anyway, I would, before you finish, I would add, you know, let’s not forget, everybody’s got a world view. So, you know, Mckibben has got a very strong worldview, which is like, in the opposite direction from Trump. And you know, economists are never value free. Never had been. Sadly, they’re just, you know, they’re even further away from value free nowadays. So it’s easy to put together, you know, a paper with 100 you know, economists and Nobel Prize winners who say Trump is horrible and he’ll destroy the world, you know, I think that’s just, you know, it’s just nonsense. You know, he’s going to be the economy is going to be far stronger under Trump than you know, would have been, you know, under Harris, by far. And I think that’ll be good for Australia too, because, you know, Australia, obviously, a lot of times, just writes the coattails of the US, whether even if labor is in power and not being all that business friendly in the first place. So I think things can be, you know, happy days are here again.

Gene Tunny  58:05

Okay. Well, you’ve made a strong prediction there. Darren Brady Nelson, so I’ll have you back on at the end of the extra administration. See how the prediction, yeah, see how it goes. Yeah. Well, I think yeah, absolutely right. Everybody. Nelson, thanks so much for your time. I’ve really enjoyed the conversation and learning your perspectives. It’s Yeah, huge week of news, and you’re someone who’s been on the ground, and you’ve had some you’ve got some valuable insights for us. So thanks so much.

58:37

Thank you. Bye.

Obsidian

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Podcast episode

Japan’s Corporate Comeback: Inside the Resolute Japan Model, w/ Wharton Prof. Michael Useem – EP260

Wharton Professor Michael Useem joins host Gene Tunny to discuss his new book, Resolute Japan, which unveils Japan’s emerging shift in management practices fueling a corporate revival. Japanese companies are adopting ambidextrous management, empowering frontline employees, and embracing Western practices while retaining stakeholder-first traditions. He emphasizes the importance of top management in driving change and the potential for Japan to regain global economic prominence by learning from both domestic and international best practices.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

Timestamps for EP260

  • Introduction and Overview of the Podcast (0:00)
  • Japan’s Economic Downturn and Resurgence (3:30)
  • Methodology and Interview Process (5:44)
  • Innovative Management Practices in Japan (11:29)
  • Ambidextrous Management and Global Influence (21:51)
  • Challenges and Opportunities for Japan (42:36)
  • Economic Research on Management Impact (42:58)
  • Final Thoughts and Recommendations (52:47)

Takeaways

  1. Japanese companies are adopting innovative management practices, such as empowering frontline employees and embracing the “gemba walk” to better understand operations.
  2. Japanese companies are retaining their commitment to stakeholders, including employees, the community, and the country, while also becoming more open to adopting Western-style management principles.
  3. The concept of “ambidextrous management” is emerging, where companies are exploring new industries while exiting declining ones, demonstrating a willingness to adapt to changing market conditions.
  4. There is an increasing openness among Japanese companies to learn from and adopt best practices from other countries, which is helping drive their resurgence.
  5. The impact of top management changes can significantly influence a company’s performance, suggesting the importance of resolute leadership in driving change and improvement.

Links relevant to the conversation

Professor Michael Useem’s profile:

https://mgmt.wharton.upenn.edu/profile/useem

Resolute Japan book:

https://www.amazon.com.au/Resolute-Japan-Leaders-Corporate-Resurgence/dp/1613631820

OECD Economic Surveys – Japan 2024:

https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-japan-2024_41e807f9-en

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Transcript: Japan’s Corporate Comeback: Inside the Resolute Japan Model, w/ Wharton Prof. Michael Useem – EP260

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.

SPEAKERS

Female speaker, Obsidian, Michael Useem, Gene Tunny

Michael Useem  00:03

Some of the impediments to competing globally, Japanese firms have begun to push back against those impediments, to adopt their own resolute method, and thus believe that companies everywhere in the world would behoove themselves to take a look at Japanese companies, close in if they have a partner, go to visit, walk around, what’s going on, what can we borrow back here in our home country that Japan is now mastering?

Gene Tunny  00:34

Hello and welcome to the show today, we’re joined by one of the foremost experts in corporate leadership. Professor Michael Yaseen from the Wharton School, and we’re talking about his new book, resolute Japan. In the 1980s Japan was seen as an unstoppable economic force, but the 1990s brought a sharp downturn, leading to the lost decades. Now, Professor you seems extensive interviews with top Japanese executives reveal how the country is experiencing a resurgence. Japan’s companies are adopting innovative management techniques, empowering frontline employees, embracing the gemba walk and incorporating Western practices while still valuing their stakeholder first traditions. In this episode, we’ll explore the remarkable resurgence we’re starting to see in Japan’s corporate giants. A special thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. Professor Michael, you seen Welcome to the program. Gene,

Michael Useem  01:53

thank you for having me.

Gene Tunny  01:54

It’s good to connect. About your new book, resolute Japan. Now Japan is, yes, it’s a fascinating economy. I mean, you set it up the book by talking about the the fact that Japan had a reversal of fortune. They’re all the concerns or, well, in the US in the 80s, about how potentially Japan could overtake the US. And then there was some really now they seem crazy predictions of the coming war with Japan and all of that. But then Japan had the economic crisis in the 90s and the lost decade. But now it looks like things are turning around. And part of that is a a resurgence in corporate Japan due to new practices. So this is the this is the thesis of your new book, resolute Japan. Can you tell us please? Well, one is that summary broadly correct about the thesis of your book. And two, how did you get interested in this topic. What? What motivated you to write this book? Please. Michael gene,

Michael Useem  03:04

the thesis is absolutely on, on the mark. And just to elaborate a little bit before about 1990 to paraphrase the title of a book by one of my professional colleagues, Japan, was number one. The growth rate was extraordinary. Toyota cars were being sold all over the world. Panasonic is a brand that everybody came to know. Some of the largest banks in the world were Japanese banks. And then came 1990 and Japan went off a cliff. And in fact, it lost not only a decade, but it probably lost three decades, as at least indicated by the big stock index for the Japanese or the Tokyo Stock Exchange, which at one point was close to a value of 40,000 and us, by the way, is just a little bit above that. So there’s a certain parallel here, we hope not, with what happened in Japan after in 1990 the index got to 40,000 and then it just the index went off a cliff. Japan went into reverse. Searches on Google for the name Japan dropped by about 80% so coming into that 1990 turning point, the adverse turning point, Japan had become a model and Gene if I can just be a little bit colorful about and I’ll get to your second question in a second about that period, I had attended a conference that included a number of practitioners, A number of business leaders, a number of academics. It must have been around 1989 everybody was talking about, how are we going to learn from Japan how to run an economy, or at least big companies? Because they seem to be extraordinarily successful, and we at the end of three days of lots of academic. Can practical talk somebody, a CEO of a company, in fact, said we haven’t come up with any sure fire way to learn how Japan does it. So what we actually ought to do is teach Japanese managers to be like us. If we can’t raise ourselves up to them, we at least can bring them down to where we are. Well, as it turned out, Japan needed no help whatsoever. On that, the index plummeted down to about a value of about 10,000 it’s now, though, over the last couple years, it’s not only a lost decade, it’s probably a lost three decades. It’s 1990 almost, well more than 30 years later, almost 35 years the index over the last several months has just come back to life and is up over 40,000 right now. It’s quite remarkable. It’s one of the great comebacks. And our book is based on interviews with a number of Japanese company leaders, typically chief executive officers. We wanted to know. We didn’t go in with this question, but we ended up asking it because it was pretty obvious. It was the big question. We went into our interviews with over 100 was 102 leaders of big Japanese companies with other theories at hand, or other indications of what we might find at hand, but what we did find in talking over the last couple of years with people who run these well known companies, some less well known, is that they have adopted a new set of let’s call them leadership principles at the top, which seem to be doing the trick. So Gene started to go on so long on that, but that’s the long and the short of it.

Gene Tunny  06:46

Okay, now we’ll get to those leadership principles. I think I want to explore what they are. But first, can you tell us about the methodology I’m interested so you’re talking with Japanese corporate leaders, so C suite executives, who did the interviews? Did you have Japanese speakers, or were they conducted in English? Can you tell us a bit about how the interviews were conducted? Please?

Michael Useem  07:11

Really good question. I’ll give you a little background on it too. I myself have interviewed many, many senior leaders, sometimes directors, non executive directors at companies in the US. I’ve done that extensively and recently with several other colleagues, we did a similar study of leaders of Indian companies. We’ve done subsequent to that, a similar study of leaders of non state owned large Chinese companies like Lenovo and Alibaba. And our method is very simple. We simply call up or write and then send an email message and then, if accepted for an interview, we simply get on the phone, or, in the case of India, we actually went to India and talk directly, informally with those and generally speaking, we’ve received a lot of yeses from people in that high office. They’re busy. We appreciate that, but explaining what we’re doing, they seem to be drawn to it. In the case of Japan, because of COVID, we worked with a Japanese associate, a Japanese colleague, who is now the dean of the Waseda business school, one of Japan’s major business schools. He’s fluent in English and obviously in Japanese. And he arranged for interviews, typically zoom based interviews with the 102 individuals, in some cases, they were conducted in English. That was great for us, and other circumstances, no, but we had a simultaneous interpreter working with us. So between to put a put a bit of a stripe, or maybe a to tie a bow around the question, we decided based on our prior experience. Certainly this was coming partly from me as well, not just my other colleagues, by the way, and working also with a Wharton colleague. His name is far beer Singh. Is professor of strategy here at the Wharton School, the professor in Japan, the Dean now of the waste of Business School is a professor of management, and we essentially set out to hear we looked at the data that you can find, publicly released data, of course, but we worked on the premise that the best way to understand what companies are doing, or one very Good way, is to talk with people who are doing it, chief executives, board chairs and beyond. So we talk to people who are on the inside of Japan’s amazing comeback, right?

Gene Tunny  09:52

Okay, and what were the practices, or what were the the innovations in leadership, in. Management that you found in your interviews, please. Michael, yeah,

Michael Useem  10:04

this is the key, sort of the key, central issue that we were trying to get at. What exactly are Japanese senior executives and some board members doing now to stage this remarkable comeback? And by the way, the comeback is being matched by investor interest. Even Warren Buffett is now increasingly looking at Japan for investment opportunities. All this is because the Japanese share prices of many companies are way up and on. Talking with the 102 it’s we’re a little bit like anthropologists. We’re listening, how does, how does everybody but what are they saying they’re doing? And then we look for the common themes across what we’ve heard, and they’re really three or four. Let me just mention maybe the two, most important, number one, they are shaking off in some of the traditions of Japanese management, which in the day prior to 1990 seemed to be a very good thing, no layoffs. Seniority prevails, pretty much a male dominated world of management. And since 1990 but especially in the last 10 years, some, not all, but many companies have decided, almost Australian us great style, to rethink how they manage by instead of kind of making pronouncements from the from a high cast list of what People ought to do, they the CEOs, sometimes board directors as well, have made a point to listen to their middle and frontline employees. Instead of telling them what to do. There’s a much, much more of an act of seeking out from the ranks what should do, which is a way of saying, let’s talk to management much if it’s the consumer products company, much more in touch with consumers of that kind, they know far better than somebody at headquarters where the market’s going what’s critical and for reasons we could go into Japanese new fairly recently appointed Japanese managers have adopted what is almost commonplace in the west and in Australia, which is to you are the chief executive, you have enormous authority, but in making decisions, what people are saying in the mid ranks, and even better, let’s talk to some consumers. Case in point, just, I’ll end on this, just to anchor the point, Lawson is one of Japan’s great call them convenience stores, a little bit like we have in the US, 711 and I’m sure in Australia, have similar stores, very convenient, often open 18 hours. In the case of 711 7am to 11pm Speedway is another brand here in the US. Lawson is akin to those brands convenience stores. And the tradition at Lawson, going way back, is the people at the headquarters would say, look at this store. You need to stock the following, and here’s how you need to sell, and here’s how you need to bring what you’ve got on the store shelves to the attention of local customers. But a new chief executive came in and said, This is nuts. The people in the stores know far better than I do from from afar, what people should have available on the shelves. Case in point, to make that very tangible, there are a number of losses stores near Fukushima, the nuclear power plants that almost went sky high after the tsunami of 2011 in Japan. And the store already, this is now more than a decade ago, the stores were permitted to stock what people needed. Well, around Fukushima, what they needed was water. They needed food supplies. They needed gasoline. And instead of that coming from Tokyo, kind of a top down instruction, make these things available. Store managers simply said, we have authority. We’ve been delegated authority to get the job done, and we’re going to do it. There are a lot of course parameters around that. It’s not just a free for all of course, but it is a management method that is more familiar to companies in many companies out countries outside of Japan. That’s my number one. That’s our number one finding is a willingness to adopt some of the principles that describe management of large companies and many in many countries in Europe, certainly Australia and New. Zealand and in the US. But before we go too far with that, what Japan has not given up, what these large Japanese companies has not given up is the commitment to multi stakeholder obligations that is, unlike in the US, where we tend to focus on total shareholder return, market value plus dividends paid out in the given year. It’s the currency. It’s sort of the currency of the land. Japan has long put a huge emphasis, you know this, your listeners will know this, a huge emphasis on stakeholders. That’s one of the reasons that they were typically knowing that employees are one of the great stakeholders. No layoffs for a long standing tradition, no layoffs and seniority. That the the point I’m making is just to round it out. And then back to you is that some, not all, I want to stress not all, but many Japanese companies have retained that commitment to stakeholders other than shareholders. So the community, the country, the employees still are at are right up there on the level with the big investors, the big institutional holders, the as we call them, in the US, sometimes the small investors, the widows who have their life savings tied up in stock, say, in general motors. In the case of, let’s make a Toyota the closest parallel to General Motors. The commitment there, we did an interview there. The commitment is to not only shareholders, but retaining what was pre 1990 the commitment remains very strong, to make certain that the country serves the society, the community, and the people who make the automobiles that come off the line. Gene back to you. Oh,

Gene Tunny  17:01

great. Yeah, very good. So on Toyota. That’s interesting. One of my colleagues, Nicholas, grew and who’s an economist as well. He’s often on the show. He used to work on auto industry policy in Australia. Well, we had a car industry once that it was protected by the tariff wall, that’s another story. We got rid of that. But he he visited, like, he tells a story about, you know, visiting the Toyota factory back in the 80s or something, and just how impressed he was with their production methodology and how they actually did listen to workers on the factory floor. This was 40 years ago. So it sounds like Toyota were all already well advanced in moving away from very traditional business models. But have they made more changes? Are they more flexible? Or you talk about ambidextrous, ambidextrous management? Can you tell us a bit about how has Toyota itself changed a bit more about Toyota, please? Yeah,

Michael Useem  18:05

yeah. Well, Toyota was pretty much already there back in 1990 the phrase that comes from the title of a book written by several US observers of Toyota, the machine that changed the world. It’s a book that probably many of your listeners and viewers know, a person named Womack was one of the authors. If you want to track that down, on one of the websites, the Machine that Changed the World in Toyota, going all the way back to the 1940s right after the war, developed a course, and you alluded to it, the Toyota lean production system, and it worked extremely well, and still does work well, and in fact, in the US, just to anchor the point, a year ago, Toyota emerged as the number one producer of automobiles sold in the US General Motors, our historic giant of auto making, which at one point had 50% of the US auto market back in the early 50s, is now exceeded in cars sold in the United States by Toyota. And that’s essentially, I think, traceable to the fact that Toyota, going way back, came up with continuous improvement the lean production system. There are many features to it, and in some respects, Toyota was already there. Other companies less so, less concerned with the microcosm of the production line. You know this, I’ve walked through a Toyota plant. It is a marvel to see in that the micromanagement of people on the floor is quite extraordinary, very disciplined. And I say that because I want to reference the fact that these Japanese companies have not given up what has historically defined some of their stronger manufacturing and management. Methods, but they have, though, in addition to those methods, the discipline on the floor, and there’s a long tradition of Japanese managers doing what’s called a GEMBA walk, which I love as a concept. I wish it happened more often in my own sandbox here, which is to go to where automobiles or maybe home products, if it’s the consumer company of that kind, where they’re actually made, and then even equally important, where they’re sold, to see how the company can add more value to the production and to the sale of the products. So gene, it’s again a long winded way of saying that what we call resolute Japan is resolute in its ongoing commitment to many of these methods that serve these companies very well back in the 1990s but then as some of those methods were adopted by Western firms in North America, Europe and, I’m sure, Australia, the advantage that Japan had in the world market began to erode against some of the international firms, non Japanese firms that were becoming very good at Japanese and their own management methods. Quick summary point is that Japan has in the last decade many companies, certainly not all, but many have not given up the good that they had prior to the falling off the cliff in 1990 but they have since, especially over the last 10 years, come to appreciate, and you referred to it earlier on, appreciate that sitting on assets that are no longer performing is not a good idea. They got to move off from that traditionally, that was hard because they had to lay people off that was resisted, seen as UN Japanese, and so some of the impediments to competing globally that became increasingly pronounced, some of the impediments increasingly pronounced after 1990 Japanese firms have begun to push back against those impediments, to adopt their own resolute method. And thus, to a quick final summary point. We believe, myself and my two co authors here, believe that the world, companies everywhere in the world would behoove themselves to take a look at Japanese companies, close in, if they have a partner, go to visit, walk around, what’s going on. What can we borrow back here in our home country that Japan is now mastering, without giving up its traditional some of its traditional commitments, which turn out to be an asset as well.

Gene Tunny  22:51

Okay, and do you have a hypothesis for how this has occurred? How? Why have these methods? Why are they increasingly adopted what you call this resolute Japan model, the RJ model. Is it out of necessity? Is it out? Well, I suppose necessity is driving a lot of this. But is it? Are they? Are they doing? Are they studying in in other countries, their senior leadership, are that? Are they going on study tours? What’s the what’s your hypothesis? Could you tell us a bit about that, please?

Michael Useem  23:22

I think it’s yes, yes, and yes, they have made pilgrimages to, I’m sure, to various enterprises in Australia. They’ve come to the US. We have many Japanese students, for example, in our in our business programs at the Wharton School, some sent by their company. These are sometimes people in their 30s and 40s, not just 2627 year old students. So that’s a yes on that. I think the care seems to be a kind of discipline. When the bubble burst, when the Japanese market that had hit a value of 40,000 tumbled down to 10,000 in the years that followed. You can imagine that boards of directors and senior managers were extremely vexed by that, and it did seem to open up their eyes to what could they borrow, what could they adopt, what could they bring in from other national settings, even if there weren’t a lot of examples within Japan at the time, I think also American and some of the larger elsewhere based consulting firms, which you know this, bring ideas from one company to another. Here are some ideas on how to think about your strategy, how to sell your product. What is one is a good time to get out of a sector. How do you get out of a given arena and get into a new arena that can be more productive? I think it’s the combination of all the above. We asked all of the 100. And two managers to help us understand their appraisal to that question. And there was no simple single factor. It was a combination of many to make that put that in the positive, though, I think it’s an era where learning from other companies, wherever they may be, Japan, China, we spend a good bit of time in India, Australia, New Zealand, US, Mexico, Canada. Good to take a look, especially at companies in your own industry that are doing very well, even if they’re not in your home country. And in fact, we’ve been running into people who have done what might be called industrial tourism. They’ll take off a couple months. They’ll go to visit Apple they’ll look in the US here though. They’ll spend a couple days at Walmart. What exactly, even if they’re not in either of those particular industries, smartphones, in one case, consumer products. In another case, we believe, and this is, I think, evident in the fact that many senior managers now do, and I strongly advocate this. Make themselves, put themselves on it. Let’s call it a sabbatical. They’ll take off for a couple weeks. One person we’ve interviewed at length took a three month sabbatical, the CEO of a US firm, bank, in fact, go take a look at what other firms are doing. Most of what they’re doing you can’t import to your home territory, but some things are good. That’s a way gene of saying good ideas, fresh ways of dealing with relatively tough global economy these days are invented, often not here. So if we’re into NIH, not invented here, we only look at our own ideas, which was part of Japan’s problem, you’re probably going to end up in a small niche cornered in by companies that have, have looked around, have got some really good ideas on how to make better products at a lower price.

Gene Tunny  27:00

That’s good that they’re, yeah, they’re open to those, those ideas that they’re they’re flowing in. Because maybe this is more of a gratuitous comment, but Japan is, I suppose, seen by many, as a bit of a closed society or a hard society to to get into. And certainly they have very low immigration, like I looked at the OECD Economic survey for Japan before I popped on this call, and the population projections are just dreadful, and that’s that’s seen as a potential challenge economically. So perhaps they need to be more open to immigration. You know, they could absorb some of the immigration that some of the Western economies are taking and which are causing sort of growth problems for us now, and absorbing them anyway. That’s, that’s a good that’s a gratuitous comment. You don’t need to respond to that. But I just, I was, it just occurred to me when you were talking about their openness to ideas, well, maybe they could be a bit more open in other areas. So yes,

Michael Useem  28:04

and then to add one more area to that list, from my standpoint, you’re totally on the money. Japanese management is still very male dominated sport arena, and I think in time watching what’s happening in many European countries, maybe above all Scandinavia, but also even here in the US, the inclusion of women in middle and senior management ranks and going on to boards. Those trend lines in many countries are strongly up, not yet up in Japan, although there is some movement, and I actually think in time, excluding half the population from consideration of employment or service on your board seems a little bit arbitrary. I think because many Japan companies are open to ideas now not invented here, including the fact that we may want to look for people who didn’t grow up in Japan, aren’t Japanese citizens, aren’t of the male persuasion. I think next five or 10 years, stay tuned. We’ll see where that goes. But I’m cautiously optimistic that we’re going to get some movement and all the above.

Gene Tunny  29:18

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

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Gene Tunny  29:53

now. Back to the show. I’d like to ask about this concept of ambidextrous. Business Management. You talk about Panasonic and how it it ended up with a new CEO for Amber, dexterity. Can you tell us a bit about that, please? What happened with Panasonic?

Michael Useem  30:12

Yeah, yeah, sure. Well, maybe just to back up a little bit and add one more element to what’s what are pushing some of the changes we’ve been talking about, everybody can change. I teach a whole course on organizational change, so I’m optimistic that we’re not born as an a person for the rest of our lives. We can make changes. Some of the changes come hard, but they can be embrace and in our experience with these interviews, many of the companies that had not changed after Japan went off that their company went off the cliff with the other companies back in 1990 new management came in and said, the way we’ve been working in the past is nuts. And so we did see that that a number of companies, and Panasonic is one of those. And if you think about, what does it mean to be open to change if you’re running a company like Panasonic or Hitachi? Hitachi, by the way, 300,000 employees Panasonic, not as many, but these are just enormous companies, and they’re in many markets and ambidexterity, to use that phrase you used a few minutes back, as people become more ambidextrous, senior managers become more ambidextrous, what that means is they are more Ready to get out of a declining industry and more ready to even if they’ve never really been in some new terrain to get into it. So you need to exploit what you’re already good at. But you also need to know that DVD tapes, at one point were like number one around the world if you wanted to watch a film. But that industry died as streaming came along. Netflix in the US made that change. Blockbuster arch rival did not make that change. They were not ambidextrous. They were not willing to get rid of the DVD format in favor of the streaming service. Revision of films and beyond. So ambidexterity slowly coming, but definitely coming to Japan. It’s worldwide. Means that senior managers, probably in consultation with consulting firms, are working hard now about how do we get out of an industry that doesn’t have much of the future. Let’s go explore and see if we can’t get into something else. One person we spoke with at another company put it this way. He said to his senior team in in 10 years, 2030 this was an interview a couple years ago. Now, by 2030 I want 80% of our income to come from five sectors we’ve not been in before, and here they are. So kind of starting from scratch. And it was, I think, a good move, because the sectors he wanted to get into, one of his senior managers to pursue actively turned out to be growing, and other areas were dying. So ambidexterity references the call it the portfolio and a willingness new part of the resolute Japan to exit areas that are that are ultimately slated to phase out. Think about what digital has done to so many areas of business these days, and with some trepidation, you want your managers to explore, where else can we go with what with the strengths that we have, with the capabilities that we’re good at, that we wouldn’t even think of as necessarily part of our own company? Anyway, I think Panasonic is out there. Is that the frontier of doing exactly that Gotcha.

Gene Tunny  34:01

So which company was it that wanted, just so I get this right, what was the company that wanted to have 80% of its revenue coming from five new business lines? Is that Panasonic? Or is that another company?

Michael Useem  34:17

That’s another that is another company, but we heard the same thing in Panasonic, not quite so sharp edged, okay, but, you know, I’ll throw a phrase at you which kind of sums up the point when it comes to leading enterprise, what got you here won’t get you there. So we were really good at, for example, producing DVD players, but that got us, that got us to our executive vice president title. We were excellent at managing that technology. But those that are following us in these elements. Positions aren’t going to get ahead by doing the same thing. So it’s almost an axiom of leadership. If you’re good for four or five years with the fundamentals, thinking, strategically, communicating, persuasively, those don’t change, but the specifics do, and thus, what got you here in terms of what you’ve managed, will not get you say that the year 2030, and many Japanese firms that we interviewed, we heard a refrain, not in so many well, in so many words, not quite the same phrasing, but in so many words,

Gene Tunny  35:33

gotcha. And I think what I found interesting about the book is you do think you highlight the areas where Japan is still, it’s still strong and very, some very high tech production techniques, isn’t it? Is that, right? It’s involved in, yes, yeah. So there are there, they do still have a lot of there’s still some advantages and things that they’re doing very well,

Michael Useem  35:58

absolutely. And that’s why resolute seem to us to be the right title, because there’s it really refers to the attitude of top management, and that is a resolute determination to take what they do well, to borrow from other national settings, not to mention one another, to adopt the best practices for getting the job done the product sold in a way where consumers, or other business consumers, really want the product that the price offered. They are determined to kind of revamp how they getting the business done, which is a way of saying, this is at the micro level, the macro questions, which are the presume the the preserve of economists with wonderful insights into what can stimulate or discourage, say, Japanese business, all that’s very important. Let’s call that the macro drivers. But at the micro level, the people that go to work every day and run the enterprise, they have stumbled on resolutely, a new set of practices that we think are going to bring the Japanese stock market, that’s one of the macro consequences above where it is now, and bring back some of the Japanese competitors that the US competitors feared back in 1990 But for the last 30 years, I’ve not paid much attention to and we think that in time, companies, it’ll take a while, companies around the world are going to increasingly stop off in Tokyo, as they are looking for best practices around the world. Japanese resolute management or leadership, is one of the topics they need to take a look at.

Gene Tunny  37:43

And the book you mentioned that like, while this resolute Japan model is growing in, in in the adoption of it, it’s still only a minority of companies, isn’t it? Is it still? Is it 10% or so you said? But perhaps, yeah, right, yeah, right.

Michael Useem  38:01

There are beach ball and beach heads. But because I think that those that are in that 10% or whatever it might be, it’s still a minority, are bringing back the luster of their brand, the value of their products, not only in Japan, but worldwide, making Japan actually no wonder the stock market is up. These companies have become more competitive those that have been at the frontier. And we think that other other Japanese managers, or certainly a new generation of Japanese managers coming up the ranks, whether at JL or Nissan, they are going to, just by looking around thinking, they’re going to be thinking, well, look these, these companies that are our neighbors, maybe not in the same industry, they’re making pretty good headway. And just to make it a little bit more tangible, one of the one of the observations, or one of the extracted conclusions from our interviews is that Japanese managers, senior managers, increasingly, do not stand on their station. They’re willing to get out of the corner office to get out to where the this is the gemba walk to where the product is being made and sold, and to not tell people what to do when they’re there. This is what Elon Musk tends to do, as I think you know from his management or his ownership and management of Tesla, he not only walks the line, but he tells people then how to improve the line. In the case of these Japanese managers that are out of the corner office onto the shop floor, working with customers at Lawson’s directly. They’re on listening tours. They again, they said this to us. This is one thing we picked up. We say, Well, why would you go to a local store in the case of Lawson? Well, I kind of want to know what’s going on. How do they sell what? What do customers want these days? That’s. Different so gene, I think this is one of the, maybe the hidden engines of change, which is, and there’s a long tradition in many national economies of looking for better ways of getting a job done in management, by looking at what high performing companies are doing that are new, fresh and something that we could adopt resolutely and try in our own enterprise.

Gene Tunny  40:28

Yep, very good. So I found the bit in your book. I like this. There’s a good list of worldwide markets that Japan is dominating in a wide variety of product niches, and I think it’s a really good list, and I’ll just read a couple of them, silicon wafers. Japanese companies account for 60% of the global share of silicon wafers, for making semiconductors, bearings, so something probably not a lot of us think about. And there’s three companies, Japanese companies accounting for 34% of the global market. And there are variety of other important products there for manufacturing. So I think it’s, I think your book is useful just in that regard, and learning about what Japanese companies are doing its role in the global economy. So, I mean, I recommend it, because I think your thesis is an interesting one, and there’s some good evidence there. And also, yeah, all of the you know stuff, all of the information and knowledge about the Japanese economy and its role in the in the global, global supply chain. So I think that’s, that’s really good, right? Gene.

Michael Useem  41:34

Think, yeah, thank you, Annette. And just my, I guess, of going away thought, here is, how do we learn more about how these companies that are making semiconductors and ball bearings and glass and construction and equipment and auto electric autos? How do we learn about what they’re doing? Lots of commentary and business periodicals about that these days, Japan has kind of come back in terms of our paying attention, but in my own humble view, thinking about, how do we learn to lead what we have not let’s make it semiconductors. How do we acquire the capabilities to build a Fab Lab, a billion dollars at least, to put that up. And then how do we make the best of what we’re doing once we’re there? I actually think there’s no better way to understand that than to pay a visit to those that are doing it. And I say that gene in part because we run a program, and I’ve learned, I guess, through experience, we run a program for CEOs, and they so think about that a CEO who, at that point in life, pretty much knows everything about everything, marketing, finance, operations, how equity markets operate. And nonetheless, the CEOs they do come there, these are often new CEOs who want to learn more about the art of being at the top of a rather big pyramid in some cases. But having said that, I’ve noticed that they pay special attention to other top executives and directors in that new CEOs trying to learn the trade or the craft of being a company leader, I tell them to, you know, take a course, for example, at a university along the line, pick up a book or two. But above all, I’ve noticed, and I reinforce this now, spend some time with people who are making the changes, who are leading the new way of doing business, and you come back with a proof of concept and a couple of concepts that are going to make the difference. So going to Japan, taking a look, no better way to learn it than to see it.

Gene Tunny  43:54

I think that’s right. You’ve got time for two more questions. I hope. I think they might be, should be quick ones, one. I’m just wondering, are you talking to any economists, or any economic researchers that you know of interested in quantifying the contributions to Japan’s, you know, stronger economic performance in the last, what, several years, or whatever it is, or decade, relative to the period before in from 1990 through to the early, mid 2010s I suppose, because I think this is, you know, potentially, these new management practices part of that. But I’m not sure what fraction of that improved performance that account for. So that’s just wondering, if you, if you know of any research going on there. So

Michael Useem  44:43

gene, I don’t know of any research going on directly by economists just way outside my my field of knowledge, having said that, it’s really important to take those factors into account. Interest rates. So the Bank of Japan has been trying to shake off the senevolence of the last 35 years with various central government edicts that change how interest rates or what they are, for example, and other methods to try to stimulate the economy. Really, really important. But gene, here’s a summary way of thinking about the world we’re in. There are several really good studies of the impact of top management, aside from the world you’re in, the province of, say, economic research. What is the impact? For example, here’s how the research goes, what is the impact of a change in the top person at a company? Same kind of research is done for sports teams. So think about a rugby team, or, in our case, a US style football team, where the research has been done, if we don’t change the rules of American football, if we take the bulk of the sports club with the same players, the same venue, the same fans, and then we change out the general manager or the head coach and watch what happens next season. Same thing has been done for private sector companies in the US, the right or the wrong person, the right or the wrong management philosophy at the top can make as much as 20 to 30% difference within the next 12 to 36 months. What next one to three years? It’s a way of saying, I think, to come back to what’s implicit in your question, in in the Japanese government itself put forward policies, and it’s been working, by the way, in reforming governance in ways that I think are going to be very productive, new rules that guide board behavior, just as you had in your country. We certainly have had a lot in the US after the failure of Enron some years ago. All that’s really important. It’s part of the story of how we bring companies into the into the current era in the best possible sense, and how do we help them get the best possible job, job done, the best best possible performance out there. But having referenced all these, those call them more macro factors, very important. At the heart, at the end of the day, also at the heart of what’s going to make a difference is who is running the show, and what precepts or capabilities do they do they bring? Yeah, and I’ll end on I was a little bit shocked when I saw the data on sports teams. I’m thinking, if you got a great group of players, yes, a new manager coming in, a new coach, is going to make some difference. Maybe move a few players around in the positions they play, bringing over the next couple of years, new new players on the payroll. But in the short run, if you bring in a coach or general manager who knows a lot about how the sport should be played, they will increase the one loss record by up to 20 or 30% within one to three years, regardless of the context, regardless of everything macro. Yeah, and that the gene is why we actually focused, in this case, not on the macro factors, which are, among other aspects of Japan, widely researched, especially by economists. But we decided to take a look at the people who actually run the show within those macro factors. And they find some find leverage. They find the ways of making a difference in the affirmative sense, aided, by the way, now with some wind at their back, because Japan has been trying to shake off its senevolence for some years, which is, I think, by way of summary, saying, I think we need the micro. We need the macro, if we’re looking to understand the Japanese economy and it’s opportunities for comeback. Absolutely,

Gene Tunny  49:02

that’s a, it’s a good point about, like you made the point about sports. You really see it in sports teams. And I can’t think of any American examples, but the one of the classic sort of British examples is Alex Ferguson at Manchester United. So, you know, led to a really, you know, great period for that, for that club. So very good, very good point.

Michael Useem  49:27

If I can intervene here for just a second, here would be two examples in the US that will show up in your experience, in your home country, in the business sector, let’s take two big companies. Let’s take Disney, and let’s take Starbucks, and if we want to appreciate what they’re going to be doing in the next four or five years, both have been very troubled. Both have replaced their CEOs. We’ll see how it goes. Starbucks, I think, as you know, has. A triple boomerang CEO. So the famous port Schultz, who got it going retired, was called back retired a second time, has now be called, has been called back a third time. And I personally think same as your illustration from from football. I think that we’ll see what they bring to the table. It hopefully is positive. It may not necessarily be, but hopefully it is that they’re taking the helm, regardless of everything else that affects the ability of Starbucks to sell coffee and just make it in Melbourne or Disney to have its film shown or locally available by virtue of a whole host of economic factors. I think the person at the top can, and often they do, make an enormous difference, fairly short term, in a football in a football league or in the s, p5, 100 here in the US, absolutely.

Gene Tunny  51:04

Okay. My final question, Michael, it’s reading through the I read the OECD Economic survey of Japan, the 2024 before I like when I was preparing for this call. And there was a part of it that I’m wondering about, that they make an observation. And given your research, I’m wondering if their observation is perhaps it’s a like, I guess there’s truth to it, but maybe it things are changing, and things aren’t as bad as the OECD is. Yes, I just like to get your reaction to it. Yeah,

Michael Useem  51:41

yeah, no, I think there’s good reason to be pessimistic. We’ve touched on some of the factors that are still barriers, and some of those factors, I think, are not going to be readily thrown off as barriers in the short run. Having said that, there are enough companies that are adopting some of these new methods, greater focus on getting out of industries that are dying, getting into sectors that are prospering. A new kind of management at the top, a willingness of people in the corner office to get out of that office and walk the floor and get more directly acquainted and bringing ideas up from from the shop floor. I think these over time and time might could be five or 10 years, maybe more than that, are probably going to erode some of the other factors that mitigate against Japan’s comeback. But the comeback, I think, just to maybe a summary line on it, the sun back is significant enough and affecting enough companies that I think we’re getting close to a tipping point where companies that are still languishing are probably beginning to think, Well, geez, I’m looking over my shoulder. Hitachi is coming back. Panasonic is doing pretty well. The airlines are pretty competitive. We’re selling Toyotas like crazy in the North American market. How come my company is still kind of in the doldrums and so gene on that, I guess on that note, I end, uh, optimistically, but it may take some years,

Gene Tunny  53:15

okay, so, but it may be right for the OECD to write, then business dynamism is weak with relatively few startups. So they’re talking about, yes, yeah, okay, so there are some issues there, but you’re optimistic because you’re seeing these, this resolute Japan model, and the the trend is that that’s being increasingly adopted. And they said, That’s good news. Yes, yes,

Michael Useem  53:42

yes, yes to all the above. And maybe gene a question in the back of your mind, and certainly in the back of my mind, well, what exactly is moving the needle? What will the move the needle in the next five years? That leads one to be optimistic in the Warren Buffett sense, I’m going to put some money in Japanese stocks the way I haven’t in the past, and I think it’s because of the rational calculus that senior managers bring to the table. So imagine you’re the new chief executive of Lawson, the huge convenience store chain in Japan. And let’s say you’re one of the languishing firms some years ago, and you begin to say, well, what can I do? Well, you talk to maybe make a visit to Germany or the US or Australia. You talk to some of the people over at Toyota. You bring some of them maybe onto your board, which, by the way, is another driver of change we haven’t talked about, but refreshing the board, bringing new people on the board, bringing people onto the board who can speak independently to you as the top executive, is part of a bigger story that we could talk about some other time. So. Uh, by way of putting pulling all those factors together, if you are kind of in your office, you’re a 55 year old senior, let’s make it a chief executive of a Japanese company that just can’t seem to increase its revenue, let alone its income much over last year, you’re saying, Well, why is that? Especially when you see some other companies doing quite well. So I think it’s the contagion of success that is going to move, maybe not the government or policymakers, although they help in their own special ways, but are probably going to move individual people to say, just like you look at another sports team, well, what is it, in our case, that makes the New York Yankees or the Los Angeles Dodgers such great baseball teams? Well, their budget is one factor, but there are lots of other factors I’d like to find out what the other factors are.

Gene Tunny  55:59

Yeah, very good. We better wrap up there that that’s been terrific, Professor Michael, you seem co author of Resolute Japan. Thanks so much for coming on to the show. Really appreciate your insight. So I’ll put a link in the show notes to your book. I recommend if you’re listening, I think, and you you’re interested in Japan or management, and you know, management’s important for economic performance, so of course, I think it’s important to consider. So yeah, please consider getting a copy of the book, Michael, again, thanks so much for your time. Really enjoyed the conversation.

Michael Useem  56:34

Thank you. I appreciate the questions right on the mark. Let’s keep an eye out. We’ll hope Japan’s going the way it seems to be going.

Gene Tunny  56:42

Thank you Absolutely. Thanks. Michael 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 economics explored.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.

Obsidian  57:33

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259

Ken Wilcox, former CEO of Silicon Valley Bank, discusses his book “The China Business Conundrum” and the challenges of doing business in China. He explains the concept of “one bed, two dreams,” highlighting the disparity in goals between western and Chinese joint venture partners. Wilcox details his bank’s entry into China, emphasizing the strategic invitations and control exerted by the Chinese Communist Party. He recounts the extensive regulations and control mechanisms, including a three-year restriction on using Chinese currency. Despite the challenges, Wilcox values the experience, noting the complex interdependence between the U.S. and China.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

About this episode’s guest: Ken Wilcox

Ken Wilcox was the CEO of Silicon Valley Bank (SVB) from 2001 to 2011, then the CEO of SVB’s joint venture with Shanghai Pudong Development Bank (SPDB-SVB) in Shanghai until 2015, followed by four years as its Vice Chairman. He currently serves on the boards of the Asia

Society of Northern California, the Asian Art Museum, and UC San Diego’s 21st Century China Center, as well as Columbia Lake Partners, a European venture-debt fund. He is on the Board of Advisors of the Fudan University School of Management in Shanghai and an Adjunct Professor at U.C. Berkeley.

Ken holds a PhD in German from Ohio State University and an MBA from Harvard Business School. He has given numerous speeches in both English and Chinese, published a variety of articles in the banking press, and recently wrote the management book Leading Through Culture: How Real Leaders Create Cultures That Motivate People to Achieve Great Things (Waterside Productions, 2020) and its accompanying workbook, How About You? (Waterside Productions, 2023). His account of establishing an innovation bank in China, The China Business Conundrum: Ensure that Win-Win Doesn’t Mean Western Companies Lose Twice, is forthcoming from Wiley.

To connect with Ken, please visit: www.linkedin.com/in/kenwilcoxsvb/

Timestamps for EP259

  • Introduction and Overview of the Podcast (0:00)
  • Ken Wilcox’s Journey into China (4:40)
  • Challenges and Strategic Invitations in China (8:10)
  • Guanxi and Corruption in Business Relationships (14:13)
  • State Control and Joint Venture Challenges (20:42)
  • Impact of SVB’s Collapse and Final Reflections (40:02)

Takeaways

  1. Joint ventures in China often suffer from differing goals between Western companies and their Chinese partners, a phenomenon Ken Wilcox refers to as “One Bed, Two Dreams.”
  2. The Chinese Communist Party (CCP) holds significant control over both private and state-owned companies, making it difficult for foreign businesses to operate independently.
  3. Guanxi, a system of mutual obligation and trust, plays a critical role in business relationships in China, but it often involves navigating corruption and complex social expectations.
  4. Foreign companies entering China are often targeted for their intellectual property, and the CCP uses strategic partnerships to gain technological insights.
  5. Ken Wilcox’s experience with Silicon Valley Bank in China illustrates the frustrations foreign firms face due to slow regulatory processes and overwhelming state control.

Links relevant to the conversation

Ken’s book “The China Business Conundrum”:

https://www.amazon.com.au/China-Business-Conundrum-Win-Win-Companies/dp/1394294166

Previous Economics Explored episodes on China:

China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253 

https://economicsexplored.com/2024/09/17/chinas-economic-future-under-xi-the-australia-china-relationship-w-emmanuel-daniel-ep253/

Enterprise China: what western businesses need to know w/ Prof. Allen Morrison  – EP171

https://economicsexplored.com/2022/12/26/enterprise-china-what-western-businesses-need-to-know-w-prof-allen-morrison-ep171/

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

https://economicsexplored.com/2023/04/09/why-were-in-the-decisive-decade-with-china-what-the-west-should-do-w-dr-jonathan-d-t-ward-ep182/

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

https://economicsexplored.com/2022/07/04/china-taiwan-the-indo-pacific-w-dr-greta-nabbs-keller-ep146/

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Transcript: The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259

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.

Ken Wilcox  00:03

I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to.

Gene Tunny  00:34

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 and welcome to the show. In this episode of economics explored, I’m excited to have a conversation with Ken Wilcox, the author of the China Business conundrum. Ken has an impressive background as a former CEO of Silicon Valley Bank, where he played a significant role in expanding the bank’s reach into China. Ken, in the conversation, also gives us his perspective on what happened with SVB last year. Ken refers to the Chinese expression, one bed, two dreams to illustrate the challenges of joint ventures in China, he explains that businesses often enter partnerships with different goals, especially in China, where government interests can add complexity and challenges. Join us as we explore the intricacies of doing business in China with our amazing guest, Ken Wilcox. A special thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. Ken Wilcox, welcome to the program.

Ken Wilcox  02:16

Thank you very much. I’m happy to be here.

Gene Tunny  02:19

It’s excellent to connect. Ken, you’ve got a new book out the China Business conundrum. Ensure that Win Win doesn’t mean Western companies lose twice. So I’m going to be very interested in your perspectives on what that that conundrum is. So just simply, is the conundrum that I mean, China’s a huge market, but there are risks going into it, and any business going into it has to be aware of those risks.

Ken Wilcox  02:45

That’s exactly right. Actually. That’s the title that was assigned to the book by Wiley, our publisher. My original title, my working title, was a little different, and I thought it was a pretty good one as well. It was based on a phrase that’s used in China by almost everybody at some point in time or another. The phrase is one bed two dreams, which, in my opinion, adequately describes why most joint ventures don’t work actually anywhere, not just in China.

Gene Tunny  03:20

Okay, can you explain that one bed two dreams?

Ken Wilcox  03:24

One bed two dreams? Yeah, another way of looking at it is it probably explains the high divorce rate in the US as well, meaning people get together and but they each have a different vision of what they want to happen, how they want the relationship to evolve, what their goals are. And that’s, I think, really true with joint ventures, and especially so in China, exactly,

Gene Tunny  03:53

yeah, that makes perfect sense now that that’s, yeah, that’s, that’s interesting. Okay, and can you tell us how, how did you get involved in in China? Can you tell us a bit about your journey from because you’re in you’re in business, you’re in the financial sector at Silicon Valley Bank. Can you tell us how you ended up getting into the Chinese market? Please?

Ken Wilcox  04:13

Sure. Absolutely. So. I was with Silicon Valley Bank, fundamentally, for 30 years. You’re probably aware of the fact that our bank doesn’t exist anymore, as of about a year and a half ago, because of a huge mistake that was made by the CFO and not corrected by the board, at least not in time. Be that as it may, our business model was a really good one. Take some pride in that, because I was, in a sense, the author of the business model when I became CEO in 2001 at that point in time, our bank worked with technology companies, maybe 30% of our portfolio. We worked with real estate developers and we worked with small business. Business. And the big decision that I made in 2001 was this. I felt that, you know, there at that point in time, there must have been 13, 14,000 banks in the US, and all of them worked with real estate developers, and all of them work with small business, but we were almost the only one in the entire country that worked with technology companies, and in particular with early stage technology companies. So that was where we had a leg up on everybody else. And my feeling was, why compete against 13,000 other banks when you don’t have any specific advantage over them. Why not focus on what we do better than anybody else? So my first big decision I only made a couple in 10 years as CEO, was to ask two thirds of the portfolio to find another bank over time, and then we filled up that empty two thirds with technology companies. And then the second thing I wanted to do was go global. Because we were we had pretty well penetrated the US. At that point in time, we had, by far and away, the biggest market share going global for us, included, initially Israel, India, London in particular, but Europe in general, and finally, we set our sights on China. I was in China with a group of people from our bank in the year 2000 giving a speech at the first meeting of the Chinese Venture Capital Association. We spent a couple of weeks after the speech touring around, and it was pretty clear to us that there were budding innovation centers in China, that if the trajectory continued, would be huge. So we decided we really wanted to be there, and then ultimately, it takes a long time to get started in China. Ultimately, we were able to position ourselves in such a way that China was asking us to come and build a technology oriented bank, just like the one that we have here in the US, in either Shanghai or Beijing, and that was the invitation, more or less coincided with my stop date, meaning already in 2001 when I became CEO, I knew that I was going to retire at the end of 2010 would it be 10 years in that position, that’s sufficient. I was already of retirement age. We got the signal from Beijing to come to China, and when the board made the decision to accept the invitation, and looked around, unfortunately or fortunately for me, they couldn’t find anybody who wanted to go, except for me, so I talked to my wife, and she was as excited as could be. She said, that’s an adventure you can’t miss. So let’s go.

Gene Tunny  08:12

Gotcha Okay, and I’d like to explore what you found in China, because from your book, I get the sense that you’ve got to be wary of these invitations. It seems that they’ve they’re strategically trying to find business partners that they can get the IP of, they can, you know, get some technology or knowledge transfer from. And so you were, it sounds like you’re actively targeted. Is that, am I reading that correctly?

Ken Wilcox  08:41

Yeah, that’s exactly right. Exactly right. That’s one of the main points. In fact in my book, somewhere around the beginning of 2009 fully two years before I moved to China, I was encouraged to get together in a meeting with the person who was then party secretary of Shanghai. His name was Yu Jung Chang. When Xi Jinping came to power at the end of 2012 Yu Jung Chang was elevated from party secretary of Shanghai to a member to being a member of the Standing Committee, meaning one of the seven most powerful people in China. I had, I believe, four meetings with you, Jung Cheng in 2009 and during those meetings, he laid it on heavy. This is, honestly what he said. You may think I’m exaggerating, but he said, you know, Ken, you’re you’re one of the smartest people I’ve ever met. You really understand China better than almost any Westerner I’ve ever run into. We’ve scoured the universe and we’ve found your bank. It’s the one that we where we most. Higher then he explicitly said, more than Goldman Sachs, more than Morgan Stanley. We have to have you here. We’ll pave the way. And of course, I didn’t realize that this is all part of the process, meaning there were probably similar such meetings going on in other places in China, maybe even that same day, because flattering you beyond belief is the first step in the process. And of course, I’ll admit that I was more naive than would have been desirable. On the other hand, I wasn’t so stupid that I didn’t realize he was laying it on too thick, but same time, you know, it felt good. And I really wanted to build a bank in China, so we accepted the offer.

Gene Tunny  10:50

Okay? And then how did it go? So what was their your ongoing relationship with the officials, and how did they facilitate or hinder the setting up of the bank. How did the actual relationship progress, and what did they get out of it? You know, What benefits did you get from the relationship? And, yeah, I just want to understand how it evolved, and how you came to this view that you express in the book about the just the this China Business conundrum, please. Ken

Ken Wilcox  11:22

Sure. First of all, it was a very long process. Again, those conversations, as I said before, at the beginning of 2009 by 2010 we were in active conversations with the bank that would ultimately be our joint venture partner, kind of a shotgun bride, if you will. They were selected for us by the Chinese Communist Party. And the way it was described to me at the time was, of course, you realize, Ken, you’ll need to have a joint venture partner, but understand this is for your benefit, not for ours, because China is a risky place, and it’s so much different from what you’re used to, you’ll need a joint venture partner. And of course, that made perfect sense to me, and frankly, the conversations over about a year and a half period with our wood joint venture partner, went swimmingly. It was all very, very nice. And once I arrived in China, though, at the beginning of 2011 there were a lot of mixed signals, and there was a lot of hurry up and slow down. Hurry up and slow down. It became really quite confusing for me. In retrospect, I believe that I would have benefited by spending a couple of years, of course, I’d been in China at that point in time, probably at least 20 times by the time I moved but visiting and living are two different things, and it probably would have been better if I had spent a couple of years in China before we even embarked on this process understanding China from a political point of view, from a governance point of view, from a from A cultural point of view and from a business climate point of view. And I might not have been so naive, right?

Gene Tunny  13:27

Yes, you mentioned there’s this concept. I’m not going to pronounce it properly, is it Guanxi? How do you pronounce that? And could you explain what that is, please?

Ken Wilcox  13:37

Yeah, guanxi is probably maybe with the most commonly used word in the literature about how people do business in China, and all it really means, I think, is mutually beneficial relationship. In fact, I’ve gotten more than one lecture by members of the party on what guanxi is the benefits of Guanxi. The concept is, let’s say that gene that I want to develop a relationship with you, and you’re interested in developing a relationship with me. Every time I see you, I’ll bring you a small gift, and I’ll be constantly looking for opportunities to do you favors, and you’ll be doing the same thing for me in my direction. And over time, we build a relationship that is allegedly at least based on trust, it’s certainly based on mutual obligation, because I’ve given you so many things you owe me, and you’ve given me so many things I owe you, and in a sense, it’s be it’s even more important in today’s China. It’s an ancient concept, I believe. But it’s even more important in today’s China because the level of trust in today’s China between individuals is really very low. World as a result, I would say, of the way in which the Chinese Communist Party has governed since it came to power in 1949

Gene Tunny  15:12

Okay, so this guanxi, this is interesting, and you’re bringing these gifts. Are you bringing gifts to, at times, party officials or officials of state owned enterprises. I just want to understand how this, what’s the role of the state in in this, and does that mean that there’s some is it corruption in a way? Can you elaborate on that? Please? Just want to understand this whole system and whether there is any corruption involved in it.

Ken Wilcox  15:39

Sure. No, there’s, frankly, a huge amount of corruption involved in by the way, Gene I don’t mean to imply that there’s no corruption in the US or in Australia, but corruption takes many forms, and it’s often informed by culture. So it’s as I’m going to describe it, I would say it’s shared by many other countries, but somewhat unique in China and yes, I was dealing constantly with government officials. Because one thing that we don’t appreciate, we Westerners and Americans, maybe in particular, we may be more naive than most Westerners. We don’t appreciate is the extent to which other countries have different cultures. I think we operate under the assumption that people are pretty much the same all around the world, and of course, there’s an element of truth to that, but it’s also true that there are significant differences in culture, governance and the structure, the financial systems that can make a huge, huge difference in the way you conduct business. So certainly, one aspect of the party’s behavior is to shower favors and gifts on people like me. Frankly, I and I think that it’s it’s somewhat manipulative in the sense that it puts us in a position where we first of all feel obligated, and secondly, if we’re not careful what kind of gift we accept, we may actually end up feeling compromised, which may be one of the reasons why business people who end up being played and I would argue that almost all Western business people are played in China, largely by the government, meaning the Chinese Communist Party. One of the reasons that they don’t like to talk about it afterwards is many of them have been compromised to one degree or another. Yeah, I believe.

Gene Tunny  17:53

Yes, yeah. Oh, plausible for sure. And what sort of gifts are we talking about? Are we talking about bottles of wine? Are we talking holidays? Are we talking Rolex watches? What type of gifts are we talking about?

Ken Wilcox  18:06

All kinds of things, yeah, but I’ll give you three examples, and these are representative examples. One of them would be my conversation partner at our joint venture partner, the man who was the president of the bank at the time, I think about five or six months into our stay, after we arrived, he almost sheepishly asked me one day, he said, Ken, is it common in the United States for people to invite their business partners to dinner at their house. And I said, Yeah, that happens on occasion, for sure, it’s I actually somewhat rare in China, you don’t get invited into houses. Often you get invited to restaurants, but sell them into houses. So he said, Well, would you mind inviting me and my wife to dinner at your house? And I said, No, that’d be great. So we set it up. And my wife was shocked. She said, I don’t know how to cook Chinese food. We’ll have to get a caterer. In any case, he brought a gift with him. In fact, I I have it here somewhere. It’s a mythological creature made out of glass. It’s about 10 inches long. It’s kind of part lion, part dragon. In any case, I thought I’d seen that in a shop sometime in the month or two prior, and I thought this is a pretty expensive gift, so I checked it out the next morning, and it was, it was worth about $800 retail Well, our board, meaning Silicon Valley Banks board the interpretation of the Foreign Corrupt Practices Act precluded me from accepting this gift, right? So in a pickle there, that’s one example. Another example would be in Shanghai. There was a a. Woman who worked in the financial services department of the municipal government of Shanghai, who was in charge of what they call the Little Giants, and these are the government spends a lot of time studying the market, trying to figure out which startups are likely to be successful, and then nurturing them in one way or another in order to enhance the probability that they’ll be successful. And she wanted to develop a relationship with me, so she and her husband invited my wife and me on a trip to go to Shandong Province to Confucius’s grave, which is that’s an attraction. People like to go there. So we went. As soon as we got there, we were delivered by this couple into the hands of high level party officials. And I really we ended up not even seeing the couple for three days. And for three days, high level party officials were were taking care of us, and they wanted to pay for everything. They wanted to pay for the hotel and every dinner. And these were expensive hotels, I refused, and it was interpreted as somewhat of an insult. And the third thing that I’ll mention was in my second and third year there, I believe this is my strong recollection two times. Anyway, the head of HR in our joint venture, who was a member of the party, came to me with the good news that the party had decided to give me a bonus was about close to a half a million dollars, and it was meant for me. It wasn’t for anybody else. It was meant for me, and it was just for being such a good citizen. So what I did with it? I didn’t I didn’t want to forfeit the opportunity to add a half a million dollars to our equity base in the bank. So I took it and funneled it into the bank, which was contrary to their wishes. They wanted me to keep it for myself. But I also wonder how many people actually do that. My suspicion is that a number of people stick it in their own bank account. And I’m not saying that it’s always the case that they feel compromised to the extent that they don’t want to talk later about the way in which they’ve been played, but I will guarantee you they’ve been played, and that most people would not want to, would not want to complain about it in public, because they would be afraid of potential repercussions.

Gene Tunny  22:50

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

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Gene Tunny  23:24

now back to the show. So yeah, a few things to explore out of that. Can we just go back to the joint venture partner that you had? Was this a? Was this a private sector, a bank? Is it? Was it another bank? Was it a was it state owned? Was Was there involvement of the Chinese Communist Party? Somehow? Can you just tell us a bit more about the that the partner?

Ken Wilcox  23:51

Yeah, I will. And let me also at the risk of something like I’m picking on your language, which I don’t intend to do, but I want to mention something else before I answer your question, and that is one of the reasons that we we have such difficulty, we Westerners, and maybe in particular, we Americans, is that we tend to we have mental models. We’ve got ideas in our head about the way things work based on our own experience of the US, we take those with us to China, and then we just superimpose them on China, and we begin to interpret what we see through the lens of these mental models. So that’s what you happen to accidentally mention one of my favorite between state owned and private I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the. Same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to. And you can be a so called private company, but they may very well. It’s highly likely if you’re the least bit successful own part of you, sometimes clandestinely through shell companies, they definitely will have a party committee which can supersede your own personal wishes or the decisions of the board. So you may be a private company, but you from by our US definitions, you’re sort of gravitating into being state owned. Now back to your question. Virtually all banks are primarily state owned in China. So yes, our joint venture partner was state owned, actually owned by the municipality of Shanghai. And because we’re I negotiated 5050, which is rare. It’s usually when you enter into a joint venture with a particularly, a clearly, unequivocally state owned Chinese company. The most you get is about 20% and I was so proud of myself because we negotiated 50% I didn’t realize at the time that it’s irrelevant, because in the end, the CCP will control you whether you own 10% or 50% or 80% so yes, our joint venture partner was a state owned company, and by virtue of the of that fact, our joint venture was functionally a state owned company,

Gene Tunny  26:51

gotcha, and what’s the status of it now? Is it? Is it ongoing? And what was it impacted by the collapse of SVB?

Ken Wilcox  27:00

Yes, it was impacted by the collapse of SVB. So I’ll tell you this, when we got permission to enter into this joint venture, we were literally the first western bank, I believe, to be given permission to enter into a joint venture with a Chinese commercial bank. I need to stick the word commercial in there, because it wouldn’t be true of investment banks. Morgan Stanley, years before, had been given permission to do a similar such thing, but we were the first western commercial bank given permission by the party to enter into a joint venture with a Chinese commercial bank. Our status meaning that permission and the banking license that went with that was as good as gold when we got it. A lot of people would have liked to have had it, and I’m sure we could have sold it for a pretty penny. Having said that, by the time SVB disappeared, which was a year and a half ago, on the one hand, our joint venture bank in China was, if not flourishing, certainly doing well enough to be desirable. On the other hand, relations between the US government and the Chinese government were at such a low ebb and continue to be, that nobody would have liked to have had it so when SVB was taken over by the regulators in the US in March of 2022 the regulators disassembled the bank in all of its parts and put them all on the auction block. And the US commercial banking operation was snatched up almost immediately by a bank from North Carolina Culver citizens and then other parts of the bank were bid on in the fullness of time. To the best of my knowledge, there is only one part that was never bid on by anybody, and that was our 50% ownership in the joint venture in China. And as a result, I think that the Chinese government, understandably, I can’t fault them for this, gave up on its being purchased by anybody and simply absorbed it about five or six weeks ago into our joint venture partner. So it just disappeared. Rod,

Gene Tunny  29:40

so the bank continues, right, okay, but the the SVB stake is gone, okay. Can I ask what you meant? You talked about control by the officials or the the Chinese? What? What did control involve? What are some, some examples of that?

Ken Wilcox  30:00

That I’ll speak about control in three different ways to give you a better sense, the first thing I want to say, which is arguably the most important, is that when we they granted us the license, meaning we talked about it for two years when I moved to China, we began putting the parts together. That was at the beginning of 2011 we finally, actually got the banking license at the end of 2011 so it took almost a year to put it once I was on the ground, it took almost a year to put it together, and putting it together mean, meant creating a bank from scratch and hiring people to fill all the positions. So by October of 2011 we had 62 positions filled. I believe there were only two or three Americans, I being one of them, the rest were all Chinese nationals. We finally got that, that license, the banking license. But when we got the banking license, they told us, the government told us, we’re so happy. This is a wonderful day when you get your banking license today. It’s a big success for both of us. However, there’s one thing that you probably aren’t going to like, but not don’t worry about it, and that is, there’s been a law on the books now since the end of the Mao era. You know, Mao was from 1949 until 1976 he basically dismantled the banking system. There were no banks in China for all that period. Then Deng Xiaoping came to power, late 70s, early 80s, and he ordered the RE establishment of the banking system. So what they told us in October of 2011 is, you know, we’re sorry that this is the way it is, but there’s a law in China that’s been around since Deng, and the law says that if there’s any new bank, and that your joint venture Bank is a new bank that has any foreign ownership, and your joint venture bank has foreign ownership because 50% of it is owned by SVB, and only 50% of it by the Chinese government. That new bank cannot use Chinese currency for the first three years. So that is definitely a form of control to the extent that we really didn’t have any business to do for three years, it would be gene like somebody saying to you, we’re so happy we’re giving you a license to open a restaurant, but sadly, and we’re sorry, this is the case. We wish we could undo it, but sadly, you’re not going to be allowed to be allowed to use food for the first three years, because without Chinese currency, there wasn’t much we could do. And so that was that is a major form of control, correct. The second thing that I will mention is that the situation in China is different from the situation in the US when it comes to banking licenses. If you get a the Federal Reserve or the Controller of the Currency granted you a banking license, you could do anything any other bank could do, starting on day one. And what I found out in November, in October of 2011 is yes, we got this banking license, but all it permits us to do is to call ourselves a bank, have a front door and welcome people to come in. It doesn’t allow us to do any banking business, per se, meaning, even if we had been allowed to use renminbi, Chinese currency, we couldn’t have opened deposit accounts, we couldn’t have made loans, we couldn’t have exchanged currencies, we couldn’t have done anything, because every single discrete banking activity requires A separate and discrete license. So to run a bank like ours, which is be true of almost any other bank for that matter, would require 2030 licenses. We by the time we disappeared, we still didn’t have all 2030 licenses. So that’s another form of control, correct? Yes, yes. The third thing I would say is the Federal Reserve came into existence a little over 100 years ago, I think 115 years ago, and in the last 150 years, let’s just say it developed a. Let’s just say, arbitrarily, this is a made up number, but 1000 regulations for banks. If the Federal Reserve has 1000 regulations for banks, the CBRC, which was then the regulator in China of banks, has 50,000 regulations, and they’ve only been in existence since 2000 and either one or two I forgot which so in, you know, in a little over a decade, they developed vastly more regulations than our Federal Reserve was able to develop in over 100 years. And interestingly, we had to report to the Federal Reserve about monthly. We had to report to the CBRC, our joint venture bank in China had to report to the CBRC daily. It was like running a McDonald’s where every night, you plug in the information of the day and it goes immediately to Chicago, where it’s interpreted, and then directions are shot back to you the next morning. And that happens daily in McDonald’s, and that happens daily with banks in China. So that’s a third level of control, which it’s utterly mind boggling, isn’t it? Yeah,

Gene Tunny  36:21

it sounds mind boggling. It’s quite, quite extraordinary. Just want to understand what did they end up getting out of it? Or like this, I get the sense that you think that the SVB got it, didn’t get the as good a deal as it as it could have, or that there was, you know, the the Chinese took advantage of SVB in a way, what did they end up getting out of it that you think was unfair in a way.

Ken Wilcox  36:54

Let me steer clear of words like unfair. Okay, although I feel that way down deep, don’t want to use that word. I this was. This hearkens back to what I said at the beginning about my original title, one bed, two dreams. Yes, our dream, I can tell you what our dream was, very brief. We wanted to be, and were until we disappeared a year and a half ago, we wanted to be the most important player in the financial services arena, with respect to technology companies, and in particular, early stage venture backed technology companies. And we fundamentally achieved that we had about 60% market share in the US, and we had growing market share in innovation centers around the world. And we felt that innovation is a global industry. Unlike many other industries, you can have a mining industry that’s fundamentally local. You can have a farming industry that’s fun, agricultural that’s fundamentally local. But technology is global, inherently global. If you’re cutting edge, you have to be cutting edge everywhere, because technology is an abstraction, and as you well know, it travels around the world. No president can build a wall high enough to stop it. So that’s the role we wanted to play. And the other thing, of course, was we were hoping to make money for our shareholders. So that was our dream. What was their dream? Their dream was to understand our business model and how it worked, and that was first and foremost their dream. They didn’t, I don’t think they cared one wit how much money they made off us. I think they simply wanted to understand our business model. I think we were a great disappointment to them, because with by the end of the first year, I was able to discern that they had been operating under the mistaken perception that we had an algorithm that would enable us to differentiate between early stage technology companies that would ultimately be successful and those who wouldn’t. And when I, when they accused me at the end of the first year of bad faith because I hadn’t disclosed the algorithm when I explained to them, you know, I’m I’m shocked that you would think that we don’t have an algorithm. Ours is good old fashioned hard work and pattern recognition. To be a lender in our bank, it takes about 10 years. You have to go through an extensive apprenticeship, and that’s the way it works. There’s no algorithm. They were shocked in the same way that I was shocked. I. Uh, so that we were a disappointment to them, I think, and I think that that caused them to become increasingly less interested in our success as time went by. But that’s the the difference I would do want to explain one more point in time, because it’s so pertinent to the experience, and that is that when I found out in October of 2011 that we weren’t going to be able to do much business in the next three years anyway, because we wouldn’t be able to use, um, Chinese currency, I assigned what, what few banking activities we were able to engage in to other people, and I spent three years trying to find a path to Xi Jinping, because ultimately, in a society as authoritarian as the PRC, big decisions emanate from the top all the way down. And if anybody was going to give us an exception to allow us to begin using renminbi, it would have to come from the likes of Xi Jinping. So I sat down with myself and charted several paths from my humble station up to the top and worked those paths for three years, and I made some progress. There’s evidence that I made progress and that my plight and my story was known by people at the very top of China by the end of the three year period. However, I did not succeed in getting the exception. But here’s what did happen after three years, the government, slash party, came to me again and they said, this is such a happy day. Everything’s a happy day. That’s such a happy day because this is the day we can grant you permission to use renminbi, so it’s what we’ve all been working toward. And then they said, By the way, there’s one other request. We admire your business model so much that we want we’re starting next week, a brand new bank here in Shanghai, and we’re going to use your business model. And would you mind spending some time with the management team of this new bank, helping them to understand some of the things that they were not able to understand? Why? Watching you fundamentally doing nothing in the last three years? Yeah, so that’s how it played out.

Gene Tunny  42:45

Yeah, yeah. Go ahead.

Ken Wilcox  42:47

Let me just say one other thing, and that is when we got the license in October of 2011 they said to me, um, it it’s sad that we can’t let you use renminbi, but you can do what we would do, meaning here in China, we all help each other because we’re trying to succeed as a country. And you can teach your business model to Chinese banks in the next three years. That would be a good use of your time. And we will. We know that you’ve got a heavy burden with these 62 employees. We don’t want you to lose too much money, so we’ll give you subsidy for the next three years, not enough to be profitable, but enough to lose as much as you might otherwise. And they were constantly in the further the three year period, asking me to send groups to different banks in China to teach them how to how our business model works, so that they could begin to emulate it as quickly as is possible. And frankly, I wasn’t willing to do that. That would be what I call, in my book, The Green Hat award. And what I mean by that is there’s a belief, a common belief, in China, that you men shouldn’t wear green hats, because if you wear a green hat, it indicates to others that you’re being your wife is cheating on you, and I felt they should be wearing a green hat, because I I gotten our board support in building this new bank in China, and it was really so that I could teach my competitors the our business model, with which I hope you see the connection, if you don’t just uh, ignore

Gene Tunny  44:47

it, yeah, yeah. I mean, it’s, uh yeah, it’s extraordinary. So they’re wanting to, wanting you to teach competitors of of the bank, it’s just bizarre.

Ken Wilcox  44:58

Honestly. Faci. Board and say I was I taught a whole bunch of competitors how to use our business model. And so I want to underscore one thing you haven’t asked, but I’ll answer anyway. And the one thing I want to underscore was it didn’t work, but I really valued the four years in China was exhilarating. It was fascinating. With the most interesting four years of my life, my wife would say the same thing, that’s on the one hand, on the other hand, I do believe that the Chinese Communist Party is beyond a shadow of a doubt the most problematic business partner, joint venture partner that you could imagine? Yeah. Oh, it was a very mixed experience.

Gene Tunny  45:52

Yeah, I can I can understand. I’ve had a guest from Arizona State University on the show before, Alan professor, Alan Morrison there, and he’s written a book enterprise China. And he, you know, we talked a bit about the specifics of it and the involvement of the party and in businesses across China. And, yeah, similar, similar theme to to your book, I know you call it something different, don’t you call it, is it China rink you call the model,

Ken Wilcox  46:21

is the phrase that I use because think about it this way, and I’m sure it sounds exactly like what your other acquaintance in Arizona is pointing to. Think about it this way. If Cisco goes to China, it’s hardly likely that any other American technology company is going to assist Cisco in its attempt to compete in China, and the US government is unlikely to assist Cisco in its attempt to compete in China. I just picked Cisco arbitrarily, but Chinese banks sometimes help each other, and the Chinese government definitely steps into this fray, and through its many levers, helps Chinese companies succeed when we were, when I was at the absolute low point, thinking, this is never going to work, I had been, by the way, by way of background, I’d been on the board of the San Francisco fed for seven years, starting somewhere around 2005 I was on that board. And even after I went to China, I went back once a month for a day to attend those Federal Reserve Board meetings. So when I was at a low point in China, sort of midway through the four year period, I went during one of my monthly visits to the Fed, I took the opportunity to talk to the people in charge, and I said, Well, I don’t understand why. In 2011 I believe it was you granted three Chinese banks licenses to operate in the US, and they’re allowed to use American currency. Why on earth aren’t we? Aren’t we reciprocating another word for tap? And you know what their response was? Yeah, that’s not our job. You chose to go on your own. We didn’t send you, and our job is to ensure the safety and soundness of the American banking system. It’s not to succeed in China, or it’s not to discriminate against Chinese banks in order to balance the equation. And that say that in a means burdened way, it’s just there, yeah. So it is different, yeah, yeah,

Gene Tunny  49:04

absolutely. Ken has been a great conversation. I’ve learned a lot. And, yeah, it was good to explore your experience. I mean, I could probably talk to you for another hour, but I’m gonna have to, I’ll have to wrap it up, because you’ve got, you’ve got things to do, and for sure. And, yeah, it’s been, it’s been amazing. I think there’s that bigger conversation about policy toward China, and there’s that whole notion of decoupling and all that. And now there’s me, there’s very, you know, there’s the debate about trade policy towards China, but that’s, you know, that’s another, an issue for another another day, I suppose. Is there anything else you’d like to mention before we wrap up? Please? Ken, no, I

Ken Wilcox  49:48

think I’ve pretty much said it all. I very much appreciate the opportunity. We are in somewhat of a pickle here in the US. And for that matter, in Australia, because we are not withstanding the disengagement that we believe we’re executing right now. We are inextricably tied up with China and undoing those those ties is is not an easy thing. It’s an extremely complicated thing.

Gene Tunny  50:28

Exactly. I think that’s a great point to end on. Very good. Ken Wilcox, author of The China Business conundrum. I’ll put a link in the show notes to your book. I recommend people read it, because it’s great. Yeah, I love that brain hat story, or that mention of that and the guanxi learning about that as well. That was that’s been very useful, very good. Ken. Thanks so much for your time. Hope the book sales go well and yeah, hopefully we’ll connect sometime in the future.

Ken Wilcox  50:57

Thank you so much. I really appreciate the opportunity. Good luck to you,

Gene Tunny  51:02

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 explored.com or a voicemail via speak pipe. 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. You music.

Obsidian  51:49

Thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258

Marian Tupy, a senior fellow at the Cato Institute, discusses his book “Super Abundance” with Gene Tunny. Tupy argues that resources are becoming more abundant relative to global population, a concept he calls “super abundance.” He explains that human ingenuity has led to cheaper commodities over time. Tupy refutes Malthusian predictions of resource scarcity, citing examples like the Haber-Bosch process for synthetic fertilizer. He also addresses environmental concerns, emphasizing that economic growth and technological advancements can mitigate issues like ocean and air pollution and resource depletion.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

About this episode’s guest: Marian Tupy, Cato Institute

Marian L. Tupy is the founder and editor of Human​Progress​.org, and a senior fellow at the Cato Institute’s Center for Global Liberty and Prosperity.

He is the co-author of the Simon Abundance Index, Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet (2022) and Ten Global Trends Every Smart Person Should Know: And Many Others You Will Find Interesting (2020).

His articles have been published in the Financial Times, the Washington Post, the Los Angeles Times, the Wall Street Journal, The Atlantic, Newsweek, the U.K. Spectator, Foreign Policy, and various other outlets both in the United States and overseas. He has appeared on BBC, CNN, CNBC, MSNBC, Fox News, Fox Business, and other channels.

Tupy received his BA in international relations and classics from the University of the Witwatersrand in Johannesburg, South Africa, and his PhD in international relations from the University of St. Andrews in the United Kingdom.

Source: https://www.cato.org/people/marian-l-tupy 

Timestamps for EP258

  • Introduction and Overview of the Podcast (0:00)
  • Explaining the Concept of Super Abundance (2:30)
  • Methodology and Stylized Facts (6:48)
  • Julian Simon and the Bet with Paul Ehrlich (9:46)
  • Future Prospects and Human Ingenuity (12:45)
  • Environmental Concerns and Degrowth (22:59)
  • Population Growth and Resource Use (33:11)
  • Final Thoughts and Future Prospects (34:08)

Takeaways

  1. Tupy argues that human ingenuity continuously expands the resource base, making resources more abundant even as populations grow.
  2. The concept of “time prices” shows that resources are becoming cheaper relative to wages, supporting the thesis of super abundance.
  3. The famous Simon-Ehrlich bet demonstrates that commodities became cheaper over time, disproving doomsday predictions about resource depletion.
  4. Technological advancements, such as desalination and agricultural productivity, are key to sustaining resource abundance.
  5. Economic prosperity and technological innovation are essential for environmental protection.

Links relevant to the conversation

Marian’s book Superabundance:

https://www.amazon.com.au/Superabundance-Population-Growth-Innovation-Flourishing/dp/1952223393

Simon–Ehrlich wager Wikipedia entry:

https://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager

Regarding the question, “Is it true that the majority of plastic in the oceans comes from Asia and Africa?” see:

https://www.perplexity.ai/search/is-it-true-that-the-majority-o-3aYOSMTyT6m9CcULDm7Iug

Lumo Coffee promotion

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Transcript: Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258

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.

Marian Tupy  00:03

The air in western rich countries is now cleaner than it has been since before industrialization. If you look at the Yale index of environmental protection and then you compare it with GDP per capita. If you combine these two statistics, what it shows you is a very strong correlation between income per capita and Environment Protection.

Gene Tunny  00:35

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 and welcome to the show. Today, I have a fascinating conversation with Marian TUPE, senior fellow at the Cato Institute, and co author of the book super abundance. Marian dives into an optimistic view of the future, highlighting how human ingenuity has consistently overcome perceived limits on our resources, even with a growing global population, we delve into the famous Simon Ehrlich wager with Marian, explaining how exploration and innovation mean that we continue to defy Malthusian predictions of decline. Toward the end of the episode, we shift gears and discuss migration, exploring its impacts on housing affordability, public service delivery and social cohesion. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored. Listeners. Details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Marianne TUPE, welcome to the program.

Marian Tupy  02:14

Thank you very much for having me.

Gene Tunny  02:17

It’s excellent to have you on so you’ve written a really interesting book called super abundance, and it’s on an issue that I think about a lot, which is on the Limits to Growth, whether there are limits to growth, whether we need to move to something called degrowth, which is becoming popular in certain circles. To begin with. Marion, could you tell us a bit about what is this concept of super abundance that you have? Please?

Marian Tupy  02:49

Well, super abundance is not just name of the book. There it is. It is also a it’s got a technical term, which is to say, when resources are becoming abundant at a higher rate than population growth. Because, why? Why bother about the link between population growth and and resources? Because, because, when people think about population growth, they usually think that there is sort of a fixed pie of resources, and the more people you have, the fewer resources you end up with. So you know, if you have 10 people at dinner, you know you have so much food to go around. If you bring 100 people to dinner, everybody has to do with a small plate, because, you know, more people are going to exalt resources more quickly. But of course, humanity is different. Humanity can grow the size of the pie. Humanity can bring additional resources to dinner, so that even 100 people can get fed, even 1000 people can get fed, or, for that matter, 10 billion people can get fed. But anyway, the point is that for the longest time, people were worried that as population increases, we will run out of resources. And in fact, what we found was that resources are becoming cheaper. And in fact, abundance of resources increasing at a faster pace than population. That’s what we call super abundance,

Gene Tunny  04:05

right? Okay, so what sort of resources do you mean are becoming cheaper? This is the majority of commodities you studied. Could you tell us a bit more about that please?

Marian Tupy  04:15

Yeah, I guess it’s useful to actually start by defining resource, if we can. You know, people talk a lot about natural resources, but I think that’s a bit confused. I think that you should really start by thinking about natural endowment, or you should talk about raw materials. You know, raw materials such as whatever minerals in the crust of the earth, metals, things like that. And when you apply human intelligence to raw materials, you end up with a resource. So take just soil, you know, it’s a it’s a raw material. It’s it’s that. But when you apply human ingenuity, such as, you know, using it in order to grow crops. Then the resource becomes wheat, right? And so in the book, we look at hundreds of different types of commodities, really, which is to say food, fuel, minerals, metals, and even, actually some services. But that’s that we can talk about it later. But the bottom line is that we look at, we could look at traded commodities, anything from uranium to zinc to iron to wheat and barley and oil and natural gas. Basically, you know, we start with the big 50, which are, which are measured, or rather, which are, which are being tracked by the IMF and the World Bank, and then we expand it going back 170 years. But yes, so, so there are these raw materials, and when you apply human intelligence to them, you get resources. That’s essentially how we define resource.

Gene Tunny  05:54

Okay, so have you established some stylized facts about the prices of these resources? Is that the main point of the book, and can you just go over that again? I just want to make sure I understand is, are you saying there’s a general tendency for them to become cheaper, or is it on average, they’re becoming less expensive, or is it the majority? Or is it a just one, a bit bit more to understand. Is it? I mean, are you trying to are you proclaiming a general law of super abundance? I just want to understand what, what your thesis is exactly.

Marian Tupy  06:27

Yeah. So usually, when people look at resources, they look at a real price of resources, meaning, you take a price of resource in, say, 1900 you compare it to a price of resource in 2000 you discounted for inflation, and that tells you whether something has gotten more or less expensive. Now, we were dissatisfied with this kind of analysis for a simple reason. We wanted to take the resources back in time as much as possible, and we wanted to include as many countries as possible. Now, when you start looking at resource abundance from a global perspective and over hundreds of years, you quickly run into a problem, which is, you know what happens to exchange rates? You know what happens to inflation rates? What if you don’t have inflation rates in 1850, or 1900 you know, how do you deal with it? And so we came up with a different methodology, which is called time prices. Basically, what we look at is nominal wage per hour, and we look at nominal price of a resource. So let’s say, let’s, let’s give a stylized example, a pound of beef costs you. Let’s say that you are making $20 an hour in the United States, and a pound of beef costs $20 Okay, so a pound of beef will cost you an hour of later, but if in 50 years time, the price of beef may go up to $40 an hour, but you are now making $80 an hour, then now you have two pounds of B for an hour of work. So everything we do, we do in terms of time cost or time price, it’s really the nominal price of something relative to nominal wage that you are making at the time of the purchase. And the beauty behind time prices is that inflation doesn’t matter because you are only dealing with nominal prices and nominal wages. So it doesn’t really matter whether the inflation is 10% or 1,000,000% over the intervening period, because you’re looking only at nominal prices, then it doesn’t really matter. And also, an hour of work is the same in Australia as in the United States, as in China. So that way you can basically make these comparisons between different countries over different periods of time, in in a in an intellectually honest and methodology methodologically sound way. Did that make that make any sense? Yeah,

Gene Tunny  08:56

yeah, that that does make sense. Understand what you’re what you’re doing there. I mean, I think the general point you make is a is a good one. And I mean, you go back long enough. I mean, you go back to the I mean, I remember when I was in school and we were hearing about the limits of growth and all of that, and and then that was, you know, before we had the rise of China and India and, you know, massive expansion of global trade world, GDP. More recently, we’ve had peak oil. That was prior to the financial crisis, that that proved not to be really something that we’re at yet, or at least doesn’t, we don’t appear to be at it. And so, yeah, I guess I’m very sympathetic to the argument about about super abundance. Can I ask? Is this a continuation of the work that Julian Simon has done? Is this because I see on your CV or your bio, you’re part of something called the Simon. Project. Could you tell us what that is and whether this is continuing his work? Yes, yes,

Marian Tupy  10:05

yes, absolutely. So. Julian was a, obviously, a huge inspiration, but so he was actually a senior fellow at Cato before I joined the Cato Institute. He died in 1998 but he was senior fellow there, so we never met. But what I wanted to do back in 2017 is to look at his work and update it, you know, to the present. And I found that his bet with with Ehrlich, he would still win. In other words, commodities continued to get cheaper, at least the ones that Julian looked at, but I was using the old methodology. I was just looking at real prices of commodities. And my co author, Gail Pooley, got in touch with me, and he says, well, let’s turn them into time prices. Let’s look, let’s look at the price of commodities relative to wages, how much more you can buy for an hour of work than your ancestors could. And then we published a paper in 2018 with this new methodology. And indeed we found, once again, that Julian was right. And then we decided to turn into a book which goes back to 1850 and basically what we find is that commodities, relative to wages, are constantly getting cheaper. If it’s a long enough period, everything is getting cheaper, including gold. The only thing that continues to become more and more expensive over the centuries is human labor, essentially the human input. And we might as well talk about Simon and Ehrlich wager, right? Yes, yes, yes, yeah, please. So Julian Simon, since we mentioned him, he was an economist at the University of Maryland, here in the United States, and he was basically looking at the data. And he was noticing that things were getting cheaper, even though population was expanding whilst over in California, at Stanford University, Paul Ehrlich, who is still alive, he’s 93 years old now, was predicting doom and gloom. He was basically saying, you know, as population increases, we are going to run out of everything, and there’s going to be mass famine. And, you know, starvation of hundreds of millions of people. And so they had a bet between 1980 and 1990 on the price of five commodities, nickel, tungsten, tin, chromium and copper. And basically, they made a futures contract for $1,000 and when the period came to an end in 1990 Ehrlich had to send a check for $576 to Simon, because commodities became 36% cheaper. Had Simon implemented our methodology, he would have won even bigger. He would have won by about 40, 42% rather than 36

Gene Tunny  12:45

very good. Yes, yeah, that’s, I’ll put a link in the show notes to that, that wager. Yep, I remember that because I think that was still very when I, when I first started learning economics, I think that wager had just, it had just been decided, and yes, it Yeah, certainly in Simon’s favor. But yep, I mean in terms of this idea of the limits to growth, or the, you know, how many earths we need to support ourselves, which is something I think you and your co author, Gail, were were reacting against, because in the blurb for your book, it goes generations of people have been taught that population growth makes resources scarcer in 2021 for example, one widely publicized report argue the world’s rapidly growing population is consuming the planet’s natural resources at an alarming rate. The world currently needs 1.6 Earths to satisfy the demand for natural resources, a figure that could rise to two planets by 2030 now what I’m interested in, Marion, have you thought about like your analysis? You’ve looked at it over. Was it 150 years or a couple 100 years? 170 170 What are you by the way,

Marian Tupy  14:05

it’s 170 because that’s, that’s all the data that we could get. Yeah. Gotcha, yeah.

Gene Tunny  14:09

What are your thoughts on where we’re going? Because we’re still, I mean, up until, say, 2070 or 2080 we’re still going to have growing global population. We still have rising living standards in well, we’ve got convergence catch up in China, India, other emerging economies. Do you think this super abundance thesis will hold despite this continuing economic growth? Or do you have any? Do you have any concerns? How confident are you in the this super abundance hypothesis?

Marian Tupy  14:47

I’m 100% confident I’m not investing in commodities, and I wouldn’t, unless you know I think that there would be a good hedge against inflation. But. No, I don’t think that commodities are going to, you know that they are, that they are going to somehow explode in price. Now, before I answer that question, let me make a couple of points. So the world’s population is going to peak at about 18, sorry, 2065 maybe 2017 and it’s going to start declining. But the question over population growth and resources that’s remains relevant, even if population plateaus and even starts declining, because the expectation is that as we become richer, we are going to be using more resources. We are going to be consuming more resources. So it’s very important to understand the exact relationship between population growth and resource abundance. But but my prediction is that even if that, even if population continues to grow, or even if plateaus, or even if we just start consuming much more resources than we currently do, we are still going to have more abundant resource based and then we currently do for a simple reason that human ingenuity just doesn’t stop. I mean, human ingenuity depends on population growth. So the more people you have, the more ideas you are actually going to have in order to increase your resource base, right? So as I said, you know, in the olden days, maybe you could produce 40 bushels of corn or wheat per acre of land. Now you have 200 bushels of wheat per acre of land. That’s human ingenuity that is applying scientific methods, GMOs, genetic modified organisms, that is applying modern fertilizer, modern watering techniques and whatever else, and pesticides and fungicides in order to produce more food. That’s, that’s, that’s really, that’s all comes from the human mind, right? And so the more people you have, the the more opportunity you have to come up with new ideas. So what are the new ideas? One we can increase the supply of resources simply by discovering new fields, or, for example, oil, gas or whatever else, much of them continues to be unexploited, and certainly on much of it hasn’t even been properly, properly. You know, checked for for resources, we don’t really know how much oil or gas we have, how much iron we have, how much, how much other metals or minerals we have, because we have only explored a tiny percentage of the world. Secondly, we can of the planet. Secondly, of course, we can increase our technology so it enables us to get to resources which were previously uneconomically expensive. So you know, many of the oil fields and gas fields which we are exploring and exploiting here in the United States were prohibitively expensive under the old drilling methods, but are perfectly economical based on fracking, right? Recycling is is another way of doing it. Dematerialization is a great way of doing it. You know, if we can, if we can, if we can do more with less meaning. 20 years ago, you walked into any, any hotel room and it would have a thick copper cable running from the wall to your computer. That’s the only way that you could get on the internet. Now it’s been completely dematerialized. We can do that functionality without actually using any materials whatsoever. We can dematerialize our car fleet. For example, if we can have cars which are powered by AI, cars are 90% of the time cars are not being used. So basically, we could get rid of 90% of cars, including all the metal and plastic that goes into them, and simply have autonomous vehicles picking us up when we need it. So that’s another way of going around the problem of material use. So efficiencies, you know, we can have relative as well as absolute efficiency. So, you know, a can of Coke or water or whatever else uses much less materials than it used to in the past. But also when, when, when you look at very sophisticated economies such as the United States and the United Kingdom, what you observe is that the total, the absolute amount of resources they use every year in order to produce GDP, is actually decreased things. So there has been a certain level of decoupling between resource use and economic growth. So that’s that’s also important. So there are many different ways in which you can actually increase your resource base, but it all requires innovations. It requires new ideas that are born in human mind.

Gene Tunny  19:46

Yep, gotcha. And I mean, that requires that we have a, you know, a good education system, too. And I mean, well, that’s another that’s an issue for another, another podcast. But I was,

Marian Tupy  19:55

in case, I was, I was going into too many details. Let me put it this way. Yeah. Today’s population is 8 billion people. Half of us would be dead if it if it wasn’t for artificial synthetic fertilizer. Our ancestors, 200 years ago, used horse manure, and they used even human excrement. They would compost and do all sorts of other things in order to produce very little yield in agriculture today, what we are using is ammonia, which is essentially a compound made from natural gas. We are using natural gas in order to create artificial synthetic fertilizer, which enables our crops to grow very fast and very big and and who would have thought that you can use natural gas in order to fertilize our crops? But haber bosch discovered this process in the early 20th century, and ever since then, half of humanity has depended on this kind of fertilizer in order to feed humanity. But it was born in human mind.

Gene Tunny  20:56

Oh, exactly. And that’s, that’s one of the points that I think Ed Conway makes, in his book, material world, a substantial story of our past and future, which I’d recommend if you’re listening. And do you want to learn more about what’s been happening with our use of resources and materials, that that book’s absolutely fascinating. And, I mean, I’m sure yours will go along that. I mean, you’ve, you’ve got some great reviews already on on your book, which is terribly just on the I’d like to talk about this issue of exploration, because, yep, that’s, that’s one of the ways that we get around this, this constraint, because of it as if things do become scarcer, then the price increases, and that sends a signal that makes it economic to mine less, you know, deposits that are of that are harder to get to. It makes it economic, or it can support exploration activity. Have you crunched the numbers on to what extent is your super abundant story being driven by, you know greater discoveries. You know exploration, finding more reserves of resources. To what extent is it driven by increases in the efficiency of extraction? Or you haven’t, no okay, because

Marian Tupy  22:19

we didn’t break it down like that. And I don’t even know if anybody has done that, but, but the main point of the book is is things are getting cheaper because of human innovation.

Gene Tunny  22:32

Yeah, yeah. And so the other option is that it could be because of general productivity, the productivity more broadly, because we’re becoming wealth, more productive, wealthier,

Marian Tupy  22:44

sure, but of course, but productivity is just another word for innovation, right?

Gene Tunny  22:49

Yeah, yeah, yeah, absolutely, yep. I think it’s a valid hypothesis. Before we sort of wrap up, I just want to ask whether you think there are other constraints on growth like this is something that I’m confronted with. You know, I generally think, I think this whole degrowth argument, I’m not a fan of it. I’ve, I’ve argued against it in various places, so I’m not a supporter of it. What the degrowth advocates will argue is that we’re reaching these planetary boundaries. I mean, one, we have concerns about climate change, and that’s in their view, that’s leading to, well, there’s the increase in temperatures, there’s the concerns about heat stress and whether humans can cope with that. There’s concerns about, I mean, all of the concerns about what it means for agriculture and and also natural disasters. So there’s that, there’s also, there are concerns about ecological collapse, in some cases. To Have you thought about those issues at all. Marion, are you concerned? Do you see any limits to growth coming from from other issues, some other environmental issues?

Marian Tupy  24:00

Yes, so I try to think about it as much as I can, as time permits. But okay, so we need to distinguish between what I would call the primitive version of degrowth, which is the claim that we are going to run out of oil, or we are going to run out of pound or something like that, and then a more sophisticated version of degrowth, or the degrowth criticism, which would be something like, we are going to poison our oceans, we are going to run out of the biosphere. We are going to kill all the animals, etc, etc. Now, this is a huge subject, and I’m very happy to come on to your program in the future, but, but let’s, let’s take as many as we can within a within a reasonable time window. Let’s think about plastics in the ocean, and let’s think about pollution of the oceans. 90% 95% of all plastic in the oceans comes from eight rivers, all of them are in. Asia and in Africa. Two are in Africa. Six of them are in Asia. What does that tell us? It tells us that when a society is rich, such as Europe, you know, Australia, North America, people are so rich that they insist on living in a clean environment and being protect and protecting their environment, which is why stuff doesn’t plastic and other poisons do not emerge from our rivers into the oceans. It’s the poor countries that do that. So the answer to having clean oceans without plastic is actually economic growth and prosperity, which will allow Asia and Africa to implement the kind of environmental policies that we have in order to prevent poison from running into the oceans. Let’s look at a second subject, which could be something like the biosphere. So I’m an environmentalist as much as you are, and probably anybody else, in a sense that we like clean environment, we like animals, we like plants. We don’t want to destroy the Earth. I love nature. So now what is, what is the best way to protect the biosphere? What is the best way to ensure that there is plenty of acreage in the world where animals can thrive. Well, the best way to do it is to have hyper efficient agriculture so that we can produce more food on fewer and fewer acres of land. If 8 billion people in the world today lived on the same amount of land as our hunter gathering ancestors, we wouldn’t need one planet, we would need 10 planets, right? But because we can produce a lot of food on acre of land, and then we can produce twice as much food in 50 years, and maybe another twice as much in another 50 years, that should enable us to feed more people on less and less land, which means that we can return land back to animals. Jesse asubel from Rockefeller University once calculated that if the world’s farmer, the average world’s farmer, became as productive as the American farmer, we could return the land mass the size of India, back to nature. So it’s all about agricultural productivity, right? The more we can make our land, the better we are water. There are concerns over running out of out of fresh water. I’m not concerned because I know that this Desalination is absurdly cheap. Israel now recycles 98% of its water and it desalinates the rest. The ideal version of desalination is to combine desalination with solar or wind power. And in fact, Israel not just supplies its own water, but it actually supplies palestines and Egypt and Jordan with fresh water out of desalination, recycling. What else is there? Fresh air. Sorry, clean air. So this is something that obviously requires global action, because, you know, there are no property rights in in the atmosphere. However, I would like to point out that the air in western rich countries is now cleaner than it has been since before industrialization. So the particulate map in the air has been declining. And in fact, if you look at the Yale, the Yale index of environmental protection, and then you compare it with GDP per capita, if you combine these two statistics, what it shows you is a very strong correlation between income per capita and environmental protection. So we talked about, you know, animals and plants preserving biosphere, but by returning more land to nature, we are talking about our oceans. Now, another thing which we could talk about is overfishing. This is something that a lot of people are concerned with, and here the answer, of course, rests in aquaculture. Already, 50% of all the fish that are being consumed around the world are being grown for the specific purpose of being eaten by essentially seafood farmers. Right? These are not fish from the wild, and obviously what we want to do is to get to 100% as soon as possible. So there are all of these different ways in which we are supposed to bump against planetary, planetary boundaries, but, but when you look at again human ingenuity and the way that we’ve been able to tackle such things as, I don’t know, desalination or aquaculture, agricultural production, it. Gives you hope that we’ll be able to do this in the future. Just more of it.

Gene Tunny  30:06

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

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Gene Tunny  30:41

now back to the show. That figure you gave about plastics in the ocean that was striking. 95% of the plastics in the ocean come from eight rivers in Asia and Africa. I mean that that’s that’s extraordinary. I’ll have to look that up, because that’s a I know a lot of people who’d be, who’d be fascinated by that, and I know my the producer of my podcast, Josh, has asked me about that Pacific Island garbage patch in the past, and has said I should cover it on the show. So it’s, it’s interesting to know what the source of those plastics, predominantly is. Do you remember where that where that comes from is that one of Bjorn Lomborg figures. Would you know this?

Marian Tupy  31:29

I can’t remember, and I sure as hell hope that I’m I’m 90 How about this? I’m 95% right that it’s 95% of plastics out of plausible. We can

Gene Tunny  31:40

go, it sounds plausible, because I imagine that, yeah, because when you think about it, yeah, be we, like in Brisbane here, we’ve done a lot of work cleaning up the Brisbane River, so it looks a lot better than it did 20 or 30 years ago. So, I mean, it’s, it’s plausible. I mean, I know that, yeah, a lot of the environmental, uh, problems we see that, yeah, they they see more acute in those in those emerging economies. So anyway, I’ll have a I’ll have a look for that. I agree with your, your general point. The other thing that your remarks, what had brought, what came to mind in the 2000s here, we had a thing called the Millennium drought in Australia, and there were concerns that, oh, it’s never going to rain again, or we’re going to have much lower rainfall than ever. And you know that people were linking this to climate change. And then we had, and then we had record, or near record rainfall, or whatever it was, in 20, 1011, it just kept it just rained for weeks, and all the cashflows got soaked, and there’s massive flood. So Brisbane flooded. I was caught in the flood at Toowong, and, yeah, but prior to that, we were worried about water security, and we went on a recycle we built a recycle water plant, then we built a decal plant, a desalination plant at Tugan for I don’t know whether it was a couple of billion, it was a lot of money, and we, we hardly ever use it. We use it occasionally, for brief periods. It’s, it’s, it’s not, it wasn’t really required. It just goes to show you, if you, if you make your decisions based on some imagined catastrophe in the future, you can end up making some, some really bad, really bad decisions. So that was a you

Marian Tupy  33:27

I remember distinctly, I was skiing in Whistler in Canada in 2014 and, you know, the the old dogs who’ve been skiing there for, for for decades, were absolutely certain that 2014 was the last year in which it was going to snow. Because, you know, the year before there was more snow, and the year before there was more snow, and now it seemed like there was ever less snow up there. But these things are not linear. And of course, all the predictions about, you know, snow free winters, remember those from 20 years ago, all gone broad. You know, Arctic, ice free, Arctic that never happened. So, you know, the earth is warming. Planet is changing. Climate change is not a myth. It is not a lie. It is it is really happening, but figuring out what exactly is happening the exact consequences of climate change on the planet, that is much more complicated, and we certainly have time. Look, I’m not suggesting this is not a problem. What I’m saying is that the notion that we have six years left, or when, when Prince Charles was still Prince Charles, before King Charles, he said something like, you know, we have 48 months to fix the world, or something ridiculous. The point is that. The point is that a lot of people have been burned by making predictions about how the world is going to end. And we it’s not that we have five years or 10 years. We have decades in which. Need to think about maybe burning less fossil fuels, maybe having more nuclear, maybe having fusion energy, but we have time to adjust. And, you know, the world is not running out of anything, and we just have to be, you know, we just have to apply our ingenuity to fixing our problems. We have. We have fixed tremendous problems before. Let’s remember that life expectancy around the world, until recently, was 35 years. 50% of babies before the age of 15 died due to natural causes, and famines were omnipresent. 10s of millions of people died every year due to famine. We have solved a lot of problems, and there is no reason to think that we cannot solve them in the future. We are a very special animal. We can think. We can long term plan. We have reason, we have cooperation, we have trade. So you know that there’s there’s rational grounds for rational optimism. Absolutely,

Gene Tunny  36:02

very good. And it’s about ingenuity and relying on on free markets letting you know, providing the incentives for people to to innovate and to reap the rewards of their of their innovation. So very good. Mario Toby, anything else before we wrap up? I really enjoyed this conversation, and it’s a good start to the day. I’m in Australia, and it’s just it’s gone past 630 so it’s a really good start to the day for me having this conversation. Anything else before we wrap up?

Marian Tupy  36:36

I would just say I very much enjoyed my trip to Australia. You are the lucky country. Very beautiful. A lot of resources. Lovely people. Keep it going. I understand you are going to build some nuclear power stations. Is that true?

Gene Tunny  36:49

Possibly, I’m I think, I think they’re worth exploring. I’m skeptical about whether we will ever build them here in Australia. I think there’s too much of a an environmental movement here in Australia for us to ever build nuclear power. I could be wrong about that. It’s looking like the cost of moving towards 80% or 90% renewable energy, or whatever they want it to be, that’s just going to be too high. So we’re going to have to do something else that possibly could be nuclear. But just knowing the Australian, Australian politics of people, just how prominent the Greens movement is, I think it’ll be hard to get nuclear reactors built in Australia. But having said that, I mean, they could end up being the path of least resistance, or there is no alternative, because the alternative, at the moment, looks to be hideously expensive electricity due to this rollout of renewables and that are unreliable, we’re trying to build this Snowy Hydro. I don’t know if you’ve heard about our Snowy Hydro 2.0 project that that was initially supposed to cost. I don’t know. Maybe it was 10 billion. Now it’s blown out to 20 billion or so. I’ll put the right numbers in the show notes. So it’s just keeps blowing out, because I have all sorts of issues. We we ended up with one of the tunnel boring machines stuck in the rock, okay, like this is, it’s been stuck for months, and this is just this. It’s just symbolic of just how dread, hopeless this project has been. So we’re having to do these, you know, massive engineering projects to back up all of the intermittent wind farms and solar farms. And it’s just, yeah, it’s a, it’s a, well, you never know.

Marian Tupy  38:43

You never know. You know. In Europe, 10 years ago, it looked like the greens, the Climate Lobby was all powerful. They’re losing power all over the place because, basically, energy became so expensive that Europe industrializing. People’s standards of living are decreasing because energy and electricity is so expensive, and energy goes into everything. It goes into literally, it impacts the price of price of tomatoes in the shop. So you never know. We certainly see very positive changes amongst environmentalists here in the United States, they’ve now recognized the importance of nuclear. If you want to get away from, from from fossil fuels, at least to some extent. We are never going to get away from completely from fossil fuels. That’s just not possible. There is not going to be energy transition. We are just going to add new stuff to energy. We are still burning coal and sorry, we are still burning wood. So you know that’s not going anywhere but, but we can. We can. We can certainly limit it, and I’m a huge proponent of nuclear especially if we can learn to make it cheaper. So we’ll see. But certainly, congratulations on being born in such a beautiful country, and I hope that you can keep it prosperous and happy. Yes,

Gene Tunny  39:59

yeah. Yes, I hope so too. I mean, one, one thing I should note, because it just comes up with this issue of population, just if you got another second, because I did what I did want to wrap up, but I thought there’s one thing, one point you made about population before I agree with you. Over the long term, I think for any individual country, this relates to your last your concluding what, what was going to be your concluded covid, about Australia, and I think you’re generally right. I mean, it is a prosperous country. It is the lucky country. We’re facing big challenges in the short term or over the next few years, because we’ve had a massive surge in population post covid, which is related to very lax immigration policy settings that are very favorable to overseas students. So then possibly rorting of the student visas, because it’s, you know, it’s a way you can get access to the Australian Labor Market. So I think that’s one of the issues we’ve got to grapple with. I know that’s an issue in other countries too, but that would just be my one qualification to this general optimism about, you know, having a larger population, more more ingenuity, that sort of thing. So I just wanted to make that that comment, it just occurred to me. But if you’ve got any reactions to that, please, please, let me know.

Marian Tupy  41:22

I mean, the question is, the question is, what? What is the negative effect? Is it? Is it increases prices of real estate, like increasing

Gene Tunny  41:30

real estate, just general congestion, I think, an inability of public services to keep up with the the population growth, yeah, just a general feeling that the country has, the country’s changing in a way that, yeah, think things just don’t seem to work as well, or it’s not the same country as generally, not as friendly or as Welcoming as it once was that would be, that would be the, my sort of take on it, yeah. But generally I think, yeah, it’s the housing issue, where it comes up the most, but it’s congestion in other areas too, well. I

Marian Tupy  42:12

mean, obviously I think that every country has a right to decide who comes in. You know, you know, I’m very I’m very liberal on immigration, but I do think that we need to know who is coming in. Are these people posing any kind of terrorist threat? Do they have criminal records? We just don’t know, because a lot of people come in illegally. I wish we could go back to the time from 20 years ago, when you know people would come in legally, and they would go through the process of having background checks and whatever else, and if they can contribute to the economy, then so much the better. And when it comes to housing, look, if Australia cannot solve it, I don’t know who can, because you’ve got a lot of land. One thing which puzzles me is that we have stopped building new cities, which is kind of bizarre when you think about it. People used to, yeah, cities left and right. And it seems just so difficult nowadays in the West to actually start properly, start a new city. You know, there are states in the United States where the federal government owns 90% of the land. If the federal government just gave it back to the States, and the states simply said, Go forth and conquer and build new cities. You know, it could be done. But ultimately, I don’t think that the issue here is lack of land. I don’t think there are the issue is lack of resources. I think the problem here is tends to be over regulation and governments putting putting barriers in in the way of human ingenuity and human enterprise. So, you know, there’s that’s certainly the case in the United States when it comes to housing. Yeah,

Gene Tunny  43:48

absolutely okay. We might end there. I think that was a good point to end on. Barry and Tubi from the Cato Institute. Thanks so much for all your work, for a great conversation, and I’ll put a link in the show notes to your new book, super abundance looks terrific and all the best for the future, and I hope to catch up with you sometime again soon. Thank

Marian Tupy  44:09

you very much. All the best.

Gene Tunny  44:12

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 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 writing. Thanks for listening. I hope you can join me again next week.

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Thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

UBI Experiment: Success or Failure? Insights from Sam Altman’s Trial – EP257

In this episode, Gene Tunny dives into a recent Universal Basic Income (UBI) experiment funded by Sam Altman, CEO of OpenAI. Gene explores the key findings of the randomised controlled trial and discusses whether the positive outcomes are enough to convince sceptics. Are UBI recipients more financially secure, or are there deeper concerns about its impact on labour force participation and long-term wealth? Get Gene’s balanced analysis of this major UBI trial and its broader implications.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

Timestamps for EP257

  • Introduction (0:00)
  • Defining Universal Basic Income (UBI) (4:21)
  • Overview of the OpenAI UBI Experiment (8:09)
  • Positive Findings from the OpenAI UBI Experiment (13:54)
  • Concerns and Criticisms of the OpenAI UBI Experiment (21:55)
  • Financial Impact of UBI on Household Net Worth (22:50)
  • Gene Tunny’s Skepticism About UBI (34:17)
  • Closing Remarks and Previous Episode Clips (37:57)

Takeaways

  1. Mixed Outcomes of UBI: The experiment showed some positive effects, such as increased financial flexibility and well-being, but also concerning results, such as a slight decrease in labour market participation.
  2. Spending Behavior: UBI recipients spent more on necessities like food and rent; interestingly, they were more likely to help others financially.
  3. Limited Educational and Employment Impact: Younger participants showed interest in further education, but there was no significant boost in human capital or labour productivity.
  4. Debate Over Financial Impact: UBI did not lead to clear improvements in recipients’ financial health. The study found increased debt in some cases, raising questions about UBI’s long-term benefits.
  5. AI and UBI: As technological advancements continue, UBI is seen by some as a solution to technological unemployment, though Gene and some experts remain sceptical about the scale of potential job loss.

Links relevant to the conversation

Bloomberg article “Sam Altman-Backed Group Completes Largest US Study on Basic Income”:

https://www.bloomberg.com/news/articles/2024-07-22/ubi-study-backed-by-openai-s-sam-altman-bolsters-support-for-basic-income

OpenResearch’s website:

https://www.openresearchlab.org

Pete Judo’s video on UBI experiment failing:

https://youtu.be/oyoMgGiWgJQ?si=j3T-3yaEL5Rajcpw

NBER working papers on the study

The Employment Effects of a Guaranteed Income: Experimental Evidence from Two U.S. States:

https://www.nber.org/papers/w32719

The Impact of Unconditional Cash Transfers on Consumption and Household Balance Sheets: Experimental Evidence from Two US States:

https://www.nber.org/papers/w32784

Two Computer Scientists Debunk A.I. Hype with Arvind Narayanan and Sayash Kapoor:

https://youtu.be/M3U5UVyGTuQ?si=qcqSflHCf837GisA

AI can do only 5pc of jobs, says MIT economist who fears crash:

https://www.afr.com/world/north-america/ai-can-do-only-5pc-of-jobs-says-mit-economist-who-fears-crash-20241003-p5kfil

Previous episodes:

https://economicsexplored.com/2022/05/03/a-ubi-advocate-on-its-benefits-and-costs-ep137-show-notes-transcript/

https://economicsexplored.com/2022/02/13/ubi-universal-basic-income-w-ben-phillips-anu-ep126/

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Transcript: The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

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.

Ben Phillips  00:04

I guess looking at history, over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods, of course, where you have some fire unemployment, but generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappeared.

Gene Tunny  00:38

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 and welcome to the show. I get asked a lot about the concept of universal basic income, ubi, and I’ve had some previous episodes on it. I had an advocate for UBI in episode 137 Michael Haynes and I had an academic expert, someone who’s done a lot of modeling of the welfare system and tax system, Ben Phillips, an associate professor at ANU. He’s somewhat skeptical about UBI, and I had that conversation with Ben in episode 126, so I’ll put links to those episodes in the show notes. So it’s, it’s a concept that I’ve, you know, I’ve talked to a lot of people about, I’ve been thinking about myself, and I think it’s time for an update, because I’ve seen a few reactions online to a new UBI experiment that was funded by Sam Altman from open AI, the chat GPT company, and the results of that came out a few months ago, so in July. And now this is a really fascinating study. It’s a large scale, randomized controlled trial, a large scale experiment. So they’re using the gold standard methodology, and it’s it’s for the US. So it’s arguably more relevant, more applicable to what a UBI could achieve in the United States or other advanced economies and some other studies that have been conducted in emerging economies, some people see the experiment as a success and as supportive of UBI, and others See it as a failure. Now what is the truth? That’s that’s what I’m trying to explore in this episode. So I’ve read the results of the study. I’ve read a couple of academic papers that have been produced using rigorous techniques. They’ve been published as NBR, so National Bureau of Economic Research working papers, so very high quality research papers, and we’ll go through the results of those in the episode. My view is that this study of the UBI experiment that’s been funded by Sam Altman, I don’t think this will get a UBI across the line. There are some positive results for UBI advocates, but I don’t think they’re enough to really convince the people who need convincing that this is a good idea. And there are some, there are some results you could perceive as negative or that really raise doubts about the whole idea of a UBI. So we’ll go through those. I’ll give my thoughts on what the results mean, and I’ll be interested in your thoughts too. So please let me know. You can contact me through email or via a voice message. So the information’s in the show notes that will allow you to do that. First, let’s recap what we mean by UBI Exactly. And there are various definitions of it, but essentially it comes down to a regular payment of some kind. So it’s a, say, $1,000 a month. Is provided to all adult citizens, and it’s unconditional. There’s no work requirements, or there’s no means testing. It’s not dependent on how much money you’re making already. You don’t have to there’s no eligibility requirements in terms of, well, it’s for people who are. Are unemployed, or they’re not earning enough money, or they’re a single parent, etc. It’s unconditional, and the idea is to provide a minimum level of income. It’s often described as a flaw to stand on, or a platform to to build your life on. The people who who advocate it do they see this as something that will help people well. It provides financial security, and it will allow people to pursue education, to pursue improving their health and fitness, their their well being. It will enable people to, essentially, you know, take some time out and try to find themselves that sort of thing. And it’s something that is seen as, uh, desirable, given that we know that there are these potentially massive technological changes happening we all know about AI that really surprised us a couple of years ago when chat GPT came out. I think that was a real shock to many of us, just how how good it, it is. I mean, obviously there are some some issues. You’ve got to be careful with what comes out of it. But really it was, it was rather extraordinary. And there are all sorts of forecasts of what AI could mean, and automation, what they could mean for the level of employment, the level of unemployment. There are concerns about massive technological unemployment. So unemployment related to new technology. Then there are also concerns about, well, what does this mean for inequality? And so what we see is some people arguing for UBI as a way to to correct those, those concerns. Now I’m I’m skeptical about some of those diagnoses, so I’m less convinced by that, but I can see the logic. I can see the rationale behind why some people are are arguing for for universal basic income. Another, another argument relates to just the nature of the welfare system and how the way we’ve set it up, where you have benefits being withdrawn as you earn more money, so you could lose part of your your pension or your your unemployment benefit. If you get a job, you’ll lose that, or you’ll lose food stamps, etc. Then that can create a disincentive to actually do better, to get a job, to work harder, and it can create a welfare trap. That’s one of the reasons why they make this. They think, well, let’s just have an unconditional benefit. There’s there’s no questions asked, and it’s just for a basic level of of support. And then if you want to make more than that, if you want to live better than that, provides, then you go out and you make the money to support yourself. Okay? So that’s, that’s essentially where these advocates of UBI are coming from. In my view, that’s what I’ve interpreted. If you’ve got a different view on UBI or what you think’s driving it, then, then let me know. Drop me a line. So let’s, let’s go on to this study in particular, and we’ll go through that. So this study, as I mentioned before, it was funded by Sam Altman, the CEO of open AI. It’s a large scale UBI experiment. It ran for three years, concluding in 2024 so this year, and it’s considered one of the most comprehensive Basic Income experiments so far, it involved 3000 participants across the US. So in Illinois and Texas, 1000 participants received monthly payments of $1,000 so that’s the treatment group, and then you had 2000 participants in a control group who received $50 monthly payments. And so they’re aged 21 to 40, and the duration was, was three years. So as I mentioned before, the open AI, they’ve published a variety of findings on their website, relating to employment and relating to what what people spent money on, education impacts health care and what it means for people’s well being or their their agency. Okay, I’ll put some links in the show notes to where those results are reported. A good summary is in a Bloomberg article that I found, and I’ll also put a link to that. And the way that they summarized it is as follows. They said that, like many of the other studies before. For it, this study has found that the recipients of the UBI, they spend more to meet their basic needs and to to assist others, and they don’t drop out of the workforce, but they work slightly fewer hours. The biggest thing that that advocates of UBI are taking out of this study, and this is this is Bloomberg summary, the researchers biggest takeaway is that cash provides flexibility, and the researchers in the for the project, they said that it can be used to address recipients specific needs. It’s responsive to changing demands and creates a possibility for increased agency. Bloomberg reports the researchers resist generalizations on the Find insane outcomes vary depending on recipients income starting out, their family structures and their priorities. So there are some benefits. So they talk about how, you know, people do end up spending more on their their basic needs. People were more likely to go to the dentist. That was seen as a, you know, a major, a major finding. Now, that’s, that’s something that’s important. I mean, as someone who’s had various dental issues through their life, I think, I think that is a good thing. There’s a bit of a bit of uncertainty about what it means for education and skills. It’s been reported that in the headline results, that recipients were significantly more likely to report plans for further education. So they’re planning to to undertake further education. Those 6% percentage points more likely, which was a 15% increase compared with the average control participants. So they’re they’re more interested in pursuing it. But then there’s one of the NBR studies that was of the data set it wrote in. This is in the abstract of this is a paper the employment effects of a guaranteed income experimental evidence from two US states. So this is NBR working paper, 32719, and this is by various researchers led by Elizabeth Rhodes, is the research director of the project, and the finding this is one thing I found interesting. We observe no significant effects on investments in human capital, though younger participants may pursue more formal education overall, Our results suggest a moderate labor supply effect that does not appear offset by other productive activities. Okay, right? So what they’ve found so younger participants may pursue more formal education. Okay, so they might be studying more, but they observe no significant effects on investments in human capital. So within the the timeframe of the study, they didn’t observe any significant increase in people graduating or obtaining particular qualifications, although they do note that younger people may pursue more formal education, this is the bit that I find potentially concerning or makes you question. Well, okay, well, is UBI really such a great idea? Because what these researchers have found in their analysis of the data coming out of this experiment is that the program resulted in a two percentage point decrease in labor market participation for participants, and a 1.3 to 1.4 hour per week reduction in labor hours. Okay, so it looks like, you know, some people did actually drop out of the workforce, although you could argue it’s not a huge number, and this is what I find. Is probably the most concerning, is that, essentially, people just took this what they did with those extra hours was engaged in leisure activity, so they watched Netflix, or maybe hopefully they went and did something more active, that they weren’t doing anything productive, so to speak. So they weren’t engaging in education activity. So I think that is potentially a bit of a concern with with the results of this experiment. Okay, we might just have another look at some of the more positive findings, because I don’t want to completely just be negative about this. Because. There could be some benefits from from UBI and particularly people having the money to be able to spend on necessities and increase in agency. So they seem to be the major positive findings that have, that have come out of this study, as I mentioned before, the key finding regarding spending cash is flexible and allows people to spend on their unique needs. So this is on open researchers page. Just go to their page on key findings spending, and what they find is that, in terms of the dollar amounts, the largest increases in spending in response to the cash transfers were on basic needs, food, rent and transportation. Now in proportional terms or in percentage terms, the largest increase so this is relative to the average spend of control participants, the largest increase was on financial support to others. So we’ll go over these results again. So so this is with this $1,000 extra a month, so recipients increase their spending by $310 well, this is the observed increase in spending. It looks like there’s some unaccounted for spending. That’s my impression from the studies. But they found that, based on this additional money, they spent $310 more a month, food, $67 rent, $52 and transportation, $50 more. So they they’re spending more. We’ll talk about the transport issue a bit spending category A bit later, because there’s a an interesting result there that does reinforce concerns over the UBI study. What they found this is the other finding that the greatest proportional increase in spending was in this category of supporting others, and that increased by an average of $22 a month. So that’s a 26% increase. And I mean that’s right, cash as open. Ai the open research, people say cash provides increased flexibility to support others. So, yeah, I guess that just shows. I mean, there are a lot of people in need, and we do try to look after our relatives where we can Okay, so that’s a summary of the findings regarding spending. And as you expect, you give people additional money, they’re going to spend some of that money. And so it’s probably a bit, probably no real surprise. You could take some comfort out of the fact that they are using it to spend on what, what are mostly essential items, and then they are helping out relatives or friends. They’re helping to support others. So, okay, maybe that’s not really that unexpected, but that’s seen as one of the great findings, or positive findings that people have. You know, they they did spend this additional money on what appear largely to be worthwhile things. So the other other significant findings that the open research people talk about is, well, they refer to a lot of it seems this is a bit of anecdotal evidence, but there are a lot of quotes in here about how people feel more in control of their destiny. So one recipient, Kendra, said it best, I feel more in control of my destiny because of not only the additional income, but the consistency of the income, it allowed me to plan, to forecast a dream, to achieve things that I thought I wouldn’t be able to achieve because I couldn’t see beyond them financially. And again, this is, this is one of the main, you know, this is one of the arguments in favor of UBI, that it does provide people with this flexibility. They can they can take risks, they can do something entrepreneurial. And one of the interpretations of of these findings is that UBI does help people do that. So there’s a there’s an increased ability to set and to achieve goals. There’s a finding about how it it helps facilitate people to move, to move neighborhoods, an 11% increase in the ability to to move. I. Okay, so moving that can be part of making a fresh start that can improve your your opportunities, your ability to get a higher paying job. So that’s potentially a positive finding, okay, so the that 11% so that was that’s an increase in the propensity to move relative to control participants. So if you go to the the actual page on open research, it said that recipients were 4.4 percentage points more likely to move neighborhoods and 11% increase compared to the average among control. Participants and recipients were four percentage points more likely to move housing units, a 9% increase relative to control participants, right? Okay, I’m not sure what the baseline rate of moving is there, but I’ll put a link in the show notes if you want to check that out. I suppose it makes sense that you get a bit more money. It does provide that flexibility to move maybe, and you know, there certainly could be benefits for doing that, particularly if it allows you to get a better job, move closer to family, or to move to a better school district, that sort of thing. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  21:33

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Gene Tunny  22:03

Now, back to the show. Okay, so there’s some of the findings of this new study, this open research study of UBI and certainly there are some, there are some positive findings, people are more likely to spend on they’re spending more on what you could say are necessities. They’re helping relatives. They’re more likely to go to the dentist. They feel more agency. These are all positive things. Now, on the other hand, we see that they have reduced their their working hours, and what we find is that the impact on their financial situation is not what may be expected. And this comes out of the second NBR research paper that you can find on via their website. There’s a paper that has some really intriguing results, and it’s the impact of unconditional cash transfers on consumption and household balance sheets, experimental evidence from two US states. So that’s NBR working paper. 32,784 it’s just incredible how many working papers they produce. I think when I first started looking at NBR working papers at university, they’ll probably up to number. I mean, it would have been several 1000 by then. I’m not sure if it had reached five figures. I’ll have to, I’ll have to put that in the shadows. But, yeah, it’s just amazing how much research comes out of that. So that’s the elite Economic Research Group in in the US. That’s, I think it’s attached to Harvard. It’s attached to one of those Ivy League universities. It’s they, they’re responsible for a lot of good research, and a lot of it goes on to be published in the top journals like American Economic Review, quarterly, Journal of Economics, etc. So all that is to say that this is a really high you’d expect. This is a really high quality study, and they’ve they’ve used really good statistical techniques to try to work out what’s going on to to determine causality, what, what’s what’s really been the impact of of this experiment, or what’s the UBI Well, they’ve used an experimental design which does help you infer something about causality. They’ve said it’s by Alexander Bartik, Elizabeth Rhodes, David Brockman, Patricia Kraus, Sarah Miller and Eva vervelt, so I’ll put a link in the show notes. Looks like a great study, and this is, this is the study that has prompted some critics of UBI or, well, some scare. Dix, I suppose. Or some people who look at the data, they’re they’re empirical people. They’ve raised big questions about UBI after this study. And there’s a great video by Pete judo. He does a lot of good work on academic malpractice. He’s got some great videos out there that are worth watching. And he’s released a video UBI failed, and everyone is pretending it didn’t, so that is definitely worth watching. And it’s that video I saw that, and then that made me think, well, I should have a closer look at what these these findings are and and just see if that is, if that is the case that the UBI experiment has failed, I’ll just go over what Pete Judo has, what his main points are and, well, what he’s taken out of it is that, okay, look, one of the main things that is advanced as a benefit is that people who get UBI are 10% more likely to go to the dentist. And he’s saying, well, they seem to highlight that because there’s not really a lot of other great findings in the study, or nothing. That means that the experiment shows that UBI as a is a total winner, and he notes that the coverage doesn’t mention the fact that people who receive the UBI ultimately they end up with a reported $1,000 lower net worth compared to the control group you think. You hang on, what’s going on there. That’s a bit of a surprising finding. And this comes out of that, that paper, that NBR, paper I was just talking about before, about the balance sheet impacts of UBI. So let’s, let’s have a look at what that study that that $1,000 negative impact that he was talking about, that that is in the paper. They do report that, but they do know that there’s a lot of uncertainty about the magnitude of those impacts, and their conclusion is that this is how they write it. This is very, very academic. I guess they’re being careful about what they conclude and how strong you know, based on the data, how confident are we in these results? And they write that we find noisily estimated, modest positive effects on asset values driven by financial assets. Okay, so people save some of the the UBI that they get. They have higher they have higher cash balances, although they’re saving them temporarily, I suppose, or they’ve just got more money in their bank account on average, but these gains are offset by higher debt, resulting in a near zero effect on net worth. Okay? So based on their analysis of the data, they they can’t see any real impact, or any significant impact on on net worth. What what you see is that there’s some additional financial assets, higher bank balances, but then they’ve taken on some additional debt, okay? And so what happens is that there’s really no impact on on net worth, and they conclude these results suggest that large temporary transfers increase short term consumption and improve financial health, but may not cause persistent improvements in the financial position of young, low income households. Okay, so that’s the that’s the group that this study was focusing on. So it doesn’t really provide much of a longer term benefit the results in this study. That’s what Pete Judo was referring to in his video, and he concluded, well, this study shows that they’re they’re actually worse off. What’s going on there? I’ll put a link in the show notes, as I said to this paper, and I’ll just highlight some of the key parts of it so you can see where the results are coming from with that Pete Judo has has referred to what he’s what he’s referring to. There’s a there’s a passage on starting in. On page three. So combined these treatment effects on asset and debt indicate that the transfer decreased household household net worth by about $1,000 the net worth estimates are noisy, but we can rule out rises in net worth of more than $5,700 including real estate and mortgages, or $3,000 excluding real estate and mortgages. Okay, so what they’re saying there is, there’s because of the just the fact that of random variation in people, there’s statistical noise, sampling error, so to speak. You have to be careful interpreting these numbers. That’s essentially what they’re they’re they’re saying there, and they do put a footnote to that statement about the the transfer decrease in household net worth by about 1000 were they right? It’s important to note our sample consists of low income households, many of whom had little in the way of savings or assets. At baseline, median net worth was essentially zero. Median savings were was less than $1,000 and only 61% of participants had at least $100 in savings. Okay, it’s hard to know what to make of that. I suppose they’re saying, Well, we’re talking about people who didn’t have much to begin with. Perhaps they’re using that as a way to justify why they may have taken on more debt. I mean, what we find is that they use this extra money to help them borrow money to buy a car, to buy a vehicle. So I’ll go to that part of the paper in a moment. Whatever they’re trying to say there. Essentially the main point is that, okay, that if you crunch the numbers, it looks like it does reduce household net worth by $1,000 but we’re not really sure what that means. And if that’s a general finding that UBI actually makes people poorer over the the long run, who knows? I mean, I I think they’re probably right to be, to be a bit cautious of making that conclusion. So I think their their general conclusion that we can’t really find any impact on household net worth, that’s probably a reasonable conclusion. And the other point is, I mean, maybe $1,000 worse off. Okay, well, is that such a is that such a big deal? I mean, is that significantly they’re saying, well, that’s not really significantly different from from zero. $1,000 isn’t what it once was. So I can, I can see why they may have reached that conclusion. What I did find interesting. I found that the fact that what the UBI enables people to do is it must improve, or it makes them more likely to want to get a car loan, they feel more likely to be able to to service a car loan. And we find that this is a finding on page 31 of the paper total auto debt rose by about 17% 17% of the control mean, and monthly minimum payments on auto loans rose by 16.5% of the control means. So maybe they went out, they they got a new car, they sold their old car, bought a new one, and they they financed that. So they got some additional auto debt, and that’s offset the gain from the higher cash balances to and they’ve had practically no change in in net worth, or possibly even a negative net worth, and that’s the finding that Pete judo’s picked up on. Okay, I guess the thing to conclude from that is that UBI doesn’t improve your financial circumstances over the long run, or this at least over the three year period that they they studied, and again, the group that they’re looking at, or they’re considering, is young, low income households in the United States. So again, I’ll leave it to you to check out. You can check out some of these findings. I’ll put some links in the show notes. See what you think. Make up your own mind, it looks like those studies are very rigorous, and results that do to me. I mean, they they do raise questions about whether UBI makes sense as a policy. I don’t see results, that would make me think, Wow, that’s amazing. Let’s roll this out across the population. And if you, if you’re a regular listen to this show, if you listen to my previous episodes on UBI, you’d know that I’m pretty skeptical about UBI. It would be hugely expensive. Of I also think it’s unnecessary. I don’t believe in the forecast of mass technological employment. I think that the market will adjust. And as economists, we’ve got great faith in in the price mechanism. We’ve got great faith in in markets, uh, eventually clearing, and we have great faith in the the ingenuity and entrepreneurial activity of people. So I’m rather skeptical about this forecast of mass technological employment. And one thing I’ve noticed is that there’s, there is a growing skepticism about just how significant or how transformational some of the recent AI developments have been. I’ll put some links in the show notes, some some videos that I’ve seen lately from there was some computer scientists. I think one of them was from MIT. So top computer scientists debunk AI hype, and they talk about AI snake oil. So they think that some of the benefits of, particularly the large language models, are oversold. And there’s also this has been widely reported. Daron simoglu, who’s professor of economics at MIT, really top economist, and he’s come out and said, Look, AI can only do 5% of jobs. I mean, that seems, yeah, that seems probably fair enough for me to consider it’s limited in the number of jobs that can take over. The more likely scenario is it will increasingly use AI as a co pilot so it’s helping us become more productive. And I mean, as this is one of the reasons economists, probably most economists, probably don’t worry too much about this forecast of mass technological unemployment. I mean, what’s going to happen is that if we are increasingly using AI as a co pilot, and then that’s helping reduce the cost of delivery. That means we can do things a lot quicker. That means various professionals, lawyers, accountants, can can provide their analysis and advice much quicker. Then it becomes cheaper, and then there’s more demand for it from from consumers or from from business for business to business transactions. That’s one of the reasons I would be skeptical about all of these doom and gloom forecasts.

37:36

Check out

Gene Tunny  37:37

those videos. They’re great. Provide you with with much more with it, well, like provide a bit of comfort. Of course, the future is inherently challenging to predict, so who knows? I mean, chat GPT was a bit of a revelation, so who knows what? What else is, what other technological developments will come up? But that’s not, that’s not the base case, in my view, that will have mass Technological Unemployment, right? So what I want to do to finish off the the episode is, I’ll, I want to put some, want to play some clips from previous episodes I’ve had on UBI, well, the previous one with Ben Phillips, I think Ben really summarized this the high cost of UBI and why. It doesn’t seem to make sense, given where we are now, the type of tax and welfare system that we have at the moment, it’s hard to see how we can actually transition to to UBI and may not actually be be sensible. And then there’s also another clip I’ve got, which is the second clip that I’ll play on this issue of technological unemployment. I think we’re essentially we, I mean, Ben, sort of, you know, make some some good points about how we’ve had sort of concerns about mass technological unemployment before, and they really haven’t. It really hasn’t occurred. So to end the episode, I’ll play those clips so you can, you can check out those clips to sample what’s in that. That UBI episode with Ben, and if you want to listen to that, please go the full episode, then please go back and have a listen. I’ll, I’ll put a link in the show notes. I think Ben is one of the people who has really analyzed what a UBI would mean in practice. And I think that’s that’s the sort of thing that if you are going to advance a UBI, you should think you should do the analysis. You should crunch the numbers on what it means, what it’ll cost, what it means for other welfare programs. So yeah, how do you make sure that you don’t have all these people who end up worse off if you just get rid of the existing welfare system and replace it with the UBI I think that’s a that’s a significant thing to think about, all right? Okay, so thanks for listening to my update on UBI. As more studies come out, I’ll, I’ll talk about those. I’ll also try to go back to some previous studies and compare what this study has found with some of those others that could be useful. But for now, I’ll, I’ll play these clips from the previous episode with Ben, so you can get a sense of of what’s in that episode. Okay, thanks for listening.

Ben Phillips  40:31

Yeah, so the current system gene, just to put in perspective, so we, we currently pay out about a little over $100 billion per year in welfare payments to adults. There’s another sort of 20 or so million to in family payments that which is effectively for the cost of children. So you put that to one side, if you also about $100 billion so the most expensive welfare system under a UBI, say, under the green scheme, would be somewhere around about $500 billion per year. So you’re looking at an additional $400 billion per year. Keep in mind, Gene, the current, current federal tax, tax receipts is about 500 billion. So you go from 500 billion to 900 billion, that’s an unbelievable amount of money. And as you probably remember well, Gene, we had a big argument, big fight, about carbon pricing, and say, 2012 that was over about a $5 billion tax. Now, regardless of what you thought of the carbon price, we’re having a big argument over 5 billion. How would we go with an additional 400 billion? Having said that, of course, you don’t have to have a full blown measure, the full blown universal basic income, but even the more sort of the cheaper versions say the like, the affluence tested model that we’ve we’ve modeled was more like a bare minimum of $100 billion per year. So you still looking at having to sort of double the welfare system in Australia and knock on from that is to increase taxes by, you know, 20 30% across the country. So I think I’m in the current environment, that’s very unlikely to ever happen, but it’s still it’s an interesting idea to think about, I guess so hibi, I

Gene Tunny  42:04

mean, it certainly would be a nice thing to have just thinking about it. I mean, and one of the advantages that’s put all the pros, or the the the arguments in favor of it is that would allow us to to be able to choose our lifestyle. And I mean, we could take a few months off and divide it to yoga or to improving our wellness, that sort of thing, or writing a book. So look, there are. I can see the the attraction of it. It’s just the fiscal cost of it and implementation. We’ve already got this welfare system in Australia, at least that seems to do a reasonable job at at not too high a cost. But I can see the attraction. What about this? There’s this vision of the future where, with AI on automation, we have massive job losses, even among white collar professionals. Now, I mean, you know, we’re economists, so we’re probably great believers in the market adjusting and eventually people finding new jobs in this in the services sector. But do you have any thoughts on that? Ben, I mean, how, how big a risk is AI and automation? And I mean, to what extent that, does that improve the argument for a UBI, if that’s the case, that we could see these mass job losses in the future?

Ben Phillips  43:37

Yeah, look, I would probably a bit like yourself gene, bitter by my economics background, and I guess looking at history, over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods, of course, where you have some high unemployment, but generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappear and that there is the argument, as you say, that basic income advocates that have have a UBI for that potential outcome in the future, but I’m skeptical of it. Gene that said I’m not, I’m not a futurist, so I don’t really know what what the future holds in that area. I could be wrong, but I’m a little skeptical, just given that we’ve had very large technological change in over the last, you know, century, and people still remain in jobs. Yes, there are issues, you know, for certain people in certain industries, but that’s sort of part of the part of the ebb and flow of the economy,

Gene Tunny  44:47

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. Dot. 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.

Obsidian  45:35

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

Qin En Looi, a partner at Saison Capital, discusses the venture capital landscape, particularly in emerging markets like Southeast Asia, India, and Latin America. Saison Capital, backed by Credit Saison, focuses on early-stage investments and has $150 million in assets under management. The firm has seen three exits and emphasizes the potential of web3 and decentralized finance (DeFi). Looi highlights the efficiency and cost advantages of DeFi, citing examples like Thala, a decentralized currency exchange, and Helix, which tokenizes private credit. He also notes the geopolitical implications, such as near-shoring to Mexico, and the positive impact of the recent Fed rate cut on private investments. NB This episode contains general information and should not be considered financial or investment advice. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

About Qin En Looi, Partner at Saison Capital

Qin En Looi is a seasoned venture capitalist with a wealth of experience in fintech, B2B commerce, and web3 startups. At Saison Capital, he leads pre-seed and seed investments and advises multiple Southeast Asia-based web3 startups. His previous roles include co-founding Glints, the leading talent ecosystem in Southeast Asia, and earning recognition from Forbes 30 Under 30. Qin En is also the creator and host of the successful podcast “Parents in Tech.”

Timestamps for EP256

  • Introduction (0:00)
  • Venture Capital Terminology and Investment Strategy (3:19)
  • Evolution of Venture Capital and web3 (5:49)
  • Qin En Looi’s Journey into Venture Capital (9:56)
  • Investment Focus on web3 and Decentralized Finance (12:29)
  • Helix and the Future of Private Credit (20:02)
  • Geographic Expansion and Global Opportunities (26:34)
  • Concerns About Geopolitical and Economic Tensions (33:59)
  • Impact of Fed Rate Cuts on Private Investments (36:40)
  • Final Thoughts and Future Outlook (39:27)

Takeaways

  1. web3 Opportunities in Emerging Markets: Southeast Asia and Latin America are ripe for blockchain and decentralized finance innovations, with venture capitalists looking to capitalize on these growing markets.
  2. Blockchain and Financial Inclusion: Qin En argues Blockchain technology offers faster and more efficient financial services, helping to increase financial inclusion in underserved regions.
  3. Decentralized Finance (DeFi) as a Game Changer: Qin En argues DeFi platforms such as decentralized exchanges are transforming traditional financial models by enabling permissionless, trustless transactions.
  4. Private Credit on Blockchain: According to Qin En, tokenizing real-world assets like private credit offers new ways to reduce costs and increase liquidity, opening up more investment opportunities.
  5. Geopolitical Risks and Global Expansion: VC firms like Saison Capital are navigating geopolitical tensions by expanding into new markets such as Mexico, taking advantage of nearshoring trends.

Links relevant to the conversation

Saison Capital: https://www.saisoncapital.com/ 

Information on United States-Mexico-Canada Agreement (USMCA) which replaced NAFTA:

https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement

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Transcript: The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

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.

Qin En Looi  00:03

No one knows how things could be, right? I think there’s just so much uncertainty at the end of the day. I think our role is to understand what is happening, to be able to respond to it quickly, where we can and for the rest part, you know, just just sort of like, accept that this is sort of an environment that we’re in.

Gene Tunny  00:29

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 and welcome to the show. This episode, I’m joined by chin N Louis, a partner at Saison capital, an early stage venture capital fund based in Singapore. Chin en shares some great insights into venture capital investing, particularly the opportunities in emerging markets like Southeast Asia, India and Latin America. He discusses the focus that Sazon capital has on web three and decentralized finance, and he argues that blockchain technology can enable faster, more efficient financial services and increase financial inclusion. Righto, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Without further ado, let’s dive into the episode. I hope you enjoy it. Hinan, welcome to the program.

Qin En Looi  01:56

Thank you for having me. Oh, it’s

Gene Tunny  01:58

very good. And yeah, keen to chat about your your VC firm, so you’re based in Singapore, and, yeah, doing all sorts of interesting things. Can you just tell us a bit about the business, please?

Qin En Looi  02:10

Absolutely. So I’m a partner at Saison capital. We are early stage venture capital fund that is backed by a large Japanese traditional finance institution called credit. Saison, I’m very proud that we are one of the few early stage funds that is built for speed, and also one of the few early venture funds that can directly invest in digital and crypto assets.

Gene Tunny  02:31

Gotcha, so you mentioned you’re backed by a Japanese financial institution, so it’s providing you with the capital in to invest. Is that what you mean? Do you have other investors or clients?

Qin En Looi  02:44

Exactly? It’s only a single LT fund, so I only have one LP to report to, and sort of one shareholder. And that gives us a lot of flexibility that a typical fund would not be able to I’ll give a specific example. So for season capital, we are not just active direct investors, direct in the sense that we invest in startups, but we also are able to invest in other early stage venture funds. To date, we have done 1818, venture capital fund investments that really helps us to build an understanding globally of what the landscape, the investment landscape is shaping up to be, right?

Gene Tunny  03:21

Got you. So there’s some terminology I want to get make sure I understand. So LP, that stands for limited partner. Is that right? Yes.

Qin En Looi  03:30

And LP is the individual or the shareholder who contributes capital to a venture fund. So at the end of the day, most venture capital funds do not manage their own money, like say, a family office. Venture capital fund is essentially an asset manager in the very particular asset class. So a LP, a limited partner is who provides, is the individual institution that provides capital for the venture funds,

Gene Tunny  03:58

gotcha, and there are also general partners. Is that correct? The GPS?

Qin En Looi  04:04

Yes. So GPS, are people like myself who run the fund, gotcha, gotcha.

Gene Tunny  04:09

And do you disclose your assets under management, or how much you you invest on behalf of clients? Or is that? I mean, if that’s confidential, that’s fine. I was just interested in the scale of of your operation? Yeah,

Qin En Looi  04:21

absolutely. So we have 150 million US dollars assets under management. But what we like to say is that this is also a evergreen Fund, in the sense that every year we can always request for more budget from our parent company if needed. Because, once again, we are not set up like the typical venture fund where, you know, you go out, you raise, it’s a closed end fund, right, whereas ours is a bit more of an open ended Fund, which means that we can always just take on additional capital from our parent company,

Gene Tunny  04:50

yeah, gotcha right. And with, with venture capital, I mean, it’s a tough game, isn’t it, because you. Like, I’ve listened to Tim Ferriss talk about this on his show. And, I mean, essentially, you know that a lot of the things you’re investing in not necessarily get the ROI, I mean, the you know, because a lot of them, it’s experimental, or it’s very novel, but you’re relying on just one of them to to to hit it big, and, you know, go to the IPO, or to have the to have the buyout, and then you get that outsized return. Is that essentially the the VC strategy is that the top of is that your strategy? Or how do you think about the your investment strategy?

Qin En Looi  05:37

Yeah, I mean, Gene, what you said is exactly sort of the textbook definition how venture has been over the past few decades. But to be honest, I think we are today at an inflection point right where I feel like venture capital really has to evolve, and we have to find new ways to create value. So exactly to a point the old ways, it’s making a whole bunch of investments, expecting most of them to fail, but those that succeed deliver exceedingly like we call those home runs, right? They deliver incredible, phenomenal returns that more than make up for it. And usually those exits come in the form of, like you said, IPOs or trade sales. That model started in the US. It has, it has and still works in the US. But I think what very quickly people are realizing is that in many parts of the world, especially in the parts that we operate in, in Southeast Asia, in India, in Latin America, that’s starting to pose a challenge, primarily because these IPO, these MNA routes, are not as deep, right in terms as compared to the US. In the US there’s the rich capital markets. There are many corporations with large war chests that can deliver those kind of returns, but hey, you don’t find many of that over here, right? Some of the largest corporations across these markets are very traditional companies that probably don’t appreciate the tech multiple and also the same thing we see on public markets, some of the largest companies, largest tech companies that went public coming out of Southeast Asia, their outcomes are not as desirable. So I think really where we are today, it’s a very interesting position where dpi, which is basically the money that’s actually returned to LPs, the money that’s actually returned from venture funds to to their investors, is at an all time low, and many people are sort of questioning the value of this asset, plus, and we really hope to be part of the conversation that reinvents what that looks like.

Gene Tunny  07:36

Gotcha, did you say dpi, is that dividends paid to investors? Yes, that’s right. Okay. Oh, good. That makes sense, right? And where are you in your, in your evolution as a as a fund or as an in VC? Is it early days? Have you had any exits of any of your the companies you’ve invested in? Has there been an exit? Where are you in that sort of journey?

Qin En Looi  08:00

Yeah, we’re still relatively early as a fund, having started just investing in 2020 but the good news is that we have already seen exits, right? We, in fact, we are three exits that have happened, that have delivered great returns for us. But look, I think for many of our portfolio, it’s still the early days, especially because we often invest before the Series A round. So generally we’re considered earlier stage investors. And you know, the cycles of these take more than 10 years. But I think you know what, what excites us? It’s really where, sort of the broader web three and digital asset industry comes in. Because essentially, we see that space as accelerating liquidity and return timelines, right? You can see what you want about the crypto, about the web three space. You know, a lot of people love it, a lot of people, even more people hate it. But what is undeniable is the ability to generate liquidity for investors at unparalleled speeds. Right? Exactly to your question around, have we seen exits? Have we seen returns? Those three exits that we have in the in the non web three space are more exceptions, rather than the norm, whereas in the web three space, generally, we see exits at, you know, between year three to year five of the company’s life cycle. So practically, as investors, our approach to to approaching the web three, the digital asset investment space, it really comes driven from, you know, there is opportunity there, but the more importantly, there’s also liquidity. Yeah,

Gene Tunny  09:26

yeah. Okay. Well, I’ll ask you about that in a moment, just before we get there, I think some, you know, many listeners would be interested in your story. How did you get into VC in the first place? Because it seems just you’re relatively young, and you know, obviously doing very well. So what’s your story? I’d be interested.

Qin En Looi  09:45

Thank you. To be honest, I would never imagine myself being a being a VC, but my story started 11 years ago. I was the first generation of venture backed founders in Southeast Asia. I often joke with. The Founders I work with now, don’t talk to me about valuations, because I did my startups seed valuation and post money valuation at $1.5 million today, seed rounds are $1.5 million but the valuation I raised 1.5 million right? So 11 years ago, together with two other co founders. We co founded glins, which today is the largest recruitment platform in Southeast Asia, the largest tech enabled recruitment platform. The company today is a series D company. There’s very small, $80 million and I was with the company for the first five years. So really, sort of going through that zero to one journey, expanding out of Singapore to the Southeast Asia region was a phenomenal journey. Made plenty of mistakes, but also took away plenty of lessons. After building glints, I went off to BCG, both on the classic consulting side, but more interestingly on the venture building side. So that was when in 2020 2021, when BCG, digital ventures today is called BCG X was really supporting corporates to build startups. Did that for almost three years before Cezanne reached out and say, Hey, do you want to cross the table and become an investor? I thought, why not? Why not step back into the startup ecosystem, albeit in a different role? And it has been a great journey since I remember joining in 2021 right at the peak of the bull market, both in the web to web three sense when due to getting done, it’s insane, right? I remember those days when you you meet a founder for the first time, like over or over call like this, and they tell you, Look, we need you to commit by tomorrow. And so those are the crazy days. And of course, we rode the wave down. But, you know, with with the current environment we’re in, starting to see a bit of recovery, overall, excited, right? And I think I count myself fortunate to sort of see a bit of a cycle, because that really helps me to shape my perspectives.

Gene Tunny  11:57

Yeah, absolutely, wow. It’s a good yeah, good story, yeah, I’ll have to look up glints. Did you say it is B, L, i n t, s, that’s right. Great. You said Southeast Asia. So you’re talking about Manila and Jakarta, like Indonesia, Philippines, right? Yes, yes.

Qin En Looi  12:14

Indonesia remains our largest market, but we also have presence across Philippines, Malaysia, and even, actually, a bit of East Asia, so Taiwan and Hong Kong too,

Gene Tunny  12:24

yeah. What I’ve noticed about Indonesia, when I’ve spent some time there and done some work over there, is just, they’re very good with the apps, like they had, I remember they had, yeah, but like, 10 years ago, they seem to be even more advanced than, you know, further along in their, you know, relationship with apps and, you know, using, was it go Jek or something? I’m trying to, yeah, I thought, and you could get a scooter and they deliver stuff, although that was really great. So they seem to be more savvy than some of us here in Australia. So that was, that’s great, okay, and you mentioned web three and exits from there, and you talked about the ability for it to generate liquidity. What sort of web three? What broadly are we talking about with web three? What types of businesses have you invested in, and what ones were exited? Or was there an exit?

Qin En Looi  13:16

Yeah, you know, when we started the web three journey, we wanted to take on the approach where we don’t know what we don’t know. So the right way to do it is to really learn as much as possible. We ended up investing, and we started out as very sector agnostic, investing, everything from the infrastructure you’re talking about, wallets, tooling to, of course, the applications. We did games, we did decentralized finance, we did real world assets. So we did, in short, a whole bunch of stuff. Now, kind of after about one and one or two years into that journey, we started to to figure out what our thesis was, and our thesis became the focusing on finance applications, on web three, broadly, they can be divided into two categories, decentralized finance, as well as real world assets or tokenized assets. So these are two, even though both are sort of finance related, both couldn’t be further apart. Decentralized finance, as the name suggests, is the idea where everything is permissionless, everything is trustless, everything is anonymous, whereas real world assets is really about bringing some of these real financial assets onto the blockchain, serving very different audiences, but I think both have created great investment opportunities for us. Gotcha. And

Gene Tunny  14:34

can you give us an example of both the defi and the tokenized assets, just so we can understand what, yeah, what are you talking about? Please, absolutely.

Qin En Looi  14:44

So, for example, one of the things that we invested in defi is what we call decentralized exchanges. Simply put, it’s, it’s a money changer business, right? Imagine today you interact with a blockchain ecosystem, and you want to, you know, get some. Currency, or in this case, get some tokens to spend, whether on products or services. You need to swap, right? It’s just that. How? Let’s say, when I go to Malaysia, I go to the US, I cannot just use my Singapore dollars. I need to swap to the native currency. So decentralized exchanges essentially provides a way for you to swap, or basically the money changer business. But what’s really interesting is not just from a customer point of view, say me swapping my Singapore dollars to US dollars, but actually the ability for you and I to both also be the money changer, right? And all of this is facilitated by the blockchain, by the smart contracts. So let’s say today I have two pools of capital, two pools of tokens, two pools of currency, let’s say Singapore dollars and US dollars. In the web, two world, I need a license to be a money changer, right? Otherwise I could go to jail. But decentralized finance works such that I can without asking anyone for permission, without anyone knowing who I am, I can deposit both my Singapore and my US dollars, the equivalent in tokens, of course, and essentially earn fees becoming a money changer, right? So I think that’s really sort of one of the cool and interesting things about decentralized finance. It really lowers the barrier to a lot of these, these applications and these use cases. So one of the more successful ones that we have done is called Tala. It’s T, H, A, L, E, it’s a decentralized exchange on one of the faster growing blockchains called Aptos apt us, right? So, you know, really sort of figuring out, where are the different each blockchain is almost like a new country we try to invest in, almost like the infrastructure of each of these new countries, right? For example, this new country coming out, you want to be investing in the airports, the railroads. That’s essentially what we have done, and that’s what we see decentralized finance as an example. Now, in the real world asset, that’s something that’s a bit more interesting, I think, something that’s a lot more relatable. We’ve invested in companies that essentially use the blockchain to reduce costs and increase access. Right? One of those companies is helix, H, E, L, i, x. They come from a very strong financial background, having dispersed more than 400 million US dollars worth of private credit. To date, most of this business remains in Southeast Asia. So the question is, how can we offer Southeast Asia credit opportunities to the world, right? And what they’re really doing is they’re using the blockchain to increase inclusion, to reduce the cost of distribution, and they have done that very successfully. And we’re super excited to back there.

Gene Tunny  17:33

Gotcha Okay, I want to ask follow ups on both of those. So both, yeah, really compelling examples with the defi, with parla Taylor, T, H, A, L, E, Tala Gotcha. Okay. How does it compare in terms of efficiency, in terms of cost to the users, relative to traditional methods, absolutely.

Qin En Looi  18:03

So I think that’s one of the things, right? Aptos, as with many other blockchains out there, are, like the modern blockchains that make it really, really cheap. We are talking about a fraction of a cent to do any transaction on the blockchain. So really, that’s one. Secondly, you have instant settlement, which I think is insane, right? Today I saw a stat. I saw a study that says, on average, it takes 18 hours to move us dollars through the SWIFT network, which is insane, because that’s pretty much the time of the longest flight from Singapore to New York. So you’d be better off putting the money, the cash, on the plane and flying it over. People call it crazy, but that’s that’s how long it genuinely takes to move fiat money today, as compared to, for example, Tala apton. So broadly, many of these, what we call high throughput blockchains, where settlement is less than one second, right at the cost that is a fraction of a cent is like point that’s like, you need to put five zeros behind the decimal point. And that’s, that’s the cost. So I think really that’s that’s some of the speed and efficiency advantages, but I think more than that is also the idea of it’s trustless, right? What I mean by that is that the blockchain, it’s public, and it’s immutable. Once you do a transaction, it cannot be reversed. And there gives a lot of sense of security that the traditional world does not have today. If I open up my Robin Hood, I open my bank app, it says I have, let’s say, $5,000 I don’t really own that 5000 right? It’s actually an IOU from the bank telling me that if I want to withdraw $5,000 they would pay it back to me. We saw what happened last year with Silicon Valley Bank. Clearly, you know, these centralized institutions do fail sometimes, yeah? And so that’s really sort of the benefit of decentralized finance, yeah,

Gene Tunny  19:47

gotcha. Okay, I might be getting confused between the different different companies. So you mentioned there’s a currency exchange, yeah? So that that’s Tala. Is it? Tela, exactly, and what’s, what’s helix again, sorry, Jan, I just forgot. Sure.

Qin En Looi  20:05

No problem. Helix is bringing Southeast Asia private credit onto the blockchain. Ah, gotcha,

Gene Tunny  20:10

right, private credit onto the blockchain. Okay, and you mentioned you were expanding. You’re making it more inclusive, and just interested in more about it, like who’s What do you mean by private credit? You mean companies with spare cash or high net worth individuals who are willing to lend that money out. Is that correct? Yes, okay, yes, exactly.

Qin En Looi  20:32

So private credit, it’s a simple model of today. You are high net worth individual, or you are a company you you want to generate yield that is above the risk free rate, but not take too much risk, right? So private credit opportunities generate generally anywhere from 10 to, let’s say, 15% APY, not the best, but it’s a lot safer, right? Than, let’s say public equities out there. So, so the model private credit, it’s essentially debt and lending, right? You lend to other companies. And, of course, you, you, you are senior in terms of the the repayment stack. So should anything go wrong? You get paid back first, as compared to, let’s say, the equity shareholders, yeah,

Gene Tunny  21:14

yeah, gotcha. Okay. And so helix, what it what does it do? It matches the the the lenders, with the borrowers, is that what’s going on that

Qin En Looi  21:24

and what they’re doing, it’s a few things, right? I think, first and foremost, often, what creates a lot of fees, it’s the fund administration, right? You need different parties, different different people, different vendors, to come on board, to attest to, to do many things, to audit and all of that. What helix is doing is, by bringing a lot of these processes on the blockchain, you can actually save a lot of that middleman costs, and these savings get passed on to your ad investors. So firstly, what helix is doing, it’s at least on the back end, reducing the costs of investment. That’s one. Now, the second thing that they’re doing is exactly like you mentioned, they’re bringing it onto the blockchain so that the current, you know, there’s this 100 and $20 billion worth of stable coins on the blockchain today, right? Many of them are sitting idle. They are not generating any you so what helix is doing is bringing these 10 to 15% yield that is has been proven. There’s a track record. It’s regulated in Singapore by the Monetary Authority of Singapore, and he has a $400 million track record with zero defaults. All of these benefits of such this particular financial product, they are bringing it onto the blockchain, so that if today you are a stable coin holder, you can directly access and invest in this opportunity.

Gene Tunny  22:48

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

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Gene Tunny  23:23

Now, back to the show. So you mentioned I’ll have to look this up. So you said $400,000,000.00 defaults, exactly. I mean, this is immediately. I’m sort of asking, just thinking, how is that even possible? How can you have zero defaults? What’s what’s going on here? I mean, what’s the how do you ensure the people who borrow the money have an ability to pay it back? Is there? Is it fully collateralized? Is it? I mean, what’s what’s going on here? Yeah,

Qin En Looi  23:57

absolutely. I think first, first things, first for us as not Saison capital, but our parent company, credit Saison, our primary business is in lending. So we understand risk. We understand all these factors very well. The Golden principle lending, it’s any fool with money, can lend it out. The hardest part is always collecting it back. So to answer your question, yes, in fact, the way helix does it is through multiple layers of security. For example, helix does not lend directly to consumers. It does not directly lend to the small and medium companies. Instead, they lend to fintechs, and these fintechs do the lending to consumers or SMEs. So what it means is, yes, there’s a middleman, but this middleman also takes first loss responsibility. So today, helix, let’s say, lends to FinTech company, a FinTech company, a lens it out. Of course, there are always losses and all of that, but helix will often sit senior, which means, let’s say the first 20, 30% of. Of let’s say the pool is a million dollars for for the sake of argument, the first 200 to 300k of that pool is actually contributed by the company itself, the FinTech itself, the what we call the originator, right? And this is what we call the junior tranche. So if there’s any losses, it comes from the junior tranche. Now where helix sits, it’s on the senior trench. It sits above that. So essentially, there’s a way to do it, and if you do enough due diligence and you structure it properly, there are ways such that the senior guys enjoy a youth that and enjoy no losses, no defaults. Of course, the bulk of the returns comes in June, right? You’re talking in junior. You’re talking about a lot higher returns. You’re talking about 2030 could sometimes even reach 40% yield. But of course, higher risk, higher reward, and the junior piece is usually taken by the companies itself to prevent moral hazard. So where helix comes in is offer senior secured capital, and usually there’s a there’s quite a generous buffer below them the interest, zero defaults, right?

Gene Tunny  26:02

Okay, yeah. I mean, I don’t mean to be skeptical, but I always, you know, just the economist in me. I guess economists are naturally skeptical of this sort of thing, and they go to too good to be true. And just thinking about, yeah, what’s the I mean, I because I was in the treasury here in Australia during the financial crisis, and yeah, I just remember, yeah. You just, you just know how things can go wrong. Everything sort of collapses at once. So just sort of naturally, yeah, naturally, a bit, a bit skeptical, but yeah, it sounds fascinating. I have to look more into it. It’s, yeah, it’s incredibly amount of innovation that is occurring out there, and you seem to be at the forefront of it. Where are these companies that you’re investing in located? I mean, are they in Southeast Asia, or are they in the States or Europe? Where are they? Yeah,

Qin En Looi  26:56

I would say about half in Asia and half in Western markets. Western markets heavily being concentrated in the US. That’s one of the things that we love about web three, right? Everything is sort of so global. Really, anyone from anywhere can can build successful companies. Some of the largest companies in the space are also built entirely remote and distributed teams. So yeah, we take a very global approach. I travel around a lot. As a result, I make a trip to the US at least twice every year to make sure that we stay on the pulse. But that is also actually where investing in other early venture funds helps, right? Because we are LPs, we are investors in those funds. We work very closely with those GPS with those venture capitalists to expand our due flow and our network access. Gotcha.

Gene Tunny  27:43

Do you have any investments in Australia? Do you are there

27:52

any? Yeah,

Gene Tunny  27:53

I’m interested, because I think things have started improving here. I mean, for years, the view was there really wasn’t, there wasn’t a lot of opportunities for startups you had to go to over the Silicon Valley. And so that’s why there was a colleague of mine at Treasury, Anthony Goldbloom, who he, I guess he got an angel investor here to help him out, but then he had to go and, you know, raise money over in Silicon Valley, and you get work with some great people there, and they ended up selling that company, Kaggle, to Google. So he did really well. But yeah, I mean, that’s, I always remember he had, you know, he essentially had to go over there to get things moving. I just wondered, to what extent, you know, now, how things have evolved. And because there are a lot of people here, they’re more angel investors, more people willing to take a chance on startups. So, yeah, I was just wondering if you had any, if you hadn’t in any investments in Australia, but yeah, that’s fine, yeah, if you, if you, hopefully, you’ll find some, some good ones, right? Oh, so we’ve talked about web three. Are there any other areas of interest, any other I don’t know what do you call them, thematics or verticals that you’re that you’re investing in? Yeah,

Qin En Looi  29:14

I mean the planning. But maybe I can share the biggest one outside of web three. It’s actually our geographic expansion into Latin so 18 months ago, our parent company opened up offices in Sao, Paulo, Brazil and also Mexico City. I think we’re super excited about the opportunity to create more awareness about Latin America, traditionally, especially for folks in Southeast Asia and Australia, it has been a really long and far journey, right? It’s we’re separated by more than 30 hours of flight, one that I took not too long ago and will be taking again next month. But look, I think for us, we see massive opportunities in Latin America. Brazil’s FinTech ecosystem is truly, I would say, cutting edge. The Central Bank was number one central bank. In the world. They are probably the first that would launch blockchain in the financial industry at scale. So I think really sort of for us as not just web three, but I would say broadly FinTech investors, we are spending a lot of time and attention in Latin America,

Gene Tunny  30:18

right? Okay, that’s interesting. I like to look more into that. Yeah, that’s a hot tip, I think, if you’re, if you’re seeing those opportunities there, and I mean, that could help their general economic development and catch up to to the the more, you know, the more advanced economies. I mean, I guess the Yeah, because I think yeah, they generally do need to do a bit of, a bit of catch up to the the advanced Western economies. So that’s that’s really fascinating. I have to, have to look more into that. Okay, Jen, this has been a fascinating conversation. Yeah, I’ve learned a lot of it’s a sort of conversation I have, and then I think, Oh, gee, I’m gonna have to go away and do hours of research on this, lots of really cutting edge stuff. What’s I might just final question about the whole sort of geopolitical and an economic, geo economic, I suppose, situation, to what extent are you? Are you concerned about the broader trends or the developments in the world? I mean, i It seems that we’re, you know, at one of the riskiest sort of times in in world history, for a long time, since probably the early 80s, really, if you think about the probability of a major global conflict, you know, is that, is that something you think about as, as Vc investors, or you just try and do that, you know, you just sort of, oh, put that to the side. We’ll just do the best we can. I mean, how are you thinking about the global situation? Yeah,

Qin En Looi  31:54

no, no, it remains super important, because at the end of the day we, I mean, venture, it’s a very small asset class in a broader world of the whole economy, right? And I think the way we see it, it’s, you know, we have to see where the tide is turning. We have to see where the wind is blowing in order to know what’s next. I think you’re right, right? All these tensions, all these geopolitical issues, are creating a lot of risks. I think some we just have to accept, some we have we can mitigate, and some we can even turn into opportunities. For example, I mean, just going back to the Latin America expansion, right? I mean, Brazil was obvious choice. It’s the largest country in Latin massive FinTech ecosystem. So it’s almost like a no brainer. The question is, why Mexico? Right? Mexico, it’s not, not nowhere close to to that, but actually, sort of, our decision to invest in Mexico heavily also actually came from, a result from this geopolitical tensions right in the past, China, Asia, is a huge sort of manufacturing and and and sort of production place for Western countries, especially the US, but we’re seeing a reversal of the trend because of these tensions to what we call near shoring right. So a lot of these key production is moving to Mexico, which, in turn, is kind of stimulating the whole sort of country, the whole economy. And hence, that’s why we’re there. So I think, I mean, that’s just one very, you know, small and perhaps example, but it just shows that, yes, it matters. I think to a large extent, a lot of these are risks that we just need to be on the lookout for. There’s not much we can do about it, but that presents opportunities. We won’t hesitate to go after it. Yeah,

Gene Tunny  33:34

it’s good point about Mexico. So Mexico, I’m trying to remember the name of the trade relationship that has with the US and Canada. It used to be called NAFTA, but they read, Trump renegotiated, I think, and got a new name. I have to put it in the show notes, but I thought that was a good point. I should ask. I mean, what about China? I mean, this is something that is, you know, I ask a lot of guests about this now, because where Australia is so heavily, well, China’s a major our major trading partner, I suppose, in terms regarding our exports of our commodities, it’s just extraordinary. And there’s the growing tension, it seems that, you know, a lot of people in the United States are concerned about policy under Xi Jinping. They’re concerned about growing, you know, China’s sort of ambitions for Taiwan. And, you know, there’s this, this growing. This is view that seems to be that the Americans appear to have, that there were in this strategic conflict. And so we’ve sort of shifted from it’s, you know, China’s, uh, entry into the global economy is amazing. And this the whole sort of globalization thesis. We’re moving away from that, and it’s more sort of decoupling now. So I’m just wondering how you think about that. What are you seeing regarding the, you know, this whole sort of issue of the US, China tension? You have any thoughts on that? Yeah,

Qin En Looi  35:01

I think at a high level, look, I don’t think this conflict is going to get resolved anytime soon, right? There clearly is two superpowers, and they sort of always want to one up each other. We’re already seeing it at various levels, right? I think, sort of the way I think about it, it’s sort of the way Singapore has been playing it, which is increasingly difficult, but you know, I think so far, Singapore has done a great job, which is to remain neutral, right, to be friendly, I think. And it’s not just on that political level, but even, I think for us as a venture asset class, at the end of the day, I think we make the most noise as compared to many other asset classes, but we are very small, right? So I think it’s important to to understand the world, the circumstances that we sit in, and try, I would say, try not to take sides, right? Because you don’t want to end up on the wrong side of the equation. No one knows how things could be, right? I think there’s just so much uncertainty at the end of the day. I think our role is to understand what is happening, to be able to respond to it quickly, where we can, and for the rest part, you know, just just sort of like, accept that this is sort of an environment that we’re in. So yeah, I think that’s sort of that sort of broadly my take on it, to remain neutral as much as possible,

Gene Tunny  36:18

right, right, fair enough. Shannon, it’s been a Yeah, fascinating conversation. Any final thoughts before we wrap up? Anything you think you know is worth talking about as at 21st of September, 2024 any anything on your mind, anything you’re you’re concerned about, anything you’re excited about that we haven’t touched on?

Qin En Looi  36:38

Yeah, no, I think you know, with sort of the Fed announcing the 50 basis points rate cut just two days ago. Look, I think that, hopefully that the tide has turned. I think especially for private investment classes, the private credit, private equity, venture capital. I think this is much needed news and optimism for us, because even though the public markets have somewhat picked up a little since last year, the private markets have remained relatively challenging. So to all the founders and also to all the investors out there who are operating this space, I would say, get you know, remain optimistic, remain encouraged. We can look forward to better days in the very near future,

Gene Tunny  37:17

right? Oh, okay, could you just expand on that? I’m interested in that. So how do you see it as a as affecting the firms, the startups, the venture funds? How do you see that, that 50 basis point cut? I mean, I’ve got a sense of how it will and I’ve got my own views, but yeah, just if you can expand on that, how you see it as as beneficial? Please.

Qin En Looi  37:39

Yeah, yeah. Look, I think in a, I mean, fast forward back to when it was zero interest, right? I think capital was cheap. A lot of capital flowed into these private classes. What has happened, whereas with sort of the bear market, is essentially, firstly, the cost of capital became a lot more expensive, and more importantly, the risk free rate increased, whereas the returns on these private classes have went down. So it became a point where many investors, many large institutional investors, have figured out that, firstly, they are over allocated in private assets, right? They are way over allocated. That’s one. Secondly, the risk return profile just doesn’t seem to add up, right? You’d rather do something that’s a lot more liquid, something, let’s say, in the public equities or even in fixed income, right, where the yield, the risk reward is a lot more attractive than these private classes. So what has happened as a result over the past two, three years is basically a dear, absolute sort of, I wouldn’t even say decline, a crash in available funding to for the LPS have towards venture capital, especially, right? And so this has a trickle effect when LPS don’t give money to VCs, VCs don’t give money to founders, and then startups unable to grow. So I think, sort of, with this shift, with with the rate cuts, at least it gives a bit more optimism. It won’t solve the problem entirely, right, but at least it gives some optimism to money coming back in to these private asset classes.

Gene Tunny  39:12

Very good, okay? Thank you. Jay Powell, very good. And Chennai, thanks so much. This has been terrific. You’ve given us so much great information and so many amazing insights. And yeah, all the all the best with your investments in the coming years. And yeah, hopefully I’ve got a chance to catch up with you again. This has been terrific. Likewise. Thanks a lot. Jean. Okay, thanks. Janine, 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 economics explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you 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. You

Obsidian  40:23

thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

Balancing Needs & Wants: Chris Ball, Hoxton Wealth, on Global Wealth Management in an Uncertain World – EP255

Chris Ball, CEO of Hoxton Wealth, discusses the company’s focus on wealth management for internationally mobile individuals, particularly in Dubai. Hoxton Wealth, with offices globally, offers fee-based services to high net worth and mass affluent clients, emphasizing comprehensive financial planning. Ball highlights the use of AI for administrative tasks and the challenges of property investing in the current political climate. He also addresses the debate on retirement income withdrawal rates, advocating for a balanced approach between needs and wants. Ball mentions the impact of geopolitical risks and economic trends on their business and the importance of risk-tailored investment strategies. NB This episode contains general information and should not be considered financial or investment advice. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

Timestamps for EP255

  • Introduction (0:00)
  • Hoxton Wealth’s Services and Client Base (4:59)
  • Challenges in Property Investing and Political Climate (5:14)
  • Client Profiles and Financial Planning (5:28)
  • Investment Strategies and Risk Management (14:43)
  • Cryptocurrency and Geopolitical Risks (20:35)
  • Economic and Demographic Trends (23:59)
  • AI in Wealth Management (31:58)
  • Technology and Client Communication (34:37)
  • Final Thoughts and Contact Information (35:44)

Takeaways

  1. The complexity of Global Wealth Management: Managing assets across multiple jurisdictions requires expertise in different tax regimes and regulatory environments, especially for high-net-worth individuals and ex-pats.
  2. AI’s Role in Financial Planning: While AI may not replace human financial advisors, it helps streamline administrative tasks, reduce costs, improve efficiency, and allow advisors to serve more clients.
  3. Property Investment Challenges: Rising interest rates and increasing regulation make property investments less attractive, especially for those looking for passive income in retirement.
  4. Retirement Strategies Vary: Wealth management clients need personalized plans that balance their wants and needs for a comfortable retirement.
  5. Crypto’s Place in Wealth Management: Chris Ball believes cryptocurrencies are here to stay. However, investors need to be prepared for volatility and risk with crypto, making it unsuitable for many traditional clients.

Links relevant to the conversation

Chris’s business, Hoxton Wealth: https://hoxtonwealth.com/ 

Chris’s bio: https://hoxtoncapital.com/staff/chris-ball/ 

Chris Ball’s LinkedIn page: https://www.linkedin.com/in/chrisballhx/ 

Fundsmith Equity Fund mentioned by Chris in the episode: https://www.fundsmith.co.uk/ 

Controversy over Dave Ramsey’s retirement withdrawal rate recommendation:

https://youtu.be/Rc1nJj4vE_w?si=_7fVgjShgFKg6VX-

https://youtu.be/kghKiz1Mi_8?si=2jAP9DtWKN-LoR50

https://youtu.be/dM6Jqm7PPpg?si=pPvYh08bieusPBzO

Info on tax in UAE:

https://taxsummaries.pwc.com/united-arab-emirates/individual/taxes-on-personal-income

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

Website: https://www.lumocoffee.com/10EXPLORED 

Promo code: 10EXPLORED 

Transcript: Balancing Needs & Wants: Chris Ball, Hoxton Wealth, on Global Wealth Management in an Uncertain World – EP255

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.

Chris Ball  00:04

Crypto is here to stay number one. I don’t, I don’t really think it’s going anywhere. I think you’ve got to be quite that, have quite thick skin to invest in crypto and be comfortable with ups and downs. Probably most of these things is, as we saw, kind of pre 22 was that a lot of people don’t really understand what cryptocurrencies are and what drive them, and unfortunately, a lot of people lose a lot of money.

Gene Tunny  00:35

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 and welcome to the show. In today’s episode, we’re joined by Chris ball, CEO of Hoxton wealth, we talk about his company’s focus on wealth management for internationally mobile individuals based in Dubai. Hoxton wealth operates globally, with offices in the UK, Australia, the US and Europe. The company caters to high net worth and to mass affluent clients, offering fee based services. Chris emphasizes the importance of understanding clients’ needs versus their wants and developing comprehensive financial plans for them. In our conversation, he highlights the use of AI to streamline administrative tasks and the challenges of property investing in the current political climate with various left wing parties proposing radical policy interventions. OK, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners and details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Okay? Chris ball from Oxton wealth, the CEO and founder, thanks for appearing on the show.

Chris Ball  02:22

Thanks very much for having me appreciate it. Gene, yes,

Gene Tunny  02:26

be good to chat about wealth management and what you’re up to. So you’re based in the Middle East. Is that right? Chris,

Chris Ball  02:34

exactly, yes. I’m based in Dubai. I’ve actually been in the Middle East for 13 years now. So I moved out in 2011 in August, 31 of August. 2011 actually was in Abu Dhabi for nine years, which is the capital of the UAE. So Dubai’s more well known part of the business, well part of the country or part of the territory, but Abu Dhabi is actually the capital, and that’s where a lot of the oil wealth is in the United Arab Emirates. So yes, I’ve been based here for 13 years. Really enjoy it. We built out our business here. My kids were born here. So it’s been, it’s been quite a nice place or good it’s been a good place to me, I suppose, is the best way to put

Gene Tunny  03:18

it right. Okay, and what’s your business involved? What does Oxton wealth focus on?

Chris Ball  03:22

So we’re a wealth management business team. We focus on helping people that are internationally mobile manage their funds. And we’ve also got a UK domestic business as well, where we help people domestically in the UK with their financial planning. You know, we help with everything from helping people plan for retirement, plan for their kids’ education, funding for property purchases, tax planning, insurance planning, all of this good stuff that fits under that umbrella of financial planning. We’re a fee only or fee based service as well. So we don’t get paid commissions unless it’s for insurance related products, but all the financial planning and the investment advice that we give, we charge a fee, which makes us quite unique internationally, because a lot of people still work off the commission only model, and all day, every day, we’re helping people globally manage, manage their money in The in the most effective manner. We typically have people come to us with more complex situations, so maybe assets in Australia, but living in the UAE, or assets in the UK and living in the States. And we’ve got businesses globally. So obviously, in Dubai, where I currently am, we’re licensed and regulated. Also got offices in the UK. We’re regulated by the Financial Conduct Authority. We have offices in Australia, where we’re regulated by ASIC. In the US with the Securities and Exchange Commission sec, and in Europe, our base is in Cyprus, which gives us that global coverage and enabling people move around to, you know, to manage their. Their their money and their funds and their planning more effectively. Gotcha.

Gene Tunny  05:03

And what’s your client base look like, broadly? Is it a lot of expats? Yeah,

Chris Ball  05:09

a lot of them are gene A lot a lot of our clients are expats or internationally mobile. Funnily enough, a lot of them have gone back to their home destinations as well now. So we have quite big footprints, dostically, with domestic what you would see is domestic clients, but it’s they’ve lived internationally, and now they cut, now they’ve come back. But, yeah, we, we typically help people with more complex financial planning needs than, you know, I’ve been a plumber and have, you know, put away a bit of their retirement, and they just want someone to manage it. So typically, we’re dealing with assets in multiple countries, and helping people plan for the next generation and how to how to pass it

Gene Tunny  05:46

on, right? And you have a lot of high net worth individuals. We

Chris Ball  05:51

do, indeed, yeah. So we deal with what we call mass affluent and high net worth individuals. We don’t have too many ultra high net worth individuals that we deal with our service or how we you know, the advice that we provide is is more geared to towards mass affluent and high net worth individuals, but typically, like I said, it’s more complex planning needs. So assets spread around different tax taxation rules that you need to take into account different regulatory regimes because they’ve got assets in different places and really working with them to find the best solution for them and their families,

Gene Tunny  06:27

right? Okay, before we I want to ask you a question about that. But before we do that, can you explain what do you mean by mass affluent versus high net worth? I mean, I just use high net worth individual, I sort of had an idea in my mind of what it is, but I wasn’t thinking too specifically. And then you mentioned ultra high net worth. How do you distinguish between those categories? We typically

Chris Ball  06:51

do it in kind of investable assets. So we’d say, let’s say I don’t know, half a million, up to a million, or that’s probably more like 250,000 up to a million, of assets we would class as what we call mass affluent. So there’s, you know, a lot of those people, and they’re affluent high net worth, we typically say from one to 5 million, and then ultra high net worth would be 5 million plus.

Gene Tunny  07:15

Gotcha, okay. And you talked about how you help them manage their their affairs. What are the typically, what are the things you look at, or what are the issues you deal with? I mean, you mentioned assets in different jurisdictions and tax I suppose I’m wondering, how do you, how do you go about finding a solution for your clients? A

Chris Ball  07:36

lot of people come to us with a very you know, they typically come in with one thing that they want to get, you know, one thing they want to get sorted. So let’s say a lot of our clients, what we call us connected people. So they have assets in the US, but they no longer reside in in the United States. So we would work with them to help them manage those US assets when they no longer reside in the US. But what most people really want to know is how much and when. So how much do I need and when can I stop working if I want to? Yeah, and you know, they’re the type of questions that we ask people because it’s difficult. You have to look holistically at all of their assets. You need to understand what their objectives and what motivates them and what they want to do, how much and when is very broad. How much you need will depend whether you want to fly business class, or you know you’re happy with economy, or whether you want five holidays a year, or you just want to go on one, whether you just want to travel domestically, or whether you want to live internationally, whether you want to support your kids, all of these things. It’s about questioning and listening and trying to find out, ultimately, what’s important to the client, to help them understand how much that they will need when they want to stop working. Now, where, you know, we kind of split that into kind of two buckets, which is, you know, what do I what do I need? You know, what’s a want, what’s a need, I suppose the best way to describe it. So what do I need to survive? And what do I want on top of that? And you know that also helps us understand realistically when they can retire. So you know, if you want $200,000 a year of income, and you’ve only got half a million dollars saved up at the moment, between your assignment assets in your bank account, you’re going to need to work for a bit longer, unfortunately, and helping them understand when that, you know, is likely to be given how much they can put away. And, you know, looking at realistic returns, and also stress testing that and flexing it as well. Yeah, is important. And you know, they’re the kind of things that we do, and they’re the kind of things that we really help people with. It’s about helping them develop that plan.

Gene Tunny  09:45

Yeah, gotcha. And you do financial modeling. How do you actually come up with that advice?

Chris Ball  09:51

So we’ve got an app that we have. So the first kind, I suppose, the first kind of step is, is that we would look to help people understand where they are. Are in the journey right at the start. So, you know, it’s great knowing where you want to get to, but if you have no idea where you started from, you’re not going to know how to get there. Very simply. There can be multiple ways to get to destination. So first off, it’s really getting a, you know, building a balance sheet, building a view of your net worth, of what you currently have. So we can get a good picture of where you currently are. We then go to the next phase, once we’ve got that. And we do this all on our app, our Hoxton wealth app, it’s free to download, even for people that aren’t clients, and they can go through this same exercise. The next is understanding their objectives, what’s important to them, understanding what they want out of life. Like we just said, The next phase is the modeling gene, which is we do through Cash Flow Planning, so ultimately helping them understand how much, and then looking at when. Then it is developing out the financial plan with them, step four, and then step five, which in my view, is the most important part, is constantly reviewing that with them every, every year, every six months, to make sure it’s still in line with what they want, making sure, you know, if there’s been any life changes we’ve, we’ve been working with them to ensure that their plan still works, or in making any tweaks to it if we need to.

Gene Tunny  11:17

Yeah, okay. Oh, that’s that’s good. And Have you followed this debate in I’ve seen it on YouTube between Dave Ramsey and and other financial advisors about what percentage you can take out of your your retirement funds each year and live on without running the risk of running out of money. And so one of Dave Ramsey’s colleagues, George Carmel, I think it is He. He was saying, Oh, be really conservative. There’s a he was saying 3% I think the fire people financially independent retire early people say 4% and then Dave Ramsey goes, no, that’s just too conservative. You can take 8% out or so, yeah, it was, yeah, but no one else agreed with Dave. That’s a huge controversy on about that bit of advice. I don’t know if you had a if you came across that at all, or had any views on that, but I’ll put some links in the show notes anyway, if people are interested in in checking that out. I just thought it was interesting that there was that even with someone like Dave Ramsey, who’s a well known financial advisor, he Yeah, that advice just seemed a bit yeah. It was very contentious. So there’s still some, it’s not a, I guess there is an element of that is up for debate and some of this advice. And suppose it depends on what rates of return you’re assuming and what level of risk you’re willing to tolerate. I don’t know if you’ve got any thoughts on that at all. Chris,

Chris Ball  12:55

yeah, I think the issue with kind of operating this, kind of, what the rule of four some people call it, it’s, you know, 4% which is the fire people like you said it’s, you know, it’s kind of widely adopted, I think, by a lot of planners. I mean, really, again, what we look at is, is okay, so needs and wants, you want your needs, ideally, to be built up with some kind of fixed level of income, because you don’t want to be worrying about your needs in retirement. So far, at the moment, what an area that we’re looking at for a lot of people, is using those needs or getting those needs funded by annuities, if you can do that when interest rates are high, and lock it in now, actually, that gives you a really good base in the US. You’ve got things like social security in the UK, state pension, etc, that can go towards that. But building that solid base up can be, can be a very sensible and prudent thing to do, because then you haven’t got to worry about the needs. With the wants, you can be more flexible. And typically with the wants, you want to be more, you know, in it, and you know you’re talking about 4% but you might actually want to take out 8% in the earlier years, and then 3% later on, as life tends to slow down, and that’s what we see a lot of as well. As people get, you know, older and maybe less mobile and want to go on less holidays, then you know that what’s the point in taking out more you really want to spend more in the earlier years? Well, probably when you can enjoy it, and then less than the later years, when you know, potentially, you know, health or or, or other issues, and getting around might, might prove a problem. Um, ultimately, what you don’t do is die the richest person in the graveyard, either way. Yeah. But also, you don’t want to be having to go back to work at 75 because that’s no fun for anyone, because you’ve run out

Gene Tunny  14:39

of money. Yeah. Yeah, exactly. So that point you made about, okay, make sure they get a steady, dependable income. And you were saying, annuities. What about investment property? To what extent are you getting? Are you advising them on the types of investments to generate that steady income? Do you have thoughts on. That, Chris,

Chris Ball  15:00

I think, I think property investor. I mean, look, it depends what parts, what parts of the world you’re talking about. So property investing, for a number of years, has been in vogue. So a lot of people have really found it attractive, or wanted to be a landlord. Now, what we’re finding is, with it rising interest rates, is it’s not very attractive to be a landlord. And actually, there’s a lot of headaches that come with being a landlord. So mortgage payments have gone up, but rental increases haven’t gone up as much. There’s very there’s more, you know, there’s a lot more socialist movements in the western world as well now that are making it more difficult to become a landlord. And, you know, put pushing, uh, pushing tougher regulation and on on landlords and how they operate, and then obviously, you’ve got all the maintenance that goes along with it as well. Do you really want to be trying to arrange a plumber in your 70s when you’re enjoying your retirement because your rental property is gone? Probably not. However, some people are portfolio landlords, and they’ve got, you know, a big you know that they use it for their fixed level of income. It is a great level. It is a great way to earn an income, I believe. And it should probably, you know, you should have some property in your portfolio, the cornerstone of it. But if you want a hands off investment, and you don’t like the day to day running of it, then you know, you should almost forget it, because I think it will become more of a job in retirement. It’s like most things, you’ve got to really want to do it and enjoy it, whereas your more traditional style investments, much less hands off, much more liquid. You know, there’s no management involved really, you know, by dividend paying stock or something like that. So I feel that more people are going to creep back into that side, and property will become less in vogue as we go forward. But, yeah,

Gene Tunny  16:48

gotcha. So can I understand? I just want to understand, are you, are you advising on the specific investments they should make, where they should put their money, or you just advising on the broadly what they should be saving what the broad asset allocation should

Chris Ball  17:04

be. So we’re holistic financial planners. We do take into account people’s risk tolerances and then ultimately help them devise investment portfolios that are suited to their risk. You know, we everything we do is risk created for our clients. Ultimately, we don’t want to be putting someone in 100% equities or a single stock equity, if they are if they won’t sleep at night when the market goes down by 10% you know, it’s all about what tolerance that you have to risk and how comfortable you can get with taking on risk yourself. But you know, typically, Gene we don’t advise on individual stocks and shares, so we’re not saying, buy Apple, sell Amazon, buy Tesla, sell Nvidia. They probably don’t want to sell nervidia at the moment. But ultimately, what we’re set what we’re saying to them is, is that we are broad based, indexed investors. We have a few actively managed funds in there with active managers that we feel have a good chance of beating the market over time due to their investment philosophy, which is typically long term investing. But we are in this for the longer term. We’re not day traders, we’re not jumping in and out. We’re not jumbling around asset allocation. We’re not trying to be territory specific. It’s it’s broad based, indexed investing is what we typically do,

Gene Tunny  18:24

yeah. And so those active investors, or the fund managers, where are they based? Are you able to say anything about them? I mean, I recognize it might be confidential, but what sort of businesses are we talking about there?

Chris Ball  18:38

So one of the funds that we invest in is a fund called fund Smith. I don’t know if you’ve ever heard of them before, by a guy called Terry Smith. So he’s the UK’s answer to Warren Buffett. They run about a 50 billion US dollar equity fund. They do, you know they do really well. He’s actually in our office yesterday, talking to our team. So we invested in it, in their active fund, other funds that we’ve looked at before, Blackrock world technology, we found that’s been good fun to get technology exposure, and there’s a couple of others as well. But really what we’re looking for is long term over performance of the equity market, which, as we know, it’s very difficult for a active manager to do over a long period of time. But there are the kind of, there are the there are the individuals that can potentially do it. And ultimately, I know it’s very difficult to pick them, and statistically speaking, it’s unlikely that they will over long periods of time, but we find it just offers, you know, that kind of passive, active hybrid can be quite nice and can offer some good returns to,

Gene Tunny  19:41

okay, so, well, a combination of passive and active. Okay, gotcha, gotcha. And how did you come to pick those funds you were looking at their historical performance, or you just, I mean, I imagine they do a roadshow, they pitch to you. I mean, how do you make the decision which, uh. Which fund manager to go with. So we

Chris Ball  20:01

have a fund research team that are constantly looking at different managers and speaking to them. We have a buy list, and then from that buy list we, you know, we essentially drill down. We have investment notes on each and then we’ll drill down and pick the underlying model portfolios. So we don’t tend we tend to run model portfolios again. Our our planners are financial planners. They’re not investment advisors. They’re two separate things. So we have a set of investment advisors that construct the portfolios for the financial planners. Gotcha?

Gene Tunny  20:35

Okay, yep, yeah, that makes sense. And I should ask, because I’ve had a few guests on the show talk about crypto, and what are your thoughts about cryptocurrency?

Chris Ball  20:46

I think crypto is here to stay number one. I don’t, I don’t really think it’s going anywhere. I think you’ve got to be quite, quite thick skin to invest in crypto and be comfortable with ups and downs. Probably most of these things is that, as we saw, kind of pre 22 Hey, it was during 2021 when the market, the crypto markets, got up to their highest points, was that a lot of people don’t really understand what cryptocurrencies are and what drive them. And unfortunately, a lot of people lose a lot of money when your next door neighbor becomes a expert in something. It normally means that the market is getting pretty hot and it’s time to get out. Unfortunately, when you’ve got people shouting to the moon every five minutes, then you know it’s it can make things slightly more difficult. But I do think, if you are happy for a large risk rated return, are you happy for a very big upside, but also happy to stomach that the big downside that can go with it and the volatility, then I think crypto does present an interesting opportunity. And like I said, I think it’s here to stay, but that’s not something that we would typically advise on. That’s just kind of my personal opinion on it. But as a business, we, we aren’t regulated, to advise on crypto, right?

Gene Tunny  22:01

Okay, yep, gotcha. And how concerned are you with geopolitical risk at the moment, particularly since you’re in the Middle East, is that affecting your your advice at all? Yeah.

Chris Ball  22:15

I mean, look, we don’t advise locally in terms of our you know, we’re not investing in local assets here in the Middle East. Obviously, political tensions are rising with, you know that Hamas and Israel, and now Hezbollah and Israel, that seems to be getting stronger. Obviously, if there is an out and out war, that wouldn’t be good for the Middle East, but you would expect things like oil prices to rise pretty rapidly as a result of that, especially if it’s affecting especially for other parts of the Middle East, getting involved as well, Saudi UAE, other bigger players, that would not be good necessarily, for for the overall region, in terms of locally. Are we seeing anything on the ground? No. I mean, this business is normal. You actually hear very little about it, unless you’re reading a lot of the publications. It’s not impacting your daily life in any way. Obviously, we’re looking, from a investment, short term investment perspective, at what’s happening in the US. And you know, seeing, we’re seeing how then elections in November will play out Ultimately, though, we don’t think a lot of it will impact too much. I think you know, if Miller Harris gets in, then ultimately it will continue. How, how will what we’ve seen with Biden more the same, and then obviously, if Donald Trump gets in, you know, we know that he tries and pushes up the markets. We might seem see a bit more of a short term push in it. But really, you know, the Constitution in America is, is, is insanely well guarded, and doesn’t really allow governments to make too many horrendous decisions. You know, it has to go through. Congress has to go obviously, before it can, you know, be put into action. So it’ll be interesting to see how it goes and what happens. But I wouldn’t expect anything too drastic, right?

Gene Tunny  24:07

Okay, okay, fair enough. And I’d like to ask about the economic and demographic trends and how they’ve affected your business and what you see happening over, say, the next decade or two. I mean, are you seeing changes in the demographics of your client base? Are you seeing more of the high net worth individuals due to I don’t know to what extent you’d you’d see it, but there are concerns expressed by some about growing inequality globally, the rich getting richer, the poor getting poorer, so to speak. Do you see that those impacts in what’s happened with your business, the growth of your business, the composition of your client base?

Chris Ball  24:53

Yeah, I think yes, and no, I suppose that there is obviously that worry that the rich are getting richer and the. Were getting poorer, that that equality gap, I think what we’ve seen more of is the flights of wealthy people to places like the Middle East, or places with lower taxes, as we’ve seen Taxes increase. And obviously, you know, that was bound to happen with the amount of money that they were spending during covid and, you know, trying to push the push through more money into the economies that’s got to be paid back for from somewhere. And I think it’s kind of like payback time now, especially in the UK, we’ve got a Labor government in now, and Keir Starmer came out and said, those with the broadest shoulders would bear the cost of it. You know, for everyone, basically, you know, if you’re rich, you’re rich, you’re going to get taxed more than anyone else, so that obviously, what concerns a lot of more wealthy people, I think that you’ve got the one end of the spectrum, which is the ultra high net worths that it doesn’t really matter, and they will go wherever they need to, and obviously they can pay for the advice. It’s more that kind of mass affluent ultra high net worth that it will really pinch the can’t move as easily. And, you know, we’ll, we’ll get caught up other things that we’ve seen, obviously inflation and rising interest rates. You know, that’s that’s been interesting, because we’ve obviously seen money come out of equity markets and go into things like money market instruments. So, you know, there was an insane amount last year in money market instruments, because interest rates were so high and the risk rated return meant that you could keep it there, and you were getting over 5% return. I mean, you know, why would you be investing in equity markets that had the potential to go down quite a lot? You know, technological advancements, we’ve obviously seen things like aI really driving the markets this year as well, and that’s had a big impact whether that kind of shine wears off, and what happens over the longer run is this, is there a lot of hype with looking at some of the PE ratios of some of the S, p5, 100. I mean the top seven, all of them are over 30. I think bar meta, which was at 29 that’s a lot. I mean, I think it was something like Tesla, yeah, he was paying, I think it was nearly double check, but I’m pretty sure it was like 74 I suppose. I mean, how can a car manufacturer be beat that? I know they’re trying to build themselves as more as a technological business, but crazy. So a lot of things like that are driving our business as well, because ultimately, it’s driving more wealth to people that hold that and have back technology. Shift to ESG, another one you know that we’ve had, we before, covid, if you remember, everyone was on this call, whole kind of environmental, social and governance piece. It seems a little bit less in your face now, but I think we’ll get back to that as as things, as things die down a bit more. Maybe not with a Republican, with a with a Republican Congress or republican president, but we shall, we shall see how that plays out. There’s so much that goes on that that impacts how we operate, but it’s really just trying to put your finger on it, isn’t it, and see which things really move the move the dial.

Gene Tunny  28:09

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

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Gene Tunny  28:43

Now back to the show. You remind me about the tax settings in the Middle East. Said is, am I right in remembering they don’t have an income tax is that right? Some

Chris Ball  28:57

countries do, but ultimately, where I’m currently based now, the United Arab Emirates, doesn’t they recently introduced corporation tax, but there’s no income tax on individuals. Saudi Arabia, no income tax. QA no income tax. Qatar, no income tax. Bahrain, no income tax as well. So the GCC zero income tax for individuals,

Gene Tunny  29:22

right? And, I mean, Saudi’s got, I guess, does UAE get oil income too, like the Saudis do from their their state owned oil company, yeah, and have a soft and wealth fund. Okay, I’ll have to, I’ll look a bit more into it, but yeah, it might put some links in the show notes. So it’s interesting, isn’t it? That’s one of the reasons people are attracted to to Dubai, for example. And you get a lot of really good people go to Dubai. But then there’s also concerns about money laundering. I’ve seen that there’s concerns about Australian outlaw motorcycle gangs, their members. Buying up luxury apartments in Dubai high rises. There was a 60 minute story about that couple of months ago. So yeah, Dubai is very attractive to people with money from all sorts of different places in the world, all sorts of

Chris Ball  30:16

backgrounds, exactly. I mean, Dubai was on the gray list for money laundering, until recently, where it’s come off. So I think that was the kind of jolt that was needed locally. And they take it very, very seriously. So the banks over here, you know, probably more so than you get in Australia and in the UK, constantly asking you, where’s the money come from? You’ve sent money. Can you prove where it’s come from? Like, there is a there is a high area of transparency that’s needed with the banks. You can’t operate in this opaque nature anymore. You know, cash transactions for properties, they’re trying to wean out and things like that. So they are making it more and more difficult and trying to take it seriously, as you would expect from an economy that is developing and wants to be developed, and is doing, you know, all the good things that they’re doing it, it would be a shame to get tarnished with that, with that brush, but, yeah, I mean, look locally the wealth is earned from, you know, the locally Abu Dhabi, the wealth is earned from will that is then, you know, that has been their main source of income. They’ve developed the Abu Dhabi Investment Authority, and then various subsidiaries around that as well, which is their sovereign wealth fund, which ultimately they go out and invest in other businesses as well to try and buy returns. So when the oil does run out, they can continue to support the country as well. And obviously, very similar to what they do in likes and Norway Saudi Arabia’s got there, I think it’s the the PIF, the public investment fund as well. So, yeah. So, you know, it seems like a lot of these Gulf states, that’s how they want to go and do things, which is obviously great, because if that keeps income taxes down, then then that’s obviously good for them to attract wealth as well, which will ultimately be spent indirectly in their economy as well,

Gene Tunny  32:00

yeah, yeah, okay, and that’s, that’s good, Chris, it was a good overview of different, different factors, different trends. What ask about AI. You mentioned AI and you were talking about, you know, what that meant for the market, for investment opportunities, what does it mean for you? What does it mean for wealth management? Are you taking advantage of it?

Chris Ball  32:22

Yeah, definitely. I think that AI will not replace advice, because advice is about questioning and trying to work with you to get answers. But where, I think you know, ultimately, people want to see the whites of people’s eyes when they when they invest. It’s it’s nice to deal with a person. And I don’t think you’ll replace that in the in the near future. Anyway, I think ultimately, AI, what we’re using it for, is to try and limit the amount of repetitive tasks that we have to do, trying to take, you know, trying to improve our administration, processes, data entry, processes, all of these things by using AI, which ultimately, hopefully drives down costs, increases profit margins within the business, and means that ultimately we can try and help a wider range of people that need our services. Because, again, you were talking before about that equality in terms of net worth that exists in wealth management as well. I mean, you know, there’s a subset of people that could probably really do with advice, but don’t get it because it’s not profitable for firms to be able to service them. They can’t do it. They can’t run it at a loss. So yeah, so it’s we all. I think we’ll see more AI tools come in to offer simplified advice to that subset of people, and then as their wealth accumulates, then they’ll be able to deal with maybe more face to face advisors, where, when it becomes a, you know, feasible for them and for the company?

Gene Tunny  33:51

Yeah, yeah. So there’s talk about robo advisors. So is that that’s what you’re thinking about. For the people with the smaller amounts of of funds they there’d be automated advice.

Chris Ball  34:03

Or, yeah, I think, I think Robo advice is an interesting one. I don’t think a good financial planner has ever lost a client to a robo advisor. Okay, robo advisors more. I’ve got $100,000 or $50,000 I don’t want to use an advisor. I just want someone to place the funds for me. So it’s more. I think it Okay. Probably replace investment advice, but the financial planning aspect is much more personal.

Gene Tunny  34:25

Yeah, gotcha, because you have to take into account the personal circumstances figure out what Yeah. The thing I liked how you were, you were talking about needs versus wants and the standard of living that they want in retirement. I thought that was, they were good points, right? Oh, okay. And how, finally, how are you using technology to interact and communicate with your clients? So, how does so, do you have an app or a portal that they Yep, okay,

Chris Ball  34:56

so we’ve got the Hoxton wealth app gene, which is our client portal. So they can, like I said, they can see their overall net worth, their plans, their policies, they can upload their documents. We communicate through push message out to them and things like that. And we’re really developing that out to become our one stop shop to communicate with clients. We have our back end, which is our operating system, effectively, which is called matrix. And that is how we, how we, you know, do fact finds, how we manage our client relationships, how we help the advisors manage more clients efficiently, rather than through paper based things, losing data, you know, data security, data integrity, is super important to us, and also, you know, it’s, it’s, you know, worth a lot to a business in terms of management information and the like. To, yeah,

Gene Tunny  35:46

absolutely okay. And Chris, what, what? Where can we find more about you? Do you have a podcast? Do you have a newsletter that people can can subscribe to? Yep,

Chris Ball  35:57

so I feature regularly on a podcast called financial planner life. But the best place to find out more about me is through my LinkedIn profile, which is Chris Paul. If you just type Chris Paul Hoxton into the search bar, it will come up and then also, obviously our company website, http://www.hoxtonwealth.com, you’ll be able to see more on you know what we’re about and what we’re doing and how everything’s going.

Gene Tunny  36:23

Okay? Well, I’ll put links in the show notes to those, to your LinkedIn, for sure, and to your to your website. Found this really informative. And, yeah, good discussion, Chris, I like the point you made about, yeah, the risk to investment properties. We’re seeing that here within Australia, because we’re having a, you know, major housing crisis, and I guess, yeah, big increase in homelessness. That was a sharp increase in rents about a year or maybe a year or so ago, and now you’ve got a political party, which was the Greens political party, and it’s morphing into a party of renters, and they’re getting a lot of traction because there are a lot of disaffected, you know, people out there who, who are, you know, not happy with the housing situation. And so, yeah, the great, but the so I understand where they’re coming from. The issue is that the policies that The Greens are advocating for are not actually correct the problem, and could actually make it worse with their the idea of red freezes and caps and things so that all sorts of silly, you know, really bad economic policy. But yeah, I thought your point was well made, and it did it. So, yeah, yeah, absolutely, that’s a really good point. Any, any final thoughts before we wrap up?

Chris Ball  37:47

No, that’s it for me, really, unless you’ve got anything. But thanks very much for having me on. Really appreciate if your if your listeners want to download our app, the Hoxton wealth app, type it into the app store, they can download it for free. Yeah. And if you ever need anything, let me know. Will

Gene Tunny  38:04

do okay? Chris ball from oxen wealth, thanks so much for joining me.

Chris Ball  38:08

We appreciate gene thanks very much.

Gene Tunny  38:11

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 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 writing. Thanks for listening. I hope you can join me again next week.

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

Efficiency and Externalities: A Q&A on Market Failures – EP254

Show host Gene Tunny responds to listener feedback about the private versus public sector’s role in wealth creation, particularly addressing externalities like environmental harm and whether governments should fund facilities like Men’s Sheds. He also explores the efficiency of the private sector compared to government spending, weighing the evidence on both sides.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

Timestamps for EP254

  • Introduction (0:00)
  • Externalities and Market Efficiency (4:47)
  • Government’s Role in Addressing Externalities (11:30)
  • Coase Theorem and Market Failures (19:43)
  • Government Spending and Efficiency (26:31)
  • Men’s Sheds and Government Support (32:51)
  • Scott Prasser’s Critique of Government Spending (39:43)
  • Balancing Government and Private Sector Roles (45:49)

Takeaways

  1. Externalities in Wealth Creation: Private markets can overlook externalities such as pollution or public health impacts, justifying government intervention in some cases.
  2. Incentives for Efficiency: Due to market competition, the private sector generally has stronger incentives for efficiency, while government projects may lack the same discipline.
  3. Government Spending Criticism: Many government projects, particularly those done for political reasons, are inefficient and do not consistently deliver expected benefits.
  4. Cost-Benefit Analysis is Crucial: Government spending should be evaluated through thorough cost-benefit analysis to avoid wasting public funds.
  5. Coase Theorem and Market Solutions: While private negotiation can theoretically resolve externalities (as per the Coase Theorem), it typically does not work in practice due to high transaction costs and imperfect information.

Links relevant to the conversation

Relevant previous episodes:

Government vs Private Sector in Wealth Creation:

https://economicsexplored.com/2024/07/05/government-vs-private-sector-who-generates-wealth-ep247/

White Elephant Stampede:

https://economicsexplored.com/2022/10/17/white-elephant-stampede-w-scott-prasser-ep161/

Coase theorem paper – “Does the Coase theorem hold in real markets? An application to the negotiations between waterworks and farmers in Denmark”

https://www.sciencedirect.com/science/article/pii/S0301479711003331

Urbis review of Men’s Sheds:

https://www.health.gov.au/sites/default/files/documents/2022/01/review-of-support-for-the-men-s-shed-movement-current-state-report_0.pdf

Beyond Blue Report on Men’s Sheds:

https://mensshed.org/wp-content/uploads/2022/05/Ultrafeed-beyondblue-Mens-Shed-in-Australia-Final-Executive-Report-2013.pdf

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Transcript: Efficiency and Externalities: A Q&A on Market Failures – EP254

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.

Scott Prasser  00:03

The governments love to, love to announce iconic projects. When I hear the word iconic, I run a mile. Okay, this is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want governments and visions. Thank you very much. It’s usually the wrong ones, and so it’s this thing of meeting the electoral demand to be doing something, instead of saying nothing can be done. Okay, that in some cases it’s not government’s responsibility to do it, and if we do anything, it doesn’t, doesn’t have any effect.

Gene Tunny  00:40

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 and welcome to the show this episode. I want to respond to a question from a listener about a recent episode, government versus the private sector who generates wealth. And then I also want to respond to some feedback from another listener about a previous episode. So I really value getting your feedback and your questions. It all helps me think about what I should cover on the show and the types of guests you want to hear from so please keep it coming. You can get in touch with me via the contact details in the show notes. So yep, I’d love to hear from you before we get into it. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, the first thing I want to do is to cover a great question that came from a listener named Mark. I’ll read out the email that I received from Mark. I’m a non economist in the Queensland public service, and as such, very much. Enjoyed your recent ish episode, government versus private sector who generates wealth? One of the arguments in the podcast was that consumers demonstrate how much they value goods and services produced by the private sector in their purchasing decisions, and that these purchases are evidence that the sector is generating value for the public sector, though it was pointed out that government spending is often inefficient and can even create a net loss, for example, because of poor discipline on business cases or spending. And Mark goes on to note, this seems to be comparing the Theory of Value slash wealth creation in the private sector with the practical realities of it in the public sector, and it ignores the externalities in private markets. Is it fair to say that, in practice, the private sector can produce profits and services that create harm to society, ultra processed food, tobacco products that cause environmental harm, etc, and this needs to be factored into an evaluation of its ability to generate wealth. And Mark goes on, this is a bit of a long winded way of raising an old argument. I guess. The response is, these harms are a result only of market design, and companies are merely following the incentives placed upon them. I’d be interested in your views, including, how do you think government should respond to the issue? So that’s a very good question. And I thought, yep, I should respond to this in the podcast. So my my quick answer to Mark’s question is yes, it is fair to say that the private sector can produce products with harmful effects. And Mark indeed gave some examples there, and he he mentioned the important concept of externalities. So these are external costs on to others other than the parties to the transaction so things like pollution, etc, or it could be cost to the public health system. So people, you know, if they smoke too much or they drink too much, then that will end up costing not only the individual who makes the choice to do those things, but others in. The society. I’ve covered externalities in previous episodes, but I probably should have mentioned them in the government versus the private sector episode, because, yep, they are an important qualification to the presumed efficiency of market outcomes. That’s absolutely correct. What I might do is I might play the segment from the episode that Mark has asked about, just so we can, I can think about exactly what I said, and we can talk about that, and can provide some more more commentary on in response to Mark’s observations and his questions. Okay, so let me play the relevant clip now. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about the significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There have I mean, there have been those botched privatizations in the UK, for example, particularly in rail and it looks like water, so I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that well, I mean public sector unions, for example, or construction unions, which where they Have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programs and spending. I think that is something that is worth thinking about here. I should make the standard point that economists always make, that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programs and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise. A simpler type of analysis, but we should be thinking whenever we’re spending money on on government goods as government purchases of goods and services. We should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting to benefit to cost ratio above one, a return on investment, we’re effectively burning money the government is then detracting from the wealth of the community, in my view, because that money would probably would have been Better if that activity was not done if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. Okay, so that was a clip from my government versus the private sector episode, and that’s what Mark was was asking about. Now, even though I didn’t explicitly mention the concept of externalities, they may have been in the back of my mind when I was when I was talking there, particularly when I was talking about the need to consider all relevant costs and benefits. I’ll note that I did try. Talk about the externality, or I’ve talked about externalities, and specifically the externality relating to greenhouse gas emissions in another recent Tish episode. So episode 243, the revival of industrial policy. Should governments pick winners. So what I might do is I’ll play a clip from that episode, because I think it, it does help provide that fuller picture when we’re thinking about government versus the private sector. So I mean my presumption, and this goes back to Adam Smith, right? I mean that if you’ve got two parties engaged in in trade or in exchange, you assume it’s mutually beneficial and that it adds to the well being of the community. Now, of course, if there are third parties that are affected, then that presumption is won’t be won’t be realized. I mean, we have to think about how these the actions, how the trade, how the exchange, could affect third parties, and particularly if there’s no scope for them to negotiate, for the third party to come into the negotiation, whether because of, well, there’s a lack of knowledge or there’s transaction costs involved. So what I’m alluding to there is the Coase theorem, which I might talk about after I play this clip. Now, what government should be doing is, to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality, which is the idea of a carbon price. And you know, you can do that in various Well, a couple two main ways. You can have an emissions trading scheme. You can, you can create a market, and then you have a carbon price that falls out of that. Or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions, or and CO two equivalent emissions. Now you know that most economists would say that is the best way to do it if you’re going to do something about it. And you know that’s sending the signal to the market that there’s a cost to the environment of of this pollution. And you know, you leave it up to the industry to sort out the most cost effective way to reduce those emissions. You don’t go and, you know, actively promote particular solutions and and in Australia, there’s a there’s a growing concern that maybe we’ve been pushing too hard on renewables policy measures and subsidies, etc, have favored renewables, and we had, we’ve had too fast a pace of development, and that’s creating issues for the reliability of the electricity grid. Okay, so I was using a carbon price as an illustration of one way that governments can address externalities, and that is through corrective taxation. That’s that’s one way the the carbon tax, or it could be setting up a market based mechanism, such as an emissions trading scheme, which would impose, and you’d have a carbon price drop out of that. And there’s a debate about, you know, which is, which is the better mechanism, but both sort of pretty much get you to the same outcome. We won’t go into the into the specifics of that debate there, but the idea is to have the the cost of the externality internalized, to bring it into the decision making of the firms and the households in the economy. So that’s, that’s the idea. And I mean, climate change is one obvious example. I know there’s a controversy about, you know exactly how we should respond, how we the pace at which we respond. I was just using that as I recognize that controversy. I’m just using it as an example. And you can think of various other examples. There’s a debate about whether we should impose a specific junk food tax, so a tax on sugary drinks, and, you know, other items of junk food to help prevent or to reduce the incidence of overweight and obesity, diabetes, etc. And that can be viewed as a. Corrective tax, of course, you might have to think about any equity issues there, particularly if poorer households are more likely to consume those those products that have been taxed then richer households. But the idea is that a corrective tax might make sense there and correct the well, the the outcome, the sub optimal outcome that comes from private decision making. On the other hand, you could think of, or you could think of some activities that would be under supplied by the market naturally, and that there could be a case for governments to promote so that’s the other side, or the other possibility, that there could be a case for a subsidy of some kind to subsidize activities that are that are considered beneficial. Now, I think this is, you know, this can be problematic because I think often subsidies come about because of lobbying. So there’s political considerations. I think the case for subsidies can often be weak. Some people, maybe some people, argue that the EV subsidies are justifiable from an efficiency point of view. Maybe they argue, or they possibly do argue that, because there’s such a well you need a critical mass of EV users, so electric vehicles to support the all the charging infrastructure, maybe there’s a case to subsidize the purchases of Ev. So you’ll find at different times various various people in the policy debate making an argument on efficiency grounds for subsidies, and that’s that comes out of that same framework of of market failure that the externalities are part of. You can think of like, typically we talk about negative externalities, such as pollution, but you can also think of positive externalities, so I might have to have another episode where I go into some examples of of that. The key point is that, yep, Mark is correct. I agree with him that the the existence of these externalities is an important qualification on the efficiency of market outcomes. One example of a positive externality that has just occurred to me is the so called Knowledge spillover. So there’s recognition that the knowledge generated by businesses, the R and D that they undertake, that can spill over to other businesses, and you know that’s that’s beneficial to society, and hence that can justify subsidies or favorable tax treatment for research and development expenses. And you do find that in various countries. So, I mean, if we think about the or the development of, you know, various products, there’s R and D that that goes into them, and the whole community ends up benefiting from that, because not everything can be patented, not everything can be protected. I mean the idea of the smartphone, for example, that that Apple invented with the iPhone, while it can protect its own proprietary technology, the the fundamental idea of, or the concept of having, of having a smartphone, of demonstrating that that is indeed possible, that has provided benefits to to other businesses, to the community, because we end up with with competitors copying that concept. So there are these, these external benefits as well. And I think we might come back to this issue of externalities in a in another episode, because there are some really juicy issues to cover. And I’d like to give some really well thought out examples there. The other thing it would be good to talk about in a in a future episode is this concept of the Coase theorem that comes from Ronald Coase, who’s a Nobel Laureate, who was a British economist, but ended up, you know, spending most of his working life in the. The US. I’ve previously done an episode on Coase regarding his theory of the firm, but he’s famous for another theory which is received the name of the Coase theorem. And what that theorem tells us is that in certain circumstances, the private sector agents that are affected by an externality can actually negotiate and reach a an optimal solution, and that optimal solution doesn’t in any way depend on the allocation of property rights, whether it doesn’t depend on whether a particular party has has a right to pollute or a right to to be able to extract A resource free of pollution. So it’s quite a powerful fear, and this idea that you may not need government to impose corrective taxation or a subsidy or regulation, you can have private sector actors figure this out for themselves, and that it doesn’t actually matter who, what the allocation of property rights is. It’s a very powerful concept, and it’s it’s very much consistent with the Chicago School view. So if you’re regular listener, or you study economics, you know there’s this thing called the Chicago school, people like Milton Friedman, George Stigler, which is associated with very pro market or laissez faire thinking, and the Coase theorem fits rather, you know, it’s compatible with that. And indeed, Ronald Coase was a professor of economics at the University of Chicago Law School. So he’s definitely part of that, that Chicago school so very powerful fear, and we might cover this in another episode. I mean, the challenge with it is that, I mean, it’s very elegant, it’s a great theory. It’d be extraordinary if, if it really did work out, it’d solve a lot of our a lot of our problems. But I guess the general consensus among economists is that while you you can see some examples of this happening in practice, and you can see these negotiations, they’re not necessarily widespread. This is not a general solution. This is not a reason. We should just say, oh, let’s leave everything to the market, because the conditions for the Coase theorem are very stringent, so they’re very tough conditions. And there’s a paper that I’ll link to in the show notes. It’s a 2012 paper from the Journal of Environmental Management. Does the coast theorem hold in real markets an application to the negotiations between water works and farmers in Denmark. So the water works are the the businesses or the utilities that are providing water to the town, and the farmers will there. They’re doing things on their farm that can affect the quality of the water through the use of pesticides and and fertilizers. And so there’s a an externality there. And so what this study looks at in Denmark is to what extent private negotiations between the water works and the farmers can help resolve the the externality can can lead to what you’d say is an efficient outcome, and what it concludes Is that okay, so it considers the results of Danish Water Works attempts to establish voluntary cultivation agreements with Danish farmers. A survey of these negotiations, I’m reading from the abstract of the paper, a survey of these negotiations show that the Coase theorem is not robust in the presence of imperfect information, non maximizing behavior and transaction costs. Thus negotiations between Danish water works and farmers may not be a suitable mechanism to achieve efficiency in the protection of groundwater quality due to violations of the assumptions of the Coase theorem, the use of standard schemes or government intervention, eg, expropriation May, under some conditions, be a more effective and cost efficient approach for the protection of vulnerable groundwater resources in Denmark, right. Oh, okay, so, yeah. That’s a that’s a bit of a negative finding about the Coase theorem. I mean, it’s incredibly elegant, and I think it’s an important concept to learn as an economist, but in practice, it, it doesn’t really seem to to help us out a lot. But let me come back to that in a future episode. I think it probably does warrant a whole episode on its own. And yeah, that’s something you want to hear, hear about, or if you’ve got any views on the Coase theorem, or if you know of any, any studies or examples that you know show the a better result for the Coase theorem, then, then let me know. I’d love to I’d love to hear them, and I’d love to hear from you. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  25:51

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Gene Tunny  26:20

now back to the show. Okay, so talked about externalities before we go on to the the other part of this episode, I want to go back to this point about there being this presumption that the the private sector will be more likely to be efficient and to provide what people want than the government. I guess I’m a little bit biased. I think that is true, and partly this goes back to, you know, when I first started learning about economics and studying economics. It must have been when I was in high school, and I remember my mother picked up a copy of Milton Friedman’s Free to Choose at a flea market somewhere. I think it was. And I remember reading that and just being struck by the incredible logic that that Milton and Rose Friedman advanced in that. And there’s a, there’s a great quote from Friedman. I found this on the net. I’m not sure whether this one was in free to choose, but something very similar would have been, and that this, certainly this concept is, is in Free To Choose. And Friedman’s other books, like tyranny, the status quo, and this concept, or this, this quote, which I think you know very much, summarized very well, summarizes his thinking, if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government, okay, so he’s talking about spending other people’s money on other people. And that’s the, that’s the situation where the people doing the spending have probably take the least care. Okay, so we’re, we’re going to be most careful and make the best decisions where we’re spending our own money on ourselves. So in the case that that Friedman’s talking about, there’s little incentive to economize or control costs, to ensure the money spent effectively, to maximize the value for for the recipients. I mean, I guess there is some, there is some pressure, because governments, they do have to, ultimately, there is a budget constraint, so they have to, I suppose they have some concern about the effectiveness of the spending, but it’s not as great as it would be if you’re spending your own money on yourself. I think that that’s fairly intuitive, so what we end up with is that we just end up with, you know, quite a significant amount of of wasteful, inefficient spending, spending that’s done for political reasons to get a political win for the government. I think we all can concede or accept that that is that something that happens. Okay? And then I’m just thinking you might if you think about that as a quadrant, so you’re either or a matrix, and you think of the different quadrants in the matrix, there are four different possibilities. You’re spending your own money on yourself, where you’ve got the most care and concern. You’re spending other people’s money on other people where you’re you’ve got the least concern or care. And then there are situations where you’re spending other people’s money on yourself. So if there’s a gift that someone will gives you money, say at Christmas, and then, therefore. I mean, I guess you do try and maximize your well being, but maybe you’re not as careful with your spending decisions. Maybe you see psychologically, even though this is not economically rational, maybe you see it as, Oh well, it’s a gift. It’s free money in a way, and I can afford to splurge, or I might buy something that I wouldn’t if it were my own, you know, if I had to work to to get the money. I mean, I certainly know that when I get gifts of gift cards for for books, I’m possibly more willing to experiment and buy a book that I I wouldn’t normally do, or I’ll just buy more books than I would when I go into the bookstore at one time rather than save that up for another time. So perhaps I am less discerning or less careful, but I’m still not completely careless. And then the other quadrant, there’s the quadrant of when you’re spending your own money on other people, so you’re giving a donation, or you’re, you’re, you’re engaging in some charitable activity, and sure, I guess you want to, you do want To make sure that you’re not wasting the money, but perhaps you’re not as careful as you would be if you had to spend it on yourself. You might, you might think, Oh, well, this, this will do. This is enough for I’ll make the judgment as to what’s best for the people. I’m, I’m, you know, buying this, this item for these clothes for, you know, maybe, oh yeah, they’ll, they’ll be happy with the socks I get them for Christmas. Yeah. I mean, I think we can all think of examples of where we we spend money on, on other people, and maybe, maybe we don’t put the time or attention into it that we’d put into it, we’d put into the decision if we if we were spending the money on ourselves. So I think, I mean, that’s going to differ for different people, of course, and maybe I’m over generalizing, but I do think that Friedman’s way of of thinking about it is useful, and I certainly agree with him about how I think we spend our own money on ourselves with much more care than the government spends other people’s money on other people, right? Oh, okay, well, that was, yeah, that was actually, there’s quite a lot to think about with, with Mark’s comment and his his questions. So Mark, thanks for that. Please continue listening, and please write in with with future comments. And indeed, if you have any reactions to what I’ve what I said today, I’d love to hear them. I’ll go on now to some feedback from another regular listener, John. I mean, John provided me with a heap of comments, and unfortunately, I don’t have time to cover them all in this episode, particularly since I spent so long talking about what Mark what he commented on. So sorry, John, but I will, I will respond to one of your specific comments, and John is, John’s pushing back or on some of the more free market or more libertarian guests and views that, that that I’ve had on the show. And this is, I think this is an interesting comment, and yeah, I’ve got some thoughts on it, so I want to read it out. I’ll read out the comment first, and then I’ll play the audio that that John’s responding to. One of the bits of audio John wrote, government does not necessarily mean centralized. There’s the Men’s Shed, which is a counterpoint to the criticism your co host on the ATA. So that’s the Australian taxpayers Alliance podcast made. I can’t remember who that was. It would have been John Humphries or Saxon Davidson, I imagine, but I’ll I couldn’t find the bits of audio that John was talking about. But anyway, I can imagine that’s that’s the sort of thing they would have would have said. And John goes on some central money, but also real dispersion of decision making and autonomy. Equally, your guest on the white elephant stampede episode. So he’s talking about Scott prasser there. So equally, your guest on another podcast criticize the Men’s Shed. Now, if there’s a credible cost benefit analysis that said that says the Men’s Shed is not useful, well, fair enough, but I’d be really surprised. The Men’s Shed supports a local repair. FA I’m involved with and maybe you’ve seen their things around made for the community. John concludes, while we’ve while we have personal freedom, the government has a legitimate role in helping us make better decisions. I understand we have lower rates of skin cancer from the slip slop slap campaign and a lower road toll resulting from government initiatives over drink driving and seat belts. Yes, I think that’s a fair points from John. That’s that’s absolutely, absolutely correct, and definitely the data supports that. I’m just thinking of an example in my state, in Queensland and Australia, there was a lot of controversy, gee, maybe it was in the 70s or the the 80s, about the introduction of making a compulsory for people to wear seat belts. And, you know, people had could rationalize not wearing seat belts in all sorts of ways. Oh, that, you know, cost us a lot of time, or it’s a distraction and it’s or won’t help us, because if you’re in a crash, then you’re actually better off being thrown out of the car. I mean, all sorts of odd rationalizations for not wanting to wear a seatbelt. And there was a there was a famous study, I’m pretty sure it was by Alan Layton. Yeah, Alan Layton was one of the authors a famous study on the effectiveness of seat belt legislation on the Queensland road toll. And this was an Australian case study in intervention analysis. So this is a paper that was published in 1979 in the Journal of the American Statistical Association. Alan Leighton was one of the co authors. He was at University of Queensland at the time. He went on to have a distinguished career as an econometrician, a great guy and what they did was that they found so they used some time clever time series analytical techniques. I’ll put a link in the show notes to this paper. It’s it’s a great bit of work. They showed that the long run legislative effect was quantified at a specific level of the explanatory variable to be a 46% reduction in deaths. Okay, so the seat belt legislation did have a significant impact, and it resulted in a major reduction in fatalities. And I think you’d be I think that’s probably a case where some type of government paternalism is is justifiable. So look, if you’re a regular listener of the show, you probably figured out I’m not an extreme libertarian or anarcho capitalist. I would describe myself as a classical liberal. I do believe in in liberalism and freedom, but I do accept that in some cases, there could be a role for some paternalistic policy measures. And I think John is is on the right track there regarding Men’s Sheds, I must say, I forgot that the Men’s Shed came up in in one of my podcast episodes. So, I mean, they seem reasonable to me. I have a couple of friends who are involved with Men’s Sheds. So the idea is that men generally of a certain age, I think it tends to be mature age, and senior men, they may have had some issues in their lives, and they get together, and they will do all sorts of, you know, manual, manual work. They’ll do some gardening, or they’ll do some woodwork or some metal shop, and it seems to be something that really helps them out with their mental health. And, you know, men need friends, and I think there’s a concern that just with developments in society, that men don’t have the traditional networks or support that they once did, and particularly with the rise in divorce so so many men, their social life is essentially organized by their wives, and so if they have a divorce, then they’re in all sorts of trouble. They lose their network, their their social support. So look, there could certainly be a case for the Men’s Sheds. What I might do now just go back to the the bit of the episode that John’s reacted to, so I can understand his feedback more fully and also understand what what Scott said in that episode. Now, Scott’s a great guy. He’s a former academic. He’s a former ministerial advisor. He’s. And he’s one of the editors of the 2022, book from Connor court, titled white elephant stampede case studies in policy and project management failures. And we talked about all sorts of big projects that turned out to be white elephants, like desalination plants, etc. I forgot he mentioned Men’s Shed. So let’s, let’s go back to that, and I’ll offer some thoughts after I play the clip.

Scott Prasser  40:27

Government is involved in too many areas. Okay, the government tries to do too much, yeah, and the government is seen as the savior of so many things. So if government could not be involved in so many things and just focus on it, on the core business, what should be, you know, good infrastructure, good roads. And what sort of thing so government is, is often called upon to be doing things now, politicians reaction to that is, something’s got to be done. This is something we can do, right, okay? And they have no concept of of financial limitations. So governments often, we saw that during the covid thing, where governments were running around doing all sorts of things. Sorts of things which were completely against the evidence. Just remember, in Queensland, we were formed by the Chief Health Officer. We and it was mandated we should wear a mask in our car. Just think about this. And we should wear a mask walking around a park. Just think about this. Now, I didn’t do that. I refuse to follow the law. So that’s an example where governments have got to ratchet up activities, to do things. Also, governments love to love to announce iconic projects. When I hear the word iconic, I run a mile. Okay, this is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want government visions. Thank you very much. It’s usually the wrong ones. And so it’s this thing of meeting the electoral demand to be doing something instead of saying nothing can be done. Okay, that’s, in some cases it’s not government’s responsibility to do it. And if we do anything, it doesn’t, it doesn’t have any effect. So, you know, it’s like, you know, why does the Commonwealth government spend $5 million on men’s work sheds? I mean, what has that got to do with the Commonwealth Government? There’s like, a little mini, a mini white elephant, because they want to be seen to be giving out money for some minority group calls or something. So it’s politics. It’s politics. The other factor is that all the organizational things inside organizations, group think happens, yeah, okay. Now, if you worked in the public bureaucracy like me, it’s sometimes very hard if you if you want to be the lone person that says, I think that’s a dumb idea. Yes, right? Yeah, it doesn’t go well with the rest of the team and the hierarchy, which so you’ve got to have in the bureaucracy someone willing to say no. Right now, our public services have become politicized. That is, people are on short term contracts. They give the government what they want, not what they need. So this sort of Once Upon a Time, treasuries would have said, and that’s why, under Joe, we had permanent public servants. Okay? Job Peterson, Premier, there were permanent public servants. Queensland didn’t have a zoo. Queensland didn’t own a bank. Okay? Queensland didn’t do all the crazy things that Joe won’t do, because the treasurer Leo hilcher and crowd will say, No, Joe, you’re not going to have it right now. I don’t think that happens anymore, because all the senior public servants are on five year contracts. They want to get their contract. We knew they will give in to the political will all the time. So that’s one of the one of the issues that helps help throughout, why we’re getting more of these things, and why Frank and fearless advice is no longer being given. I don’t want to sound too precious, but it is. It is very hard in the bureaucracy. If you’re in the hierarchy and you want to get a promotion in the future and you write a memo to the premier. This is a really dumb idea, and I have done this myself, and I have saved the taxpayer money, I can tell you right here, and that’s because I had a very good director general in the Premier’s department. But it’s hard all those organizational factors, the political factors and government and all the interest group pressures now, interest group pressures on wanting to get something from government. Australia has always looked more to government than other countries. You know, we’ve always we founded by government. Australia was founded by, you know, sending out convicts. Here it was a government, yeah, thing in America. America was founded by people trying to get away from government. They want a religious freedom. Okay? So there’s a difference, yeah, sort of context. So all those factors have driving that. Plus, I think economic theory, more, you know, modern monetary theory, so it says, oh, spend as much as you want. It doesn’t matter. It’s all right. You know, there’s no, there’s no limitation on what government. Can spend. So the idea of balanced budgets, being careful and frugal, has sort of gone by the by, if you like. So all those factors, to me, are contributing to this sort of galloping syndrome of white elephants.

Gene Tunny  45:17

Okay, so I think Scott made a lot of a lot of very great points there. And I think that observation he makes about the differences between Australia and the United States and how they were they were founded, I think that’s, that’s rather that’s rather clever. That’s a really good insight there. And perhaps that does explain some of the reasons for differences in in policy choices. Who knows? I’m not a political scientist, but I thought that was a rather. There was a there were a lot of insightful things that that Scott said there regarding Men’s Sheds. Look, I honestly don’t know whether it makes sense for government to to to subsidize them or not, or to provide funding to them. I mean, my my bias, would be to say, Well, look, this government really doesn’t have a role here. I mean, if men want to get together and have Men’s Sheds, then then fair enough go for it. Does the government need to provide some support? Well, look, I mean, there could be a case. I wouldn’t rule it out completely, but you would need to have a it’d be good to see a cost benefit analysis of subcard. Does it make sense to provide funding for the Men’s Shed? Does this help improve mental health outcomes so much or sufficiently that it justifies the government chipping in some money? Look, it’s possible. Maybe it does. Maybe it improves well being. It avoids health costs in some way, it prevents suicides, it it prevents alcoholism, which leads to all sorts of problems. Who knows it? They could have some positive outcomes. And it looks like there have been, there has been a little bit of of research, but that’s not, it’s not no comprehensive studies, or CBAS, from cost benefit analysis studies, from what I can see, I’ll link to a couple of those in the show notes. I think there’s definitely a rationale for the Men’s Shed in how they address social isolation and help improve men’s health by getting them working together, collaborating on woodworking, metalworking, gardening, community projects, etc. So I think they’ll provide some benefits, and I’ll link to some studies that I’ve found. So there’s a report that was prepared for Beyond Blue back in 2013 and what that shows, or what that finds, is that there are clear health benefits associated with Men’s Sheds, Particularly when compared with less socially active men and they have some some data here. So it looks like it’s it’s from a survey shows that the shed members scored significantly higher physical functioning, physical roles, general health, vitality and mental health in non shed members, as measured by this, this survey instrument, it looks like that they use. So there’s some, some evidence looks like it has a, yeah, I mean, they may well be statistically significant. I’d have to think about the the sampling error around the reported stats. But I’ll put a link in the show notes there. You can check that out. There’s that you know that would be of interest. If this is a report by there’s another report by Urbis review of support for the Men’s Shed movement, current state report. And, yeah, generally, it reports on how well it argues that these Men’s Sheds are valuable spaces for men to get together, reducing socialized isolation, improving well being. They have the men the Shedders, so that’s what they call the people who go to the Men’s Shed. They have increased engagement with and across communities, and they recognize that the shed, the Men’s Shed, as a social amenity available to the whole community, thereby increasing social capital within communities. Okay, so some benefits, but these are things that are, you know, could be a bit they are intangible in a way. They’re difficult to measure, but I’ll put a link to this day. Be in the show notes as well. And yeah, thanks John for your comments. And yeah, if you want to, I’m willing to have a chat about Men’s Shed sometime in the future and all of the issues around them. It’s interesting. Yeah, I’d never thought there’d be a big controversy about Men’s Sheds. But yes, I guess it’s a it’s something that government has been contributing a little bit of funding to. It doesn’t look like it’s a huge amount. And yep, as with all government spending, we should be thinking about whether that is a good use of public funds or not. And there can be legitimate debates about what we’re spending money on, and whether that money should be spent on something else, or indeed return to taxpayers. Because, I mean, the the tax burden is seems to be ever increasing, and we have to think about whether spending by governments is is essential for the community. Well being Righto, thanks to Mark and to John for their comments, for their questions. Really appreciate them listening. If you’re listening, you have your own thoughts on either the episodes I talked about today or other episodes. Please get in touch. I’d love to hear from you. Love to reflect on your feedback and to help clarify concepts, provide examples. So yes, please do get in touch. You can find my details in the show notes. Okay, I’ll wrap it up there, and I’ll talk to you next week. Thank you, 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. 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