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John Cochrane on Free Markets & Economic Growth and the Fiscal Theory of the Price Level – EP214

Professor John Cochrane of the Hoover Institution discusses the importance of free markets for economic growth and highlights stagnating growth as the biggest economic issue of our time. John talks about what may be his next book, “Free to Grow,” which aims to update Milton and Rose Friedman’s “Free to Choose” for today’s world. After John speaks, show host Gene Tunny interviews him about his views on growth and his controversial Fiscal Theory of the Price Level. This is a recording of a live event at the Centre for Independent Studies in Sydney on 26 September 2023. 

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About Professor John Cochrane

John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution. He is also a research associate of the National Bureau of Economic Research and an adjunct scholar of the CATO Institute. 

Before joining Hoover, Cochrane was a Professor of Finance at the University of Chicago’s Booth School of Business, and earlier at its Economics Department. Cochrane earned a bachelor’s degree in physics at MIT and his PhD in economics at the University of California at Berkeley. He was a junior staff economist on the Council of Economic Advisers (1982–83).

For more on John, check out his bio here:

https://www.hoover.org/profiles/john-h-cochrane

What’s covered in EP214

  • 00:03:36 Importance of economic growth.
  • 00:16:06 Incentives drive productivity and growth.
  • 00:17:12 Regulation hinders economic growth.
  • 00:22:59 Fixing problems requires better solutions.
  • 00:28:53 Fixing social programs by embracing free markets.
  • 00:39:28 Regulatory state causing innovation slowdown.
  • 00:46:24 Free market healthcare benefits the poor in John’s view.
  • 00:48:47 Fiscal Theory of the Price Level: Inflation caused by government debt.
  • 00:53:56 Avoid old left-right division.
  • 01:05:21 Government debt may lead to a sovereign debt crisis.

Links relevant to the conversation

Video of the Free to Grow event on YouTube:

CIS web post about the Free to Grow event:

https://www.cis.org.au/event/free-to-grow-unlocking-economic-prosperity/

Transcript: John Cochrane on Free Markets & Economic Growth and the Fiscal Theory of the Price Level – EP214

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked at by a human, Tim Hughes from Adept Economics, who did his best to decipher some tricky dialogue that otters understandably missed. 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  00:03

Yeah, John has written this immense book. It’s fascinating. I’ve picked it up but then I discovered I had to buy three more books to be able to, to interpret it. But it’s it is it’s, it’s terrific.

John Cochrane  00:17

Get past, past, just ignore the chapters to the equations and get to the fun stuff…

Gene Tunny  00:26

I’m getting through it!

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning in to the show. In late September, renowned US economist Professor John Cochrane spoke at the Centre for Independent Studies in Sydney. I’m an adjunct Fellow at CIS and I was lucky enough to interview John after his talk, and I also moderated the Q&A session. John is usually based at the Hoover Institution at Stanford, but he was visiting Australia and New Zealand to attend conferences held by the central banks of both countries. The theme of the event that CIS held was “Free to Grow”. John emphasised the importance of free markets for economic growth, and how stagnating growth is the big issue of our time in his view. After his talk, which I’m replaying entirely because it’s so good, I asked John about his views on economic growth and about his controversial fiscal theory of the price level. So stay listening to hear what he says about that. If you’d like to watch the video version of the CIS event, it’s available on YouTube. And I’ll put a link to it in the show notes. I’ve edited the audio so it’s a bit shorter. But if you’d like to hear the whole thing, including a great introduction of John by the CEO of CIS Tom Switzer, then check out the video, I’d be interested in what you think about what either John or I have to say in this episode. So please get in touch. Contact details are in the show notes. Okay, let’s get into the episode. I hope you enjoy it.

John Cochrane  02:24

Thank you. Thanks, it truly is a pleasure to be here. You may ask why, why do I visit central banks rather than just coming to talk to you? The answer is because central banks pay business class, you know, you know who pay, who prints the money. So I want to tell you a little bit about a project that I’m on. I call it Free To Grow. I hope it’s the next book, you’ll notice the allusion to Free To Choose. But Free to Choose was nearly 50 years ago. And it’s time to update it for today’s world and today’s problems. And it really amounts to I’ve been blogging and writing op eds, and so forth for about 15 years now. It’s time to put all that together in one place, which I discovered is not as simple as copy paste. Because you copy paste and you get immense amounts, it means copy, paste and boil down. And that’s much much harder than I thought. So part of that process is to come to talk to people like you where I have to boil it down, because after half an hour, you’re gonna fall asleep. And we can’t go on and on too far. So thank you for coming. What is the most important economic issue of, you know, facing us or the globe or anyone else? Is it climate change, inequality, unemployment, recession? The answer is none of the above, long term growth, the one that nobody talks about now, to get you to think about growth, why it’s a problem and why we need to do something about it. Let me ask you another quiz question. When was the best economy ever? Now a lot of my left wing friends, they’ll point ah the 1950s were just wonderful because, you know, the economy was growing and middle class jobs and so forth. 1950 the average American income was $15,000 in real terms, today it is $60,000. 15 versus 60. Which do you want? It’s not even close. The absolute best economy ever, in all of human history is right now. by a long shot, unless you want 15 versus 60. Now gee, this is GDP per capita and it evokes yawns, but I want to get you excited about it. GDP per capita is not just about more stuff. It’s about first of all better stuff. That household in the 1950 at a tiny house badly insulated, terrible cars that rusted immediately. One maybe black and white TV, health care. You know, they they all smoke. But you know most things you know if you got cancer in 1950 well, they you know, it’s cheap and then they’ll send in the priest. GDP per capita is health, environment, education, culture, defence, social programmes or any hope of repaying government debt, GDP per capita, that people look down on it, but it correlates with everything else. I’m trying to appeal to the progressives in the audience, which might be a few, but we nonetheless, we have to listen. You want to eliminate extreme, you know, extreme poverty, health, child mortality, clean water, all of those things are just collapsing the number of people who live in extreme poverty around the globe is is fallen dramatically. Child mortality what our ancestors even 100 150 years ago, many of their children died. And as a father and grandfather, I cannot imagine that heartbreak that’s just practically unknown, that comes from GDP that comes from economic growth that comes from it’s all part of it. Even you know, things like parks and a clean environment that that all cool, you have to be able to avoid that stuff. One of the things I find most shocking is the new degrowth movement. A lot of the climate movement will admit that it’s really not about the climate, it’s about an excuse to stop growth, and go back to some idea of the farm. These people have never been on an actual farm, say in India, and had to go get the water by hand first thing every morning. It’s just and it’s also annoys me because how much how much does the world economy have to grow before everyone can enjoy the standard of living of say, a social justice activist who likes to fly private jets to Davos we got along great growth before that, for that can happen. GDP is actually a vast undercount. People say, Oh, it doesn’t include, you know, parks and so forth. But it’s a vast undercount of how much better off we are now than than in the past. Among other things, it’s you know, it’s at market prices, it doesn’t count willingness to pay. If you remember, your your economics, the willingness to pay is always much greater than the market price, we get Google Maps for free, that’s worth a lot GDP counts it as nothing, and no medicines, medicines may be expensive. But if you’re about to die, you’d be willing to pay a whole lot more than that $10,000 it costs. A lot of our progressive friends worry about, oh, you know, we’ll run we can’t keep growing forever. That’s wrong. GDP is not just more stuff. First of all, we keep forecasting the end of resources, and it keeps not happening. But where we’re going GDP is the value of things, it’s producing valuable things for your fellow citizens. You know, it’s it’s funny, they say, oh, it’s immoral to go make a profit, you should go do social justice, the most moral thing you can do is to get up in the morning work hard for your fellow citizens. And and and they pay you for it, which shows you how valuable it is to them. But what we are doing, you know, where we’re going is the services economy, the economy of the future, the GDP of the future, will be for example, health, it will be the ability to to live longer and to conquer diseases and to live happier that that doesn’t take a lot of materials. Now I emphasised across time 15,000 in … from like 1,000 in the 1800s 15,0oo in the 1950s, 60,000 today, this is just an enormous increase in prosperity. Let’s look across countries. What’s the economic problem for India? Should they worry about recession? Should they worry about inequality? Well, their income is 2000. Our income is 60,000. The number one question for India is how to be more like us. That’s just orders of magnitude more important. Even China’s only only 20,000. This swamps these kinds of numbers 15 to 60, 2,000 to 60,000, that swamps every other economic issue. A recession is maybe a fall of 2 to 5%. We’re talking orders of magnitude. Climate is as you know, in the news, let’s just take the IPCC reports that say this will cost us 5% of GDP in 100 years, 5% of GDP versus, you know, doubling tripling, quadrupling, the process of growth. India $2,000 plus or minus 5%, or $2,000 to $60,000. And this is just the swamps, that that kind of issue. Now the question is, will this continue? As long as we’re thinking climate change and the economy of 100 years from now, instead of 5%? better off, will growth continue at say 2% a year? Well, then it’s 200% better in 100 years or three times better than today? If it was 4%, we would be five times better than today. That’s Those are big numbers two times better than today four times better than today or just like today that the the end of growth. So the question I see for Western society is will that continue? And the danger is the creeping stagnation, but it may not continue. The US from 1950 to 2000 grew per capita three and a half percent a year. Since 2000. It’s been 2%. We’re cutting the growth rate nearly in half. And the US as much as I will bemoan it is doing better than everywhere else, except maybe Australia, you guys are catching up. But Italy, my favourite country to go visit stopped growing in in 20, in 2010, just a disaster, Europe, Europe is falling behind, the UK, mother country to us both the UK is half as well off as the US in GDP per capita. And it’s just it’s stagnating and going nowhere, you know, half again, I’m going to I’m going to pick on climate, not because climate isn’t important, but just to get a sense of proportionality of what’s important relative to other things, the crisis of climate change 5% of GDP in 100 years, relative to doubling the UK GDP per capita, if they could just be like the US, you know, so climate change is, you know, that UK versus us is 10 times worse than the damage of climate change, we should be paying attention to long term growth and that and that convergence. So for us, the issue is is stagnating growth, and if it keeps going whether our children and grandchildren will experience what we did relative to our grandparents, of course, for for India, for China, for Africa, the ability to live lives like we do in 100 years, rather than be stuck in grinding poverty forever. That is the most important issue. So where does growth come from? Productivity. In the end, it’s all about what can each person produce per hour. It’s about supply. It’s about efficiency. It’s not about stimulus demand, central banks sending money out. It’s not about it’s not about unions. So why are why are we all wealthy? Because our grant, say your grandfather likely worked in a mine. And it’s 1890 and kaboom with a pick? Did Did we get richer because unions made the profits of the mine go to the worker, and now he gets, you know, 50 cents an hour rather than 25 cents an hour at the pick? No, it’s because now the mine is run with some enormous machine. And everybody else moved to the city and got nice jobs like we have. It’s about productivity. In turn, it’s actually, something is really stuck in our in our policy discussion. It’s always 1933. It’s jobs. It’s stimulus. No, Keynes is dead. We’re stuck with the long run. And the long run is about growth and supply. Where does productivity come from? In the end ideas, ideas, not just products and inventions, the you know, the iPhone, we all we all understand that’s an idea. But the little ideas of how to run businesses better. My my favourites is I spent a lot of time Southwest Airlines if you ever travel in the US, they figured out how to board an aeroplane in 10 minutes, United still takes us 30 minutes because we’re all going there fighting for the overhead bins then you swim upstream to check your bags. That is productivity growth. 10 minutes to board a plane versus 30 minutes to board a plane. Every little thing, you know old fashioned businesses like steel, steel I just found out in the US is is cut by at least in half how many man hours it takes to make us a tonne of steel, the yields on boring things like wheat, are just boom, boom, boom up every year. That’s the slow improvements in how do we do things. So it’s ideas. And ideas are very tricky, economically the crucial event and I’m gonna say something that you probably won’t like. The crucial thing about an idea is that it’s what we call non rival, its intellectual property. iPhone property, real property if you use, take my iPhone, I can’t use it anymore. If you take my wonderful recipe for spaghetti alla Puttanesca I can still use it. It doesn’t hurt me at all for you as you use it. Now, why are we all upset about intellectual property? Intellectual property, Once created, should be used by everybody immediately and then we’re all more productively. Why are we so upset about intellectual property? Well, you do need the incentive to create it. But you only need the incentive to create it. It’s it’s tricky that way. Universities you know, my business is creating intellectual property and giving it away for free. That is the good thing. Now that leads you to say, well, we should subsidise research. We should subsidise new ideas. No, no, no, don’t jump to that fact many of my growth theory economist jumped to you know, subsidised research. That’s the answer to producing new ideas. The problem is and let me tell you for sure because I work in a university. It is very easy to subsidise terrible ideas. You know in In the past, there used to be theology departments, whatever, I don’t know what you think religiously, but that doesn’t improve productivity. Now, it’s called departments of intersectional studies, which is the same thing. But it does not lead to productivity gains is what what matters with us whether you want, it is easy to fill academic journals with BS. So we need ideas. And for us, we need new ideas and better ideas. It’s much easier for China, India and Africa, because the ideas are there, they just need to copy. The only reason, the only reason India is not as productive as the US is they don’t do things the way the US does. Their technology, their productivity is not as high, which is a whole bunch of things, education, legal system, management, all the rest of it, but they don’t have to invent anything new. They just have to copy ideas, and it’s not going to hurt us, for them them to copy them. Ideas need to be embodied. So ideas, not just ideas, lots of inventions that are that they need to be embodied, usually a new products, new businesses, new ways of doing things. So they need incentives. And that is, I don’t really call it free market economy, economics, I call it incentive economics. That is the one thing we have to offer. Nobody else pays attention to incentives. Our job is to pay you need the incentives to take those ideas and implement them in new products, new businesses, and every step is hard. We think of growth as 2%. For years just gonna happen. No, every one of those 2% is is is is hard work to do things a little better, and to upset the established order. The problem is, every step is disruptive. So think about Uber and taxis. Easy example, Uber comes in, obviously better, right? We get cheaper rides, cars get used, people get employment opportunities, part time work, and who hates it? The taxi companies. Now I don’t know what happened here. But what happened in the US is just an unholy mess. The taxi companies had been protected forever. They, they they don’t like it. Nobody, don’t count on businesses to be for free markets, businesses hate free markets. Businesses want protection from competition and an easy life. And that’s the problem. This process of productivity enhancement has to be embodied in new businesses that disrupt the existing order. So all of regulation is designed to stop growth. Think of economic regulation, what does economic regulation do? By and large, it says I protect you from competition from him in order to keep the existing way of things going. A lot of it is about transfers, I’m going to take money from you and give to him but we’re going to do it very inefficiently by making you charge by forcing you to charge a higher prices. This regulation is designed to stop growth, not to get it going to preserve jobs, businesses always of doing things. Why? Because we live in democracies. Democracies are responsive to the needs of their citizens. And when the citizens come come screaming to stop competition and preserve my way of life. Democracies give them what they want good and hard as HL Mencken used to say, My ancestor I have an ancestor who came from Germany to the US and he came to the US. They hated Germans at the time, he went to New York, didn’t speak English. He wrote back come to America, the streets are paved with gold. Why? They were in a business they they made furniture and they wanted to move into pianos. But the guilds in Germany didn’t like this. There’s no damn guilds here stopping us from doing what we want to do. That’s what it needs. So why how do we how do we get around that? Well, we have property rights. We have rule of law, the institutions that protect our ability to innovate and and to and to cause problems for the existing people. So why are we stagnating? In my view, the answer is simple. We got people we got ideas, we’ve got entrepreneurial spirit, we have abundant investment capital, we just can’t get the permits. Now my notes say US regulatory nightmare insert horror stories. And you can we have all heard horror stories of regulation gumming up the works of doing things. Good ideas include public institutions. Now I’m I’m a good libertarian with lots of adjectives in front and one is a rule of law in libertarian. Property lights a rule of law and efficient legal system, that the the prep protections against depredation against the ability of your neighbours to go and demand competition that’s really important. And we see that good institutions are one of the most important things to get into growth, that’s why. So how can we get going growth again? Well, let’s we gotta fix the all the sand in the gears that’s getting in the wing. Can this help? There is a strain of thought and economics that says we have just run out of ideas. That’s the end of that, you know, growth is bound to end. I don’t think that’s true. But let’s let’s fix what we can, we can look and see lots of sand in the gears and we can certainly improve the level and, and I think we can do an enormous amount. When you look across countries, the GDP per capita from the Central African Republic, which is about 200, to India, 2000, China, about 20,000. UK about 40,000 US 60,000. There’s a very strong correlation between our incomes and ease of doing business index rule of law index, those kinds of institutional indices, so we know what’s good. What’s amazing is is how big the effect is, from 200 to 60,000, is really just institutions that my favourite is the my colleague, Chad Jones has a textbook on growth theory. And the cover is is a picture of Korea from a satellite, North Korea dark South Korea light. Now, now the good Lord has given us a controlled experiment, I’m sorry for the people of North Korea, but you want same background, same culture, same language, same everything. In fact, North Korea was the wealthier part in before the for the war, you want a controlled experiment on what government can do, it’s just amazing that it can do so much damage. But But there it is, for you, well, continue that regression line, the ease of doing business index puts the US at 82, 100 is possible. 100 just means the best observable everywhere, as I run that regression line out that puts the US 400% higher than it is today. Well, that seems possible that that is I think, a struggle. So how do we do? Erm fixed regulation sounds, you know, like pie in the sky. And the bulk of what I have to offer is, you know, concrete ideas of how we do it. The problem is, here’s there’s a political problem, stimulus is so attractive, stimulus is, ah, I the great politician will give you money and this will float all around, say yay give me, write me a check. Fixing things is a reform effort. And every market is screwed up in its own way with a bunch of vested interests, I call it what we need is the Marie Kondo approach to our public life. You can’t just stimulus, you can’t just go down and buy a lot of containers. You got to fix the sock drawer, and then the underwear drawer and my god the garage is waiting for us the tax code?.Well, that’s the way it is, you know, you have to know where you’re going and and, and start that reform effort. So I want to give you some examples. You’re not going to get in the next 10 minutes programme for everything, but it is the Marie Kondo approach. How can we get out though of the debate, you can see there’s sort of stuck. And I, what I’ve been thinking about mostly is I don’t want to call it out of the box, because that’s so trite, but a way beyond sort of the standard left right dilemma. And I think that’s right, I think there is an answer to air, to most of our problems, that is not just one or the other side more of this. What do you have to do first? Many regulations actually have some reason to them. So understand why, but then do a better job of what they’re doing. One important exercise is what’s the question? As you look at policies, most are answers in search of a question. My favourite being like tax the rich, it’s always tax the rich, but why keeps changing over the time? Well, let’s get the question. And then we can find a better answer. Regulation, regulation is not more versus less. Regulation is better, worse versus worse, well crafted versus not well crafted, full of unintended consequences and bad incentives or not. The the game is to fix, not just more or less, that’s harder. Another important principle, think of the overall incentives, the overall system, not just parts in isolation. And above all, think about the incentives. No one else is thinking about the incentives. It’s politics is just about taking from you giving to him. Nobody’s thinking about the incentives. If you think about the incentives, you’re away from the political wrangling about about who gets what. So for example, let’s think about let me start with an easy one, taxes. What should we do about taxes? Well, what’s the question? If the question is raise revenue for the government with minimal damage to the economy? I said the question once you say the question, the answer is very simple. That the answer to that question is eliminate income taxes, corporate taxes, state taxes, taxes on rates of return, basically just a flat sales tax on absolutely everything. That raises the most revenue for the government with with least cost and and now the objection what’s what’s wrong with that? First objection is, wait a minute, that’s gonna be like a 50% tax rate. Yeah. If GDP if if The government spending 50% of GDP, the tax rate average tax rate is going to be 50%. And if you don’t like that, you need to spend less. The it’s the same tax rate now it’s just raised in a different way. What we do now is we, we put it in lots of different places, so people don’t know. But the idea is simple. What about inequality? Well, number one, get the rich at the Porsche dealer. If you have a flat sales tax, you’re gonna get them you’re just gonna get them at the Porsche dealer, not when when they make the money, and it’s vastly simple. But what about inequality? Oh, you mean that wasn’t the question? The problem with our tax code is it’s trying to do and this is the US, by the way, I should say, I don’t know anything about Australia, and I hate Americans who wander around the world telling other people what they should do. So but I’m gonna seem parochial as a result, because all my stories about America, we’re trying to do 15 things. We’re trying to raise revenue, we’re trying to transfer income, we’re trying to subsidise all sorts of stuff, like my neighbour in Palo Alto lives in a $5 million house got 7500 bucks from the government for his new Tesla. That’s nice. We’re trying to and we’re trying to subsidise all sorts of things off budget without actually, you know, we’re taxing and spending without taxing spending? Well, you’re trying to do too many things. No wonder you get a mess. Let’s separate these. So the way I’d like to do it is let’s put all of that stuff on budget as expenditures. The flat taxes said, Oh, it’s not progressive. But what is the taxes don’t matter. What matters is the whole system. If we raise money efficiently with a flat tax, and then spend checks to whoever you want to spend, the whole system can be as progressive as you want. And as progressive as the voters will like, or as less progressive as you want. But it doesn’t matter. There’s this focus on each one individually, no, look at the whole system. And that can be as progressive as you want. And that you know, but if you put it on budget, then it’s up to the voters. I’m gonna follow principle, I got nothing to say about transfers, all I got to say about is incentives. And I want the lowest possible marginal rates, with the highest possible revenue for the government, that fixes the incentives, how high those rates are? up to you how much you want to spend, how much gets transferred up to the voters? how much they’re happy to do. Let me talk about social programmes. We are in the US at least, we’re running 5 to 7% of GDP structural deficits. And here come the retirement of the baby boomers. That’s our that’s our debt problem. Well, here’s a classic of left versus right. Right, oh, we gotta cut social programmes, we’re gonna go bankrupt. Left, you heartless whatever, you’re gonna throw grandma from the back of the train, how can you do that? How can we break out of this one? Let’s look at incentives. What’s the real problem with American social programmes. The real problem is not how much money we spend. The real problem is the disastrous incentives and it’s incentives that the programmes all put together. You take the average American between zero and $60,000. They if they earn an extra dollar in legal income, they lose $1 of benefits. And that’s on average, there’s many cliffs where you earn $1 And you lose all your health insurance. Make sure not to earn that extra dollar. If you have, if you have affordable housing with an income limit, earn an extra dollar, you lose your house, people are very smart, they respond to incentives. The other problem we have is that low income Americans basically don’t work. The labour force participation is just catastrophically low. Well, duh, why don’t they work? Because if they earn extra, do you want to cheer after me? If you earn an extra dollar, you lose $1 of benefits. So why don’t we work on fixing the disincentives of social programmes? What will happen then, what will happen is more people work, so they won’t need so much social programmes just save money, you’ll help people who actually need help much more effectively. And you reduce the cycle of poverty and dysfunction in a lot of our neighbourhoods. How can we do that? Well, one of the most important ways is that the problem comes from all programmes together. It’s the the food stamps you it’s only like a 50% implicit tax rate. But if you add the food stamps, the Social Security, the low the earned income tax credit, the the low income bus pass, that actually exists, I mean, all the things that are income limited, you put those together, so why don’t we put those all together instead of having 15, 150 actually different different programmes, remove the cliffs. One of the most crazy things in the US if you get another dollar of income, we lower your benefits. If you go get out and get another programme that gives you another dollar of transfers. We don’t lower your benefits. Well we can fix these things. Control the disincentives. Banking, oh boy. banking regulations. This is a classic one of disincentives. And there’s we have we’re in we’ve just done this again. We’re in this cycle of, the crisis comes, bail everybody out, promised to fix it. It doesn’t work. Great. Run comes again, bail everybody out. Again, this is a ne.., this is an important one because there’s remember the little old lady who swallowed the fly, just swallowed the spider to catch the fly and so on and so forth. This is when you think about how things got bad is not just dumb people. It’s smart people patching up a dumb system. And that’s what happened a run happens. What do you do? You got to bail out the creditors to stop the runs. Now you have moral hazard. A bailout deposit insurance is like giving your uncle Luigi your credit card on his way to Las Vegas. That’s what we economists call moral hazard. So we write rules, okay, no double down on 16. No spinning double black or whatever. Luigi figures out, I have an Italian family so I get to use this. Luigi figures out and goes to the craps table and next thing you know you got another crisis. We have the answer. It’s it’s a sensible thing. But now it’s it’s it’s falling apart we have the answer, which is was put in place 1992 but it requires tearing the whole system down and starting from scratch. And that’s the hard part, the answer, by the way is banks should get their money by issuing stock. And then deposits should just flow into flow into trade. It’s called narrow banking. It’s been around since the 1930s. There’s a lot of money people making money in the current system. Housing, you have a housing problem, we have a housing problem, let them build. And I’m only beginning, health, oh boy, healthcare. This one always causes me problems. But I got to tell you so healthcare in the US is one of the most dysfunctional things around. It’s actually possibly worse than socialised health care. Fully private health care can work. Now here and in 30 seconds, I’m not gonna give you the programme. But health is a complex personal service. It’s like lawyering, accounting, architecture, construction, aeroplane pilots, car repair. It’s a complex personal service, all of those we leave to the free market, there is no reason that healthcare can’t be left to the free market as well. And then a brutally competitive market can give us better service and lower prices. Oh my goodness, I haven’t even gotten to horrible publication, public education, labour laws, occupational licencing laws, immigration restrictions, regulatory barriers, lawsuits, prevailing wage, domestic content rolls, the sand in the productivity gears. What are we gonna do? Well, that’s it, those are all out there. But you can see the general principle can, can be used to fix all those if we want to, you know, free, free markets is still a vital way to fix today’s problems. And that’s just today’s economy. Well, you know, new ideas are also the the sand in the gears is there too. You know, there’s a possibility of factory built mini nuclear power plants. Why don’t we have those in the US? Because the Nuclear Regulatory Commission has not licenced a single new plant since 1975. AI, we live in a moment of a spectacular technological advance. It’s like Gutenberg. It’s potentially like like Gutenberg’s movable press. And immediately what do people want to do? Run to Washington to regulate it. And where’s this, it’s not just coming from fear the robots will take over. There’s a strong demand to regulate it because this is information. We are we’re living at the outbreak of the technical censor the censorship state, and boy, oh boy who has control over ChatGPT3, has control over politics, especially biology I see great advances in biology, better health, longevity, that what we’re learning about about the fundamentals of life is fantastic. But good luck getting FDA approval, or increasingly politicised research funding. So let me summarise here we can’t just bemoan, there’s a tendency among us free marketers to have a beer and just say, Oh, how dumb Why are their zoning zoning laws are so dumb, they’re stopping that. But if you understand where they came from, and what the disincentives are, I think you have a better chance of fixing you have to understand where they came from. That patchwork the old lady and the fly, how to how to ask the right questions, to get the answer. You have to examine the whole system, you have to examine the incentives. And you have to make your opponents state the question. And then often there’s a very simple answer. And then they go duh, that wasn’t the question I asked. It’s okay, now we’ll have a better conversation. There’s a way to do this. Economists are quite a bit at fault, my fellow economists. What you’re taught in economics school, is how to look at every problem, diagnose some failure of the hypothetical totally free market, and then advocate new rules that the benevolent omniscient planner will do to fix the problem. But we don’t live in a free market. When you see a problem. Look first, not at a hypothetical failure of some free market look for the regulation that caused the problem, as you can see with zoning and housing, it’s not a failure of the market, it’s regulatory. Now I have to close on a optimistic note. You know, people often tell me, Oh, if only we could get leaders who will listen, They all believe in democracy. How does this happen? Things things will get better when the average person understands how it works and votes for sensible policy. I know a lot of politicians, they, by and large, understand perfectly well how things work. And they understand they won’t get voted in office for it. So when the average person sees, you know, when the average person sees too high house prices, and says, Well, why don’t we let people build more houses, you’ll get politicians who understand that. So really, the way things work is there’s leaders, there’s the chattering classes around them, and there’s the vast amount of sensible voters around that. If you operate in the world of ideas, then the politics will follow. And that’s why institutions like this one exist, we exist to help the ideas that then will make their way into policy. The idea that you can just whisper into the into the great emperors ear, that’s not how a democracy works. And thank goodness, that’s the way our society works. Okay, thank you.

Gene Tunny  36:19

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

Female speaker  36:24

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

Gene Tunny  36:54

Now back to the show.

36:59

John, thank you. And now it’s time for our Q&A session with our friend and colleague leading proceedings, Gene Tunny is director of Adept Economics in Brisbane. And he’s the author of a recent CIS publication that I’d encourage you to read, Debunking Degrowth. Gene Tunny, over to you Gene.

Gene Tunny  37:17

Thanks, Tom. And thank you, John, for that excellent lecture. That was terrific. John, I’d like to start with this idea of the age of stagnation or the risk of stagnation. And it seems like you’re attributing that to government, I’d like to understand what evidence there is behind that. So we’ve, if you believe the people on the left, we’ve had an age of neoliberalism, we had the reforms of Thatcher and Reagan and in this country, we had Hawke and Keating and then Howard. And there’s an argument that we’ve deregulated too much. But you would push back on that, could you tell us a bit more about why you’re so confident, it’s it’s government regulation that is driving that slowdown?

John Cochrane  37:55

You got an alternative for me? I mean, just look out the window, and you know, try to run a business and and see how hard it is to get anything done. So Reagan and Thatcher were great, but they just scratched the surface. They sort of talked about deregulation, but you know, how many federal agencies did Reagan actually get rid of? You know? So there was a little bit of a pause. But the regulatory state just kept adding more and more. And I see it’s a larger issue, not just of the size of regulation, but the nature of it, our public institutions in the US are fraying. I actually am a free marketer, I look back with nostalgia at the era of regulation. And by which I mean, when our regulatory agencies had rules and cost benefit analysis and public comment and proper procedures. Now, it’s just an executive order and a Dear Colleague letter, you know, and so that that’s in many ways worse as an example. Also, it’s getting more and more politicised. I was shocked. So you may or may not know what’s going on. There was a case, Missouri v Biden that revealed what was happening the censorship of the internet during the COVID era, and went unremarked. The Biden administration was simply threatening businesses like Twitter, we’ll close you down. We’ll send the EEOC, the NLRB, the EPA, you know, this alphabet soup of agents, we’ll send them after you. But by saying that, you know, you see right there, it’s taken for granted. This isn’t rules. This isn’t law. This is just we arbitrary power to close things down. So I see the regulatory state getting bigger, the the legal system in the US, you know, you can’t get anything built because you’re gonna get years of environmental suits. And it’s part of sort of the scorched earth politics. That may not be the answer to the question you wanted, but that’s what I see.

Gene Tunny  39:45

No that’s okay, I just wanted to ask because the the alternative view is that there has been that slowdown in the rate of innovation that you mentioned the the Robert Gordon thesis of the rise and fall of American growth. I think it’s, yeah to me, it seems like a difficult thing to be able to prove one way or another,

John Cochrane  40:02

It is no, what you’re asking me is not just my view but what I think of those views. Yeah. So these views, we got to take this seriously. Gordon basically said, our growth was an SJ thing, it was a one time thing, we learned to use fossil fuels. And that’s over, just, you know, that the possibilities are over. And there is evidence, you know, it’s taking more and more in resource, find an invention. But in part, that’s always been the case. So there’s a great study of the steam engine, steam engines invented, it wasn’t, you know, 18, if you’ve been to the museum’s, it wasn’t like the final steam engines 100 years of making it better and better, and it gets harder and harder to harder to make it better. And we’re kind of running out of ways to make steam engines better. And then someone invents the diesel engine, and then someone invents the aeroplane. So I think we’ve been in a period of sort of, there was a new invention, we kind of work and all that, and you’re waiting for the next new thing to come, which I think is potentially biology or AI. So just wait. But who knows, you know that that’s a possibility. We but we also know, the regulatory state is causing tremendous problems. So you know, maybe we can only raise GDP by a factor of four, before we run in, run out of ideas, factor four will be pretty good. And to let India and Africa have our way, know how to do things the way that will be pretty good, too. And if 200 years from now, that’s where we plateau. Okay, we’re done.

Gene Tunny  41:20

What do you think the risks are with? With AI? I mean, there’s a lot of potential there with biotech is that is the risk that we’re going to be too timid, that we’re going to over regulate, because of the precautionary principle, for example, how do you see that? And what alternative would you offer? What, would you have a principle that you could apply for there?

John Cochrane  41:38

The last big thing on the internet was was, you know, social media sorts of things and Google, and then they’ve been kind of looking for what, I live in Silicon Valley, they’ve been looking for what to do for 10 years. And I talked, everybody wanted crypto for a while that was kind of going nowhere. Not that kind of hard. But the old tech companies have turned into regulatory regulated utilities with remarkable speed. And I worry that this, this is really a demand for the new stuff to do that I don’t, the idea of the robots will take over. They’ve been worrying about that since 1850. I think just technically, that’s silly is just complete sentences, it completes your sentences. Don’t worry about that taking over. I think the demand for regulation is the demand to control the flow of information that we get, and we’re worried about tech is there’s no monopoly that doesn’t get enforced by the government that lasts very long. People say tech’s a monopoly? Oh, yeah, Netscape, AOL, Yahoo, they got that one wrapped up, don’t they? And the same thing is happening to the big tech tech companies now. So the demand I think, really is the danger is the danger of the surveillance state. And, and so, you know, there’s you can see the political demand for regulation, and people like to keep their profits up. So that’s the demand for regulation. Not that the robots are gonna come get us.

Gene Tunny  42:57

Okay. I’d like to ask, again about, well about government. And you mentioned the, the Marie Kondo approach to fixing government and if I remember Marie Kondo correctly, it’s you pick up an item and if it doesn’t bring you joy, you toss it out. Are there parts of the government that don’t bring you joy, that you would toss out?

John Cochrane  43:16

I think the converse of that question is going to be harder or easier to answer. Yes. What what do I like about the government? I think the US is vastly underfunded the legal system, that it takes years to get to get something through the courts is just a shame. That’s part of public infrastructure. You know, where roads, bridges and efficient courts. So that’s why as much as I hate lawyers, and environmental suits and all the rest of it, nonetheless, that’s, you know, that’s a part of the work that we can have some public infrastructure there. Is there anything else that we actually like? What do we like in the government?

Gene Tunny  43:54

That’s okay.

John Cochrane  43:56

Sorry? Yeah, National Defence. That’s a big inefficiency that we put up with. Thank you. It is remarkable. I’m a good libertarian and free marketer, that the military is so efficient at what it does. I mean, it’s a big inefficient waste, but that it actually wins wars is pretty amazing. You know, given given the structure that they’re really amazing people.

Gene Tunny  44:17

Okay. John I’d like to ask about health care, for example, and you’re a proponent of free market, in health care. A lot of the other advanced economies or most of them would have large public health care systems. And the concern is that if you have the free market in health care, there’d be some people that would miss out, they’d be left behind, there’d be people who couldn’t afford it, people who wouldn’t be insured. How do you deal with that objection given, if you look at the US system, US life expectancy is significantly lower than other advanced economies. How would you cope with that objection? How do you, I know it’s difficult to unscramble from where we are and you do have regulation intervention already, but how would you deal with that, that objection?

John Cochrane  45:01

Yeah the US already has a public health system that’s just a remarkably inefficient one. So most of the population is on some sort of government thing, whether it’s Obamacare or federal employees, and the US, you know, in other countries they say, You’re we’re paying taxes, you’re gonna pay some taxes to pay for his health care. In the US, the government says, well, we don’t want to tax and spend instead you business are going to provide her health care, and is that any different than taxing and spending? But then we have this horrible system of cross subsidies, which is what kills the competition? You know what, so government doesn’t want to pay that much. So we say, well, you hospital, you have to provide free health care, and the hospital says fine where are we making up the difference? Well, we’ll let you overcharge everybody else. Okay, but now you can’t have any competition. That’s where the whole homeless comes from. Now, now the left behind issue. So US life expectancy is lower. That’s because we shoot each other. And we and we do a lot of bad drugs. But US life expectancy, if you have cancer, it’s a whole lot better than anywhere else in the world. So it’s horrendously expensive, but but not that bad. You know, the poor people have cars and houses and lots of things, they don’t get great health care, by the way, anywhere in the world. Everywhere in the world, rich people have ways of getting really good quality health care, and we sort of have a fig leaf that that everybody else is, is getting great stuff. So I don’t see that free market health care, because it’s going to be so much more competitive, so much more cost effective. I think it’s gonna serve poor people, poor people, you know, have money just like anybody else. They’ll they’ll buy health insurance and it’ll be cost effective. And, and I don’t mind subsidising it. So you want a subsidy, so we can have transfers, I said, do you know all the transfers you want? I just I’m gonna give you a voucher, you can have a voucher for 5000 bucks, 10,000 bucks here, I don’t care what it is. Go buy your health care on a brutally competitive insurance and healthcare market. You’re going to come great because you got a $10,000 voucher.

Gene Tunny  47:00

Okay, okay. Might be good to ask, go to the audience soon. ButI’ve got one more question…

John Cochrane  47:04

I’ll try to shorten up my answers. Stop asking such good questions.

Gene Tunny  47:08

No, I’ve got one more question about your fiscal theory the price level, which is, yeah John’s written this immense book. It’s fascinating. I’ve picked it up. But then I discovered I had to buy three more books to be able to, to interpret it. But it’s it is it’s, it’s it’s terrific…

John Cochrane  47:27

Get past the, past, just ignore the chapters of the equations and get to the fun stuff…

Gene Tunny  47:31

I’m getting through it. But John, how do you distinguish this from, say, the Milton Friedman view that inflation is always and everywhere a monetary phenomenon, you’ve got a fiscal theory of the price level. We look at what happened during the pandemic, when we had this massive monetary expansion in the Western world and in Australia and the United States, UK. And then we see the inflation following that. And we think, Well, this is what Milton Friedman was telling us. But you’ve got a theory of inflation that is different. You’re saying it’s to do with fiscal policy with government debt? What do you say about Friedman’s theory and how is yours different how does yours add to it or reject Friedman?

John Cochrane  48:08

That’s not a question that’s gonna get you a short answer. 600 page book in 30 seconds, here we come! The fiscal theory of the price level says that where does inflation come from fundamentally? It comes from more government debt than people think can be repaid by future taxes. Government debts and assets just like stocks and bonds. If you think the stock doesn’t have is not doesn’t have any dividends coming, what do you do you try to sell the stock the price goes down. If you hold government debt, and you think, you know, these guys are never gonna pay this off. What do you do? You try to get rid of the government debt? How do you do that? You try to buy stuff to try to sell the government debt, but we can’t all sell it. The only the you know, what is if we try to sell the government debt, we buy stuff, prices go up. That’s where inflation comes from. Now, what about Milton Friedman? I love Milton Friedman. Milton Friedman was 99% right. Wrong about one little thing. So Friedman, he said money causes inflation, not total government debt. Now, how do we agree and disagree? Suppose you take $5 trillion of money and hand it out from helicopters, as Milton said, that’s gonna cause inflation. I agree, because money is one form of government debt. And when you drop money from helicopters, you’re telling people here’s debt, we have no intention of paying this off with future taxes. So we agree that is, it’s an expansion of government debt is money that finances a deficit. But suppose the government drops $5 trillion of money from helicopters. And simultaneously the government burglars come and take $5 trillion of treasury bills out of your safe, you have no more wealth, you have lots more money, but we took away your treasury bills. Now monetarism would say that causes exactly the same inflation as just giving you the debt. And I say ah ah ah, what counts is overall amount of government liabilities and as proof, yes, in the pandemic, the government did drop a lot of money and debt on everyone and got inflation. It was financing huge deficits. That was a fiscal expansion. The government also did $5 trillion of giving you money and taking back debt. That was called quantitative easing. And what did that do? Nothing. So 5 trillion in quantitative easing designed to increase inflation, absolutely no effect whatsoever. 5 trillion of deficits, which could have been money could have been debt, 5 trillion deficits, we got inflation. That’s actually Episode One for the fiscal theory.

Gene Tunny  50:27

Okay. Thanks, John. That explains it better to me for sure.

John Cochrane  50:31

And Milton was great. Now many not that many episodes of money causing inflation, and they were almost all governments printing money to, to cover deficits. So we agree on all those episodes.

Gene Tunny  50:43

Very good. Okay, Tom, should we open up to the floor for questions? And question I’m going to enforce the questions must be questions rule. Gigi Foster?

John Cochrane  50:54

I welcome speeches. Short speeches.

Gigi Foster  50:56

I’m Gigi Foster. I’m a professor of economics at UNSW, one of our local universities. And thank you so much for your lovely talk, which I will be trying to get somehow for my students, hopefully CIS will make that possible. So I really agree with you know, 99%, of what you said. But towards the end, I thought maybe your optimism about being able to fix this through democratic processes may be a little bit overstated. And my worry is that what we have now is this sclerotic mess in not just in government, but in organisations as well, including universities. And it is sustained by poor incentives on the part of the people in the state and the bureaucracies that are not accountable, and the politicians themselves who are career incentives. And what we face is a situation similar to what Kafka saw, similar to what we had in the USSR before it fell. And we know that how those bureaucracies end is they they either have wars that defeat them, or they come crashing down under the weight of their own inefficiency. And right now, our democratic mechanisms are not very strong. A few elections, sometimes, to me, it’s just not a strong enough force. So I’ve been advocating for a lot of direct democratic revival in the resistance and restoration movement here in Australia. And I wanted to know what you thought about the need for that. And if we don’t think it’s necessary, how is this going to come to pass?

John Cochrane  52:08

In the past, democracies, especially actually, small countries, who seem better able to do it than the US are capable of reform. Even the US we’ve had a social security reform, we had a tax reform there, you know, historically, we’ve been able to fix things. I worry as you do, that the institutions are fraying that we are we are in the US having, the government is so powerful, that it’s worth scorched earth tactics, to destroy the institutions to grab power for the next round, because then you get control of the Justice Department, the surveillance state, the taxes and all the rest of it. There is a limited government allows you to lose elections and go lick your wounds and try again. So and I, I’ll be a little political here. I think our big, one of our biggest challenges is we face a political religious movement on the far progressive left, that is understood the march through the institutions. It’s a small fraction of popular opinion, but they know they grabbed the educational institutions, they grabbed the bureaucracies they grabbed the philanthropies, they have the universities, they have the institutions of civil society in their grasp. And they are profoundly undemocratic. They they are, they call themselves save our democracy, but they are Maoist in their in their policies and that and with the fraying of institutions, and the rise of a technical surveillance state, that, you know, that is a genuine threat to democracy and growth. So I was trying to close optimistically, I’m making your point. I am, you know, very worried about that, and our freedom to have events like this.

Gene Tunny  53:47

Righto, Peter Tulip, at the back and then over here… Thank you, Chief Economist at CIS, yes.

Peter Tulip  53:54

Thank you. I’d like to ask about you’re talking about avoiding the left right division, that a lot of the regulations you want to get rid of have a strong constituency within the economics profession. But that’s not true of all of them. There are some views and in particular, free trade, or housing policy, you mentioned where left wing economists, like Jason Furman or Paul Krugman, have almost exactly the same agenda, as you do. But the general public is on a different planet. And part of that is that the public just doesn’t trust market forces. I was wondering if you have views, how do we prosecute those other issues where economists across the spectrum agree, and we’re against the general public?

John Cochrane  54:43

Boy, that’s a hard one, by the way, Econ profession is in many cases very interested also. You know, how do you get consult like health economists, you know, they live to consult for the for the big health either, they’re not gonna say free market. They live to provide advice and benevolent dictators, they tend to be pro regulation as well. How do we get, boy, basic education on basic things that support the institute? I get to think about that one and come back after another question, but because those are fairly straightforward, and of course, the far left doesn’t believe in the far right doesn’t either. You know, Trump has 25% tariffs on everybody. In fact, I was so disappointed in California. There’s a there’s now a yimby movement where progressive lefties they’re saying, You know what, I get it. The only way to bring down housing prices is let people build housing and market rate housing, not just government subsidised housing. And instantly the Republican Party said, no, no, no, no, we must have zoning control and local local. Don’t Don’t count on the right to be free market either.

Gene Tunny  55:56

Over here, and then we’ll go over here. Yes, if you could just…

Michael Potter 55:59

Yes, Michael Potter. So I just wanted to ask about you mentioned I think a when you were talking about health care that the US system is actually worse than a socialised system was just wondering if you could expand or develop on that idea. Why is the system which is sort of partly free market and partly regulated or socialised, why is that actually worse than a fully socialised system?

John Cochrane  56:23

Well in part I was making a joke. But you know, what, there’s a couple of original sins in US healthcare, and one of them is this idea that we’re going to do, we’re not going to tax and spend, we’re going to do it by forced cross subsidies. Because if you tax and spend, you can still have a competitive system. When you do it by forced cross subsidies, you you have to stop competition, and then just the price just explodes. So, you know, we have better health care than most places, but we pay we have twice as good health care at five times the price. And actually, you know, there is this issue, what do you do about poor people? And I said, vouchers is one way to do it another way is, let’s just, if you want it, you know, deal with the homeless people shouldn’t die in the gutter, why don’t we pass some taxes and give them whatever health care you think is a compassionate society deserves the least fortunate. And then the rest of us can be left to the mercies of the free market. And one of the crazy things is that my health care insurance has to be so screwed up, just because to provide health care to the bottom 5% of the homeless person in the gutter, that’s silly. You know, we, we need, you know, I can still go to a private hotel. And we don’t, you know, we don’t we don’t try to socialise that in order to solve the homeless problem. So there is, you know, I assume a government provided system all one in is pretty horrendously inefficient. But a system a crony capitalist system can be as efficient as a, as a well run, government provided system. And I’ll say it I would be for taxing and spending, you know, one way to, you know, tax and provide a a community hospital for the poor, and then we get the free market.

Gene Tunny  58:07

Okay, with some questions over here. And then we’ll go to you, we’ll go to this gentleman. Thank you. Thank you. Thanks.

David Tregenza 58:14

Hello, my name is David Tregenza. I was just wondering, when you talked about development economics. I’ve read arguments from maybe more progressive that the reason America has such all those ideas booming is from their large spend on military, which then leaks to entrepreneurs. And that’s where computers, internet, rockets, satellites, and all that come from? What do you say to that?

John Cochrane  58:38

Well like, China seems pretty good at taking our military ideas and implementing them. You know, those ideas are available for anyone. Now, to what extent was, you know, to what extent the idea is that the most efficient way to produce new ideas, you know, Apollo programme was 1% of GDP, we got Tang and Teflon, you know, maybe we could have gotten that cheaper from from other ways. So some of the basic ideas did come from the military. But the hard work is not the basic idea. The hard work is the implementing it and starting the new company, you know, famously, Xerox, created the mouse and didn’t know what to do with it. Steve Jobs saw the mouse and boom, that, you know, he knew what to do with it. So I’m not sure that we have a dearth of basic ideas. We have as the dearth of is the ability to take new ideas and implement them in new companies, which then challenge the profits and ways of doing things of the old companies.

Gene Tunny  59:36

Nicholas Moore is it? Has the microphone.

Nicholas Moore 59:37

Thanks, thanks for the presentation. It’s been terrific. I’m, of course a subscriber to to, as you say, 99% of these views, using a natural experiment US versus the UK I think is a good test. But I always used to get confused when I looked at France and the UK because the French obviously wouldn’t embrace the sort of ideas we’re talking about, whereas the UK, typically would have, and again, looking at the US, you know, the contrast between California who arguably embrace all the wrong ideas. And when we talk about AI, you know, Where’s that coming from? So, so there does, you know, the natural experiments throw up a bit of challenge don’t they in terms of where GDP per capita ends up where ideas come from?

John Cochrane  1:00:23

I don’t know are France, France and the UK that different in terms of overall level of so…

Nicholas Moore 1:00:28

That’s a point so their GDP is per capita is the same, one’s more open and one’s more closed

John Cochrane 1:00:33

France spends 55% of GDP the UK spends 50% of GDP on on government stuff. There’s sort of this de industrialised, the UK is a financial centre and then tourist de industrialised wasteland, France has a certain efficient technocracy. So they they may be socialist, but they kind of they send people to the Ecole Polytechnique, and then they build nuclear power plants and we don’t kind of let you I don’t know what it’s like in the US. There’s kind of anything we want to build in the US there’s just this chaos of regulatory nightmare. And, you know, can you get stuff built in the in the UK the way it can, you know, you get the technocrats in France to build something they build something you know, they can build a high speed train, the US can’t build a high speed train. SNC, I don’t know if I told this story SNCF bailed out of the contract to build the California High Speed Trains. They said you guys are crazy. Not even socialist France works like this. I don’t see a great. I wish the UK had taken Brexit and become Singapore on Thames. But they don’t seem heading that direction.

Gene Tunny  1:01:44

Very good. Michael Brennan is it Michael?

Michael Brennan 1:01:46

Thanks yeah, Michael Brennan, used to be the chair of the Productivity Commission in Australia up until a couple of weeks ago, I wanted to ask about the economics profession, and where you see the role that it has played. I mean, I hate to indulge in nostalgia, but it does feel as though in your country and ours the economics profession had and played a much stronger role in the economic policy debate but had a much stronger feel for markets, institutions, the broad sweep. We feel it feels to me as though a lot of economists have gone down different rabbit holes, either very abstract, or ultra empirical, but involved in very narrow questions rather than the sorts of big questions that that you’re posing and answering.

John Cochrane  1:02:31

You know, to the extent that economists want to waste their time on technical stuff, they’re not harming anybody. So enjoy it. The economics profession has actually always been quite left wing and statist and, and serve and view their job as sort of advancing progressive goals. The American Economic Association was was founded that way, there’s kind of a, you’re thinking Milton Friedman, University of Chicago, but that was a very small number of people for a very short window of time. And now mostly, they’re in their advancing progressive agendas. You know, you can’t even you can’t publish a paper that says raising raising minimum wages, lowers employment anymore, so it’s kind of going a way of the other sciences as well. So we’re really the danger I see is that it is becoming part of the ideology production machine for the progressive narrative, and becoming less open to critical empirical work that challenges that that narrative, and you know, well, when you work for the government’s guess what you tend to say that the government’s good things?

Gene Tunny  1:03:36

Okay. There’s one question over here.

David Murray 1:03:39

Yeah. David Murray. How do you help people understand these concepts of corporate social responsibility and social licence?

John Cochrane  1:03:47

Do I want them to understand those concepts? With Friedman, your job is to to make profits for your shareholders. Unfortunately, right now, the way you make profits for your shareholders is to keep the regulator’s out of your hair. And the way you do that is to echo whatever political blather is in the regulator’s minds these days. So never count on big businesses to challenge the regulatory state or argue for free markets. They’re in business to get good regulatory treatment, and maybe you can protect us from your markets, and that means they go along with whatever nonsense is coming out of Washington.

Gene Tunny  1:04:21

Okay John, I might ask one more question. I’ve had a gentleman on my podcast who produces these things called Goldbacks. So there, there are a lot of people maybe, still, maybe, I don’t know, it’s under 10% of the population. But there are a significant number of people who are worried about the future of the US and the future of the global economy. And, you know, worry about fiat money. Is fiat money a problem? Do we need to go back to something like a gold standard or goldback currency? What’s your view on that before we wrap up?

John Cochrane  1:04:51

Fiat money is now a share in federal government. It is not, fiat money means money that’s backed by nothing but our money is backed our money is backed by the willingness of our government to raise taxes to soak up the money if necessary, I’m giving you fiscal theory the price level. So it’s a great system, so long as our governments maintain the fiscal space to always back their money with taxpayer, that’s a good system, so long as governments are fiscally solvent, I think the danger of the of the current, not fiat money, so the current system of money backed by the present value of fiscal surpluses is that it might not be backed anymore. And that therefore I do see a possibility of a of a sovereign, a grand sovereign debt crisis. When do you get a crisis? Nobody ever sees a crisis coming, right? Because if you knew the crisis was going to happen tomorrow, then it would have already happened today, you’d run and get your money out. What is the one cl.., and crises always happen when there’s money that can’t be paid back, shady accounting and nobody doubts that this is good stuff yet. Have I just described government debt? So I think, you know, in the next crisis, there is a possibility that our, we reveal our governments to have debts that they have no way of repaying and you could have a global inflation a default on you know, Italy, in some of the EU states, basically, a run on sovereign debt is possible. I don’t, we’re not there yet. But that’s kind of where the end of Western civilization goes. And then you got a problem because our monetary system is all built on the idea that government debt is sacrosanct. Now really any idea of history and you think government debt is the safest assets since the since the Henry the Henry the Third, I think defaulted on the Petruzzi government debt has been the riskiest asset around. And so we live in this kind of golden age. So to your question. I think if that happens, not, I mean, we’re in smoking financial ruins, but you might want some monetary system that doesn’t depend on the value of the government. And, you know, we all have our free market fantasies about that’s the one one place I’ve kind of stuck with the government we have a decent system of short term government debt is long, you know, it works okay. In free market fantasyland. And, you know, after we’ve had our third drink, we should talk about private monetary systems for the moment I kind of put it in, you know, airline pilots. Yeah, pilot licences should be privatised. Okay. Maybe that’s not the first thing we want to do. It’s kind of thing you talk about at the third rank of the Cato. So the same thing? Now gold is not the answer. So a gold standard is a government promise to deliver gold. So you haven’t gotten rid of the government. And a gold standard is a fiscal commitment. No government’s ever had enough gold to back their currency. So what is the gold standard, a gold standard, the government says I promised all these notes. One for one with gold, I know that the gold so what keeps that afloat? What keeps that afloat is the Government’s commitment, that if you start coming to ask for gold, I will raise taxes, and I or enough to get or borrow the gold to give you it’s a commitment to running the fiscal theory the price level. And it’s a bad one because the relative price of gold and other stuff fluctuates, it just would not work in a modern economy, because we don’t use gold coins. So So gold isn’t the answer. And gold doesn’t obviate the problem of if the government’s are bankrupt, they’re not going to be able to give you a gold standard. Is there something in the Bitcoin space that could maybe do it? We need to Yeah, I believe money has to be backed. So you need to find a security that’s backed by real assets that has a steady real value that there’s a lot of it, and that in and that people could use, we could devise such a system but you know, why don’t we just have our governments not default and have to build this from the smoking ruins anyway.

Gene Tunny  1:08:46

Very good Professor John Cochrane. Terrific, thank you. John’s gonna move a vote of thanks. Very good.

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 outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

56:06

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Credits

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

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Podcast episode

Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

Australian Treasurer Jim Chalmers argues for values-based capitalism and against neoliberalism in a January 2023 essay in the Australian Monthly magazine. In this episode, show host Gene Tunny discusses the Treasurer’s essay with Dr John Humphreys. John is the Australian Taxpayers’ Alliance (ATA) Chief Economist and the founder of the Australian Liberal Democrats. Gene and John discuss just how literally we should take the Treasurer, the risks of the so-called co-investment approach, and whether the Treasurer is arguing for socialism (or a different -ism).      

This episode features audio from an ATA Econ Chat livestream broadcast on 31 January 23. You can watch the whole thing here:

https://www.facebook.com/AusTaxpayers/videos/509950911277607

You can follow the ATA on various platforms including Facebook and YouTube.

You can follow John Humphreys on Twitter.

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

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

What’s covered in EP175

  • Jim Chalmers’ idea of co-investing with the private sector [4:21]
  • Regarding superannuation funds increasingly having social goals that they aim to meet as well as financial goals [9:12]
  • The Australian stage 3 tax cuts and values-based capitalism: are they compatible?  [12:37]
  • ESG, stakeholder capitalism, and socialism [15:24]
  • How does the Treasurer intend to direct investment? [23:28]
  • How a poor government policy can lead to another poor government policy [27:31]
  • The social impact investment bank expected in the 2023 Australian budget [32:34]

Links relevant to the conversation

Jim Chalmers’ essay Capitalism after the Crises

Clean Energy Finance Corporation Financial Outcomes 2021-22

Australian Government principles for social impact investing | Treasury.gov.au

Impact Investing Won’t Save Capitalism  

Transcript: Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I discuss so-called values based capitalism with John Humphreys. John is chief economist of the Australian taxpayers Alliance, and he’s President of the Australian Liberal Democrats. The idea of values based capitalism has been injected into the Australian policy debate by the Australian treasurer of Jim Chalmers. In a monthly magazine essay, the Treasurer argues we need greater coordination between the public and private sectors, and we need co investment. He argues that government business philanthropic and investor interests and objectives are increasingly aligned and intertwined. The Treasurer is the top economic official in Australia. He’s the equivalent of the US Treasury secretary in the UK Chancellor of the Exchequer. So obviously people pay attention when he tells us what he thinks. The audio of my conversation with John Humphreys is taken from a live stream I did with him on the 31st of January 2023. I’ll put a link to the full live stream in the show notes. Okay, let’s get into the episode. Please stick around to the end, because I have additional thoughts after my conversation with John. Well, I think we have to chat about this essay by the treasurer Jim Chalmers capitalism, after the crises, rather extraordinary for the treasurer to publish something like this. I mean, although we had the former PM, Kevin Rudd, publish something similar about how he was going to save global capitalism in I think it was around February 2009. While we’re all busy in Treasury, with actually managing the budget and all of that, somehow, the pm found time to write a 8000 word essay. And now, I mean, Jim Chalmers is done. Well, I think is 6000. It may not be as long as the one Rudd wrote. And Jim Chalmers wants to remake Australian capitalism. I don’t know if he necessarily wants to remake global capitalism. But he does have a critique of neoliberalism. So that’s the new thing that everyone hates. And I mean, it’s similar to a lot of critiques of so called neoliberalism that, you know, we we’ve gone too far in the direction of the market, and we don’t care about society as much anymore and isn’t as all dreadful. And isn’t all this inequality, terrible. It’s causing problems for Democracy Now look, okay. There’s certainly issues and in some countries, inequality has certainly increased, there’s no doubt about that. Overall, it’s this very simplistic analysis. And look, it’s Jim Chalmers is views. I mean, you know, fine. That’s his philosophy, it’s probably what you’d expect from Jim chamas. He’s entitled to those views. I mean, my personal view is you should be looking at specific policies. I mean, what exactly do you think we did wrong? Okay, let’s look at specific issues and see how we can fix those up. I mean, is it tariff cuts? You don’t approve of them in tariff cuts that the whole Keating government supported? I mean, what is it precisely that you think is the problem? So there’s this general critique of neoliberalism, which is no different from a lot of stuff you see online by various progressives? And, look, I mean, I’m not necessarily going to defend everything that that’s been done in economic reform. I mean, there certainly been like, I think there have been some great successes. But there have also been areas where the insert less than stellar results. There’s no doubt about that. But I think what’s important is to get it all. Okay, let’s understand what he actually wants to do because he’s got this general critique, okay. But what do you want to do? And his main idea seems to be this idea of co-investment. That’s the real substantive thing. That seems to be how he’s going to define his time as treasurer or his time as PM if he later becomes PM, because in a way, this is job application for PM he wants to be Labour leader. He sees this as defining his philosophy as a labour treasurer. We’re going to fix capitalism. He talks about values based capitalism, he thinks capitalism, we want to move away from a system where it relies upon people beings If interested in greedy and the private sector alone, we want to have a cooperation between the private sector and the public sector. We want the public sector, getting the policy settings right and and then co-investing with the private sector to provide some, some ideas about how that will occur. He talks about the Clean Energy Finance Corporation, which is designed to provide finance for various renewable energy projects. He sees that as a success, even though it doesn’t appear to be meeting its investment mandate. So I had a look at that, because I found it interesting that that was his one, the example that he gave, so he talks about co-investment as a powerful tool at our disposal. The Clean Energy Finance Corporation has been a great success, partnering with investors to direct capital where it can have the greatest impact, not by subsidising returns, but by helping structure investment vehicles in a rapidly emerging economic sector, we will employ this co-investment model in more areas of the economy, with programmes already underway in the industry, housing and electricity sectors. Okay. So they’re looking at providing some type of framework, having these entities like the Clean Energy Finance Corporation, and I think they’ve set one up similar to that in housing, it’s to encourage investment by the private sector and by I guess, providing more accessible finance, or making creating financial products, perhaps with some government guarantee, I don’t know, we have to wait and see what exactly the treasurer is, is talking about here. So yeah, that’s where I think we’ve really got to focus. This seems to be his idea of how he’s going to be this innovative, new wave labour treasurer. Yeah, Nick’s made a good point here in the comments that they want the super funds to, to invest in some of these areas such as housing, or an infrastructure. But again, I mean, we’ve got to ask exactly how are they going to do that? There’s, what I see is the risk that the government provides some sort of guarantee or does provide financing, he’s saying it’s not subsidised. But, I mean, you’ve got to wonder about if it isn’t subsidised? Or if if the government’s not making finance more readily available in the market within the banks would then what exactly is the market failure they’re addressing? Why wouldn’t the private sector do it? So I think there is going to be some sort of subsidy or, or risk taken on by the public sector that’s not compensated for. And so when I looked at the Clean Energy Finance Corporation webpage on financial outcomes, I discovered that and this is what this is a an institution that the treasurer claims has been a great success is its return its lifetime annualised portfolio benchmark. Return. So this is, this is a return that they’ve earned. So 4.38%, which is, you know, hardly anything, really, if you think about what you’d really want to be earning as an investment vehicle like that. So I think there is a risk that this sort of thing is subsidised. I think there’s a risk that they’re taking too much risk onto the government balance sheet. And there’s a potential to fund projects, which are uneconomic. So if that’s the big idea, I mean, okay, well, let’s see the specifics, and let’s analyse exactly what you’re, you’re recommending, and we can talk about that. Yeah. And there’s that point about, yeah, they do want access to the super funds, money, they will have to make sure that it’s a compelling investment opportunity to actually get that money. And, and that is a big risk. I mean, we don’t yeah, that those super funds, if they just invest in something because the government wants them to invest in it, then they are breaching their fiduciary duties. That would be a terrible thing if the government does direct where that money should go.

John Humphreys  09:12

Interesting points on that today. I think this is part of the problem that we’re sneaking up on the situation several ways. Super funds increasingly have social goals that they need to meet, as well as financial goals. You make a good point that, well, that needs to show that they’re going to meet the financial needs of the super investors. Increasingly, the super funds feel the need to meet their social KPIs, rather than their financial KPIs. And if they are required to meet social KPIs, then they’ll very easily get away with it. Remember, it’s not like this super is optional. We’re forced to give it and if the government gives the super funds who have guaranteed access to our money, social KPIs, you must do something social. By the way, here’s something social we want you to do. You can imagine it happening, even if it doesn’t have financial risk. I think the point Nick can correct me if I have not expressed her concern accurately, please jump into the chat again, Nick. But that’s my understanding of your point.

Gene Tunny  10:09

Yeah. So the whole thing with this values based capitalism, one of the concerns is that you end up with this very odd relationship between the government and banks and super funds. And in a way, it’s very odd for a Labour leader or an aspiring Labour leader. And this is a point that Matt Canavan made that he was very critical, as you probably would expect of this sort of thing. And I mean, he was saying that the treasurer seems to have been spending too much time in the boardrooms of banks and super funds. So yes, it’s, it’s very strange, but what I think might be going on, and this is, this is one thing that I’m wondering is, is this because he really doesn’t have many other options due to the state of the budget due to the high amount of debt, and due to the fact that he’s committed to the stage three tax cuts? Katherine Catherine Murphy on the Guardian podcast asked him, Okay, if you’re talking about values based capitalism, does this mean or she, she was basically asking me if you actually, given what you’re professing about values based capitalism and your concerns about inequality, etc? Does this mean you’d revisit those stage three tax cuts? And other there was a good question, and he just gave the standard line? I look, we’ve already dealt with that. And we’re, you know, my position on that. I think she probably could have pressed him more on that because it is a legitimate question, if in terms of traditional Labour government, some people have been saying that with this essay, Jim Chalmers is channelling Whitlam or it’s going back to the Whitlam government, I’m not entirely sure about that, because the Whitlam government was big spending on social welfare programmes, I really ramped that up. I mean, I know now we are spending more on that sort of thing. But there’s, I don’t know if there’s a capacity for this government, given the fiscal situation to really increase those welfare payments, or expand the welfare state much at all. And so he’s really falling back on this sort of thing, because he may not have any other option. And to an extent, that’s because the government’s had to go along with the stage three tax cuts for political reasons to win the last election. And now they can’t go back on it. So you know, this could be the only shot he’s got in the locker, so to speak. That’s one thought I’ve had on this, this essay.

John Humphreys  12:47

It will be interesting to see what they do in the next budget in terms of tax, I suspect, I’ll sneak that tax rate up, they are going into that. Look, I think that was politically hamstrung with their previous commitments. And quite frankly, I think they made the right decision to stick to their promise, both because I’m a big advocate of the stage three tax cuts, but also politically, if you want to keep any political capital, you can’t just line up lie after lie after lie in your first year in power. So I think it was the right political move and the right economic move. I suspect they also know it’s the right political move. They think it’s the wrong economic move, but they’re stuck with it. And so I’m happy about that. You’re not just a couple of quantifications. I haven’t thought about this article as long as you have, but I think you’ll write in one very important point. There’s been a lot of furor about the words. And I think the words of what Jim says, if taken literally, we shouldn’t be worried if they can, literally. But you pointed out, I think that it’s not necessarily true that we should take it literally, because there’s a lot of fluff and waffle in the middle there, that could be interpreted multiple ways. And to a large degree, what we have to do is go back to them and say, what does that mean, exactly? Exactly what I’m suggesting here. And I suspect what’s happening is there’s two things it’s worth responding to both. I suspect he’s the policy recommendations coming out of this, I suspect will end up being tinkering. I don’t think it’d be good tinkering. But this is probably a lot of grandiose statements. I’m not sure if they’re going to follow through on grandiose actions. I gotta say, as I say that, if I’m right, that would be a good thing. Because if they followed through on all the grandiose statements, I think it would be a supreme mistake for the future evolution of our country. So I am hopeful that this is a lot of bluff and bluster. But also if history is anything to go by, politicians are often full of bluff and bluster and grandiose statements. And then once they actually sit down and work out, what does this mean? It can be a tweak here and tweak there.

Gene Tunny  14:46

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

Female speaker  14:51

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Gene Tunny  15:21

Now back to the show.

John Humphreys  15:24

I do worry about them targeting the super funds, I do worry about what they when they say race, it just sort of interaction cooperation between the government in the corporate sector, that could be done in several different ways. Some of them supremely damaging, and some of them rather mild. And some of them perhaps useful, we really need to know the details first, but I worry that what he’s talking about is not the mild version. But hopefully what he does is the mild version. But what he’s talking about here has echoes of a lot of things that have been growing over the last couple of decades. Some people have actually said it in the chat and see if I can find some here. I think Percy said this twice. It’s the ESG goals. A lot of the language here is also the language of ESG, the environment, the social and governance systems. And it’s steadily in being embedded through several different means fair and foul into the goals of a lot of companies sometimes basically being shoehorned in there by governments, sometimes by industry super funds, which as was also pointed out by Percy, I think, that they are closely related to the union’s so you are getting lots of deviations from normal capitalism for ESG. Another term that’s been thrown around a lot by people that are it looks like Jim Chalmers is influenced by the stakeholder capitalism, and stakeholder capitalism, it sounds so benign, but if you scratch the surface, it’s a very worrying idea. The whole point of capitalism is that corporations are supposed to represent the owners and benefit the owner, it is capitalist who make a profit and the profit goes to the people who made the investment. That’s the idea. Stakeholder capitalism basically means all you know that ownership thing we told you about, yeah, not so much. Right? I mean, you don’t have to be an owner to have a stake, you could be a consumer, or a worker, or a neighbour or just anyone with a pet dog that ran across someone’s front yard. And that basically means society, if society is the owner, where that’s not a real thing, right? That’s always code word for government. If society is the owner of the business, i.e. government is the owner of the business. That does not, that system and economics does not have a good track record at work. There’s a couple of things here. The Chalmers thing has been likened to out and out socialism. I don’t think that’s quite right, because what he’s talking about is this incestuous relationship with big business and big government and big unions. And now socialism, just what’s the leaders of big business up against the wall, shoots them and takes their property. This is like traditional socialism. It’s been likened a bit to Whitlam. And you already mentioned that before, but it’s not quite that either. Because what Whitlam wanted to do was have the government take over all of the realms of how you help the massive welfare state, massive redistributions. He’s not really talking about changing the welfare state. He’s talking about changing the way business operates. So it’s not quite socialist. It’s not quite Whitlamisk, what I call it an eco socialism. It’s instead, this incestuous mix of big government, big corporations, big unions, and we need another word for that. There was a word for that this is not a new idea. This is the thing I’m seeing showing up by some of the op ed writers look at this wonderful new idea. It’s not Whitlam. It’s not Marx, it’s a new idea. It’s actually not a new idea. These ideas have been around for quite a while they were quite prominent, about 100 years ago. I believe, Jim Chalmers is the follower of an Italian economist at the moment. These ideas were very popular amongst a certain Italian politician. From about 90 years ago, if anyone knows their Italian history, El Deus, the Mussolini ideas were basically exactly this. But we don’t need to get rid of business. What we do is we need to have a really close relationship between big government, big business, big unions, we all work together. It may be better than for more efficient for socialism, but it’s a bloody dangerous system. And of course, if you actually call it fascism, everyone gets upset because they say no, no, no, Jim Thomas doesn’t hate the Jews. But fascism isn’t only the economic system of fascism isn’t just about being a Nazi. The economic system of fascism was quite literally the idea that big business can exist, but they just have to cooperate in bed with big government. That was literally the idea of the fascist model of the economy. And it’s not a new idea. I don’t think it has a good track record is actually working as an economic idea. And I’m not trying to say Jim Chalmers is a fascist, I’m just simply saying that we can look at how this has worked in the past. And I don’t think it’s been pretty. The other thing to note about this is they talk a big game about how much they want to cooperate with big business and integrate with them. It’s as if they that they’re unable to draw a distinction between the markets and a business. Right. I mean, most people on my side of politics we believe that a market is a better way of cool donating things, then bureaucrats and politicians. That’s true. That’s not from a love affair with business. Indeed, business are often also the enemy of markets. Like I am not pro business, I am pro markets and markets happen to have business in them. And it seems when a lefty stumbles across this idea and sees markets working, they think markets work, because there’s a couple of nice businesses. So they Co Op those businesses. But it’s not the existence of those businesses that make the market work. It’s the nature of the dynamic nature and the competitive nature of the market. That helps the market system to work. And sometimes a good market needs businesses to fail. If businesses make enough bad decisions, they fail this idea that markets defending markets are about defending businesses. Some people on outside of politics need to get out of that way of thinking, bad businesses should fail. We’re not here to defend businesses, I’m happy to defend people who make good decisions and get ahead and are rewarded for that, whether they are in any field of Endeavour. But it’s not just about defending businesses. And this approach the Chalmers has seems to be pro business anti markets, whereas I am pro market and indifferent to any individual business. And that’s some of the things I do notice in some of his language. He talks about redesigning markets, and that markets need to be carefully constructed. So I think once again, that shows a fundamental misunderstanding of what we mean with markets. Markets are evolutionary concepts. They’re not design. They’re not constructed at all. They happen sort of spontaneously out of the interaction of a bunch of voluntary interactions between consenting adults, it is a it is an evolved system. And one of the most dangerous things we have is these politicians that lack the humility to realise that they can’t design such a complex system meddling in a hugely complicated evolved system that is probably beyond their capacity, it’s beyond their can to actually understand the dynamics. It’s beyond the understanding of most people. Leonard Reed famously wrote a book saying no one knows how to, it’s called “I pencil”. And he pointed out that no one knows how to make a pencil, seems like a crazy statement. But if you unwrap each part of making a pencil, someone has to know how to cut down the wood, which means they have to know how to use a chainsaw, which means they have to know how to make the chainsaw, which means they don’t have to know how to get the metal for the chainsaw, which means they have to know how to make the iron, which the steel which comes from the iron, which comes from the mining. So you go back through all the parts of making a pencil, no one person can do it, but it comes together spontaneously, seemingly spontaneously without any central controller. That’s the important point. There’s no central controller in that. And yet, you can go and buy a pencil now for 10 cents. It involves the cooperation of literally 1000s of people around the world who speak different languages, and may not even like each other, they may hate each other. And yet 1000s of people around the world all coordinated and managed to bring you a pencil at your local store for 10 cents. That is insane. And there is no controller. It wasn’t designed, it wasn’t carefully constructed, as Jim Chalmers seems to think, it was a spontaneous order coming together. And that is the dangerous thing. I think there is when these politicians decide that they need to redesign markets in their own image. And often they have wonderful goals, right? I mean, their vision of the world, that vision of the future is not some dystopian nightmare. That’s just the accidental byproduct of their arrogance and their lack of humility. So anyway, that’s my rant on this. Now, I haven’t spent as little thinking about it as you, so maybe I’ll have to duck into it a bit more over the next week.

Gene Tunny  23:28

But I want to have a closer look at just what these vehicles are and how they intend to direct investment. I mean, he talks about, well, we’re not going to pick winners. Okay, that’s great. Oh, but we’re just gonna set the priority. So it’s like this state directed model that the French had, I think in the 50s or 60s, I wouldn’t call it fascism. I’d call it corporatism, or, or whatever the French used to call their system back in the day, the government’s got an idea of where the investment needs to go broadly. It’s sort of national economic planning. That’s the type of mindset and one thing I’m waiting to see is will they try and revive this idea of an infrastructure bank? So this was something that was raised during the time of the Rudd Government but got knocked down. Turnbull criticised Kevin Rudd has been Kev Lonnie, with reference to Kim Lonnie and there was the people were talking about well is this gonna be the new transcontinental I don’t know if you remember it was it transcontinental, the tri-continental, the, the Merchant banking arm of the state bank of Victoria that went bust in the late 80s. Victoria, when it just got into, you know, just made all these crazy loans during that, that colossal boom in the late 80s. There’s a real risk to government balance sheets here, and I just want to wait and see just what they’re proposing. And whether there is some bold scheme like that, that the treasurer could be announcing. That’s what I’m going to be looking out for.

John Humphreys  24:58

I think on the retail politics that is the right thing to look for I should reiterate, I don’t actually think Jim Chalmers is intended to be a fascist, because I don’t think he intends to follow through on the logical consequences of his own article. But I still think it’s worthwhile pushing back on the substance of the article, even if I don’t think you’ll follow through on it. I don’t want people to think of it as an ideal, because I still think the ideals in there are very dangerous. And look, I also take your point, in reality he’ll be whether it’s fascism, or corporatism, it’ll be a watered down version of that. And we need to see the details I agree. But still, the steel man version of that is worth addressing, in case it seduces the thoughts of any young people that stumble across these ideas. You make a good point that perhaps corporatism is the better word for it than fascism. I’ve thought about that a bit lately, that could work. I wonder though, whether there is a difference between the two, they both involve this incestuous relationship of big business and big government. Perhaps the difference is who has the upper hand. And I think in corporatism, perhaps the idea is that big business has the upper hand, and they kind of use big government as their tool for success. And in fascism, it’s the government has the upper hand, and they use big businesses, their tool for enforcement, or getting things done. But anyway, that’s a thought bubble there on what the potential difference could be. I don’t know which one Jim Thomas hopes he would achieve. Probably not corporatism. But I’ll cheekily put that aside for the voters. What he

Gene Tunny  26:17

wants to achieve is he wants to get enough votes from the labour left by imagining he’s can remake capitalism, where, really, he’s going to get some he’s going to create some investment vehicles. There’ll be some additional money into into renewables and housing. But is it really going to make much of a difference? And I don’t know, I mean, in housing that, you know, that’s one of their big challenges. I mean, that housing affordability is a massive problem now. And the number of people who can’t find accommodation, particularly in Brisbane, I mean, I go for a walk along Wickham terrace in Spring Hill. And I mean, the usual homeless people, you see, but now you see there are people living in cars, they’ve got all their worldly possessions, in, in the back of their vehicles. And it’s just tragic. And it’s because for years, we’ve just stopped people from building houses where people want them. So we’ve got, we’ve got problems that have been created, in part through government regulation. And now that’s going to be used as one of the excuses for remaking capitalism and providing, I don’t know, whatever, they’re going to do subsidised housing, there’ll be some money for that social housing, but it’s not really going to be enough to solve the problem, in my view.

John Humphreys  27:30

But it’s so often the theme, isn’t it? A government programme goes wrong. And the lefties turn around for capitalists to say, Why did you do that? And then they use that to justify another government programme that also goes wrong. And the whole cycle repeats itself. I do like the fact that every time I try to get us distracted in a conversation about the grandiose philosophy of the implications of Jim Chalmers article, he brings us back to the real retail politics, which I think is entirely correct. I think your read on this is true that his grand philosophical statements, they’re mostly just fluff and waffles so that he can try to get the Labour leadership and it’ll mean a bit of tinkering. I think you’re right. I just still enjoy rebutting the actual words. Anyway, that this has been a fun discussion.

Gene Tunny  28:13

Definitely John. Okay, I hope you enjoyed my conversation with John Humphrys about the Australian treasurer’s essay on values based capitalism. I’d say the takeaways from the episode include firstly, that there’s clearly been a big change in the intellectual climate since the financial crisis, and treasurer Jim Chalmers has picked up on this making some of the standard criticisms of so called Neo liberalism. Secondly, it’s important to consider specific policies and to weigh up their costs and benefits and the likelihood that claim benefits will be achieved in my view. If we do so it’s understandable why there’s been such a negative reaction to Jim Chalmers essay by economists and financial commentators here in Australia, I should say, I don’t want to be too negative. I have met Jim Chalmers in the past when he worked for treasurer Wayne Swan, and he struck me as a nice person. He clearly thinks a lot about economic issues, and I respect that. And the treasurer did say some say on things in the essay, for instance, he writes, in the wider world, the contest between democracies and autocracies is economic as well as military. Despite deep disquiet about our own economic models. The reality is that democracies largely work. As of 2021 GDP per capita is around 60%, higher in democracies than in autocracies and the gap isn’t closing. Thankfully, Chalmers is a Social Democrat rather than a revolutionary. But he argues that to protect democracy, we need to have greater economic inclusion. That’s fair enough, but we need to think critically about the measures he proposes to promote it. obvious questions include, will they actually achieve greater economic inclusion, what will they cost? What are the risks to the government’s balance sheet and to taxpayers who will ultimately bear the cost of any bad investments? As I suggested in my conversation with John, history tells us we should be wary of governments owning banks or other financial institutions that don’t have a great track record. The failures of the state banks of South Australia and Victoria were big news in the early 90s. But now three decades have passed and the lessons may have been forgotten sadly. Also, as I noted, when chatting with John the results of the body that the treasurer calls a great success, the Clean Energy Finance Corporation, well, they’ve been pretty ordinary and they don’t appear to be meeting the target of return. The presentation of the financial results for the corporation is rather confusing, but it looks to me that they’re underperforming. I’ll put a link in the show notes so you can see for yourself. One thing I should have covered in my chat with John is the concept of social impact investing. This is an investment where there are both financial and social returns, such as in a profitable social housing development. Social impact investing is one of the concepts that Jim Chalmers is fond of. In a recent financial review article, John Keogh referred to an example from New South Wales in 2013, a social impact bond which raised $7 million from investors to finance the new PIN programme. N E W P I N. New PIN stands for New Parent Infant network. It appears to be a programme to support new parents so they look after their children properly and the children don’t end up in foster care. It looks like the Queensland Government has tried something similar. Typically, impact investments require government involvement of some sort to ensure that the private sector investors get a return. For instance, governments could pay performance bonuses if certain social outcomes are achieved. There’s a handy note from the Treasury which summarises the Australian Government’s principles for social impact investing, which I’ll link to in the show notes refers to such things as payments by results, contracts and outcomes focus grants, that’s how the investors will be rewarded if the investment achieves its social objectives. These payments could be justified because successful programmes could result in budgetary savings in the future. For example, if programmes result in healthier children, that could reduce health costs in the future. You could also imagine programmes resulting in savings in welfare spending, or cost of the justice system. I’d say that such savings are possible, but we should think critically about the likelihood of such benefits and follow up to make sure that they do actually occur. That is, so we’re not paying nonprofits and investors additional money for results that they don’t actually achieve. It looks like treasurer charmers might end up announcing a social impact investment bank in his next Australian government budget in May 2023. James says that the Financial Review gave a good summary of what this bank could do in an article in October last year, which I’ll link to in the show notes. He wrote, the new body would work with investors to supply capital to intermediary funds, which would direct private investment into social housing, aged care, early education or disability services alongside government funding. This could take some pressure off the government budget for providing these services alone. Okay, that’s the point I made in my chat with John, that some of the motivation for what Chalmers is proposing is the poor state of the government budget, they just don’t have the money to undertake traditional programmes. He’s talking about impact investing because he doesn’t have a lot of options. With his social impact investing bank, he can support things that he wants to do off budget, so to speak. James Ayers continues, the institution would make returns when service providers who would typically be receiving some government funding make predetermined improvements to social outcomes such as housing, education or caring for more people under agreed service standards. Apparently, there’s a body like this already in the UK called Big Society Capital. There’s a fair bit to explore with impact investing, so better return to it for a closer look at a future episode. There are a lot of players involved and I’ll do my best to get someone familiar with impact investing on the show for a deep dive. In the Australian model, it looks like there’ll be a government backed social impact investment bank referred to as a wholesaler. Major commercial banks could also provide capital for this bank. It appears based on reporting from the financial review. There’s talk about 200 million coming from the government and 200 million from the private sector. I expect the social impact investment bank will provide finance at lower than market rates for social impact investing funds. These funds then invest in nonprofits or so-called Social Enterprise causes which are delivering programmes under government contracts. An example of a social impact investing fund is the $91 million social impact investment trust, established by social ventures Australia, a nonprofit and Hester a superannuation fund. How the performance bonuses are shared by the nonprofit, the investors and the government back bank will need to be defined by various contracts between the players. This all seems very elaborate to me. There are no doubt a lot of investment bankers and fund managers earning healthy fees along the way. Does this lead to better results? It may do so if the investors push the nonprofit to deliver superior services. As always, I’m open minded but sceptical. I’ve seen that the consultancy firm Airbus has undertaken a positive evaluation of the New South Wales new ping programme. So it could be good to go through that in a future episode. I haven’t had a real chance to dissect that one yet. I do wonder just how much we can rely on impact investing to solve social problems compared with other measures. As I noted with John, I doubt it will solve the housing availability shortage, which to me appears related to restrictions on housing developments. And it’s not going to replace welfare state programmes such as Australia’s various support payments and the National Disability scheme. Maybe you can do positive things at the margins, we have to wait and see because it’s still early days when it comes to impact investing. For a sceptical take on impact investing, which I’ll link to in the show notes, I’d refer you to a 2020 Harvard Business Review article by Ruben Finnegan, who I know well and Alan Schwartz is a prominent Australian businessman. Impact Investing won’t save capitalism. Okay, that’s all from me on values based capitalism for now. If you’d like a closer look at impact investing or any other topic, please let me know. Thank you. Right oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

37:41

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Podcast episode

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

Professor Allen Morrison has been studying China for over three decades, and he’s an expert on the Enterprise China model, the close relationship between business and state in China. Chinese companies take the lead from Beijing to help meet state objectives, including reduced dependency on the west. In return, they get competitive advantages over western businesses trying to break into China. In this episode, Prof. Morrison, from the Thunderbird School of Global Management at Arizona State University, talks to show host Gene Tunny about his new book with INSEAD’s Prof. Stewart Black on Enterprise China. 

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

What we discuss with Prof. Morrison

  • How the business model in China differs from the model in the west [01:50]
  • How the Chinese Communist Party oversees businesses in China [10:20]
  • What western businesses need to know when doing business in China [12:40]
  • Does China have an imperial ambition? [17:28
  • Companies which have done well and those which have done badly in China [22:29]
  • Challenges to the Enterprise China model and the CCP [27:48]
  • Gene’s takeaways from the episode [39:30]

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

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

About this episode’s guest: Allen Morrison

Allen J. Morrison is professor in the Thunderbird School of Global Management. Morrison previously served as CEO and director-general, senior advisor for global management education and executive education initiatives at Arizona State University. Before joining ASU in 2014, Morrison was professor of global management and the holder of the Kristian Gerhard Jebsen Chair for Responsible Leadership in the Maritime Industry at IMD. Professor Morrison was also director of the IMD Global CEO Center, which focuses on the challenges CEOs face while leading their companies in the global economy.

For further information about Prof. Morrison, check out his ASU page:

https://search.asu.edu/profile/2551923

Links relevant to the conversation

Get a copy of Enterprise China: Adopting a Competitive Strategy for Business Success:

https://amzn.to/3YMb1aI

Prof. Morrison’s article “Competing with “Enterprise China” vs. Chinese Enterprises” on the Thunderbird School of Global Management website:

https://thunderbird.asu.edu/thought-leadership/insights/competing-enterprise-china-vs-chinese-enterprises

William Kirby’s HBR article “The real reason Uber is giving up in China”:

https://hbr.org/2016/08/the-real-reason-uber-is-giving-up-in-china

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

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

Gene Tunny  00:00

Coming up on Economics Explored.

Allen Morrison  00:03

The Chinese model is the enterprise China model. If you want to do business, you will wait for the signalling and the support of the government, the government or the there that like the puppeteer is controlling this.

Gene Tunny  00:16

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny, broadcasting from Brisbane, Australia. This is episode 171 on enterprise China. My guest is Professor Allen Morrison of the Thunderbird School of Global Management at Arizona State University. Allen is the co-author of the new book enterprise China, adopting a competitive strategy for business success. In this episode, I chat with Allen about the close relationship between Chinese companies and the Chinese government and what that means for businesses wanting to compete in China. I also ask Allen about just how worried we should be about China’s global ambitions. Please check out the shownotes relevant links and information and for details they can get in touch with any questions or comments. Let me know what you think about this episode. I’d love to hear from you. Right now in my conversation with Professor Allen Morrison on enterprise China. Stick around to the end of the conversation for what I think are the big takeaways. Thanks to my audio engineer, Josh Crotts visit assistance in producing this episode. I hope you enjoy it. Professor Alan Morrison, thanks for joining me on the programme. 

Allen Morrison  01:30

Great to be here. 

Gene Tunny  01:33

Excellent. Allen, I’m keen to chat with you about your new book, Enterprise China. Could you begin please, by explaining what motivated you to write this book? And then what do you mean by Enterprise China, please?

Allen Morrison  01:50

Right. Right. Well, thank you. It’s good to be here. Thanks for having me. So I’ve been working in and around China for my entire professional career, well over 30 years. In fact, I was in China in Beijing in Tiananmen Square when they declared martial law. I’ve been a visiting professor several times in China, I’ve spent well over a year living in hotel rooms in China, advising Western companies, Chinese companies, also state enterprises in China. So my interest in background in China goes back more than three decades. What has fascinated me about China is that the story about China is very different than anywhere else in the world. And the business model is very different, how the approach to business is very different. In the West, we have long held the belief that if we invest in China, China will grow and it has grown. If we help them with technology, China will grow, and it has grown. And we have believed based on our own experience and values that as China advances up the per capita income curve that the public would hunger for democracy, China would open up would befriend everyone in the West. We also believe that as capitalism flourished, the role of the state would diminish. China has flourished, the economy has prospered the people are richer, 800 million people have been taken out of poverty. But the system didn’t change. In fact, the state is doubling down. And what has emerged is a very successful model we call the enterprise China model, where the state and the enterprise in a free market environment, a free market background, if you will have come together to create a very different model of competing, the model has enabled China to prosper. And we in the West are a not we’re not accepting of the model. We just don’t understand it. We are convinced it’s going to fail. It hasn’t failed and may not fail, and we don’t have a good solution for it. So that really prompted us my clue my co author, Professor Steward Black, was affiliated with INSEAD great business school, that really prompted us to better understand how the Chinese model works with the state and companies working together and how we in the West can best respond.

Gene Tunny  04:40

Gotcha. What I think is great about the work you’ve done, Alan, is that you’ve highlighted just how extraordinary this change has been just what’s been happening with China and there was an article that you wrote a couple of years ago Competing with Enterprise China versus Chinese enterprises, which summarises this, and I might just read this out, because I think it’s fascinating. In 2020, China dethrone the US from the top of the Fortune Global 500. In 2021, China extended its lead with 13 more firms on the list than the US, 135 versus 122. And I think that would, that would surprise a lot of people. So could you tell us a bit more about this enterprise China model, please? How did you learn about it? What is there a framework? I mean, are they are these companies? Are they been directed by the administration? I mean, how does it work?

Allen Morrison  05:39

Yeah, so enterprise, China consists of three types of Chinese enterprises, which captures most of the economy. Okay. On the one hand, we have state owned enterprises owned by Beijing, we’ll just say 100 of these firms. Not many of them. Many of the biggest firms in the world on that Fortune list are these firms. They are owned by the state, they’re an appendage to the state. The second level of firms are also state owned enterprises. But they’re owned by provincial governments, municipal governments, there’s 150,000 of these firms. Some of the big firms on that list are also in this set. But there are a lot of these firms out there, the third set are privately owned enterprises. These are firms like Alibaba, Tencent, and so on. But these firms are also heavily influenced by the state. And that owner influence comes in two ways. One is the state typically owns a small piece of these enterprises. They own 4% or 8%, or 12%, either of the parent or subsidiary organisations. So you scratch the surface of we’ve been quite, quite rigorous and looking at a whole swath of mid sized and large Chinese firms. Every single one of them has some component of Chinese ownership, albeit 4% 6%. So the second way they influence these firms is simply by, you know, through regulation or through signalling. So for example, you know, we go back to 2020, when, when Alibaba Jack Ma, Alibaba has, you know, market cap was $665 billion. Jack Ma himself personally was worth about $50 billion. And part of Alibaba is ecosystem is this company called Ant Financial, Jack Ma wants Ant to go public, it would bring in about 300 would value at $315 billion and bring in about $35 billion from the IPO, that would value add at more than Deutsche Bank, Credit Suisse, Barclays, ING, Goldman Sachs, together, huge. But then Jack Ma makes a few comments that this state viewed as disrespectful, shall we say? The IPO is shut off. Jack Ma is basically exile, the stock plummets in value. And this is just a signal to other tech companies that who’s in charge. It’s the state. And so the state can influence these and they influence them directly and indirectly, that what is very typical with these firms, even the privately owned firms are those that are traded in Hong Kong or those that are traded in the NASDAQ. These firms will partner with a state enterprise or a municipality, and they’ll say look, you know, municipality will say here’s the deal, we’ll give you the factory, we’ll give you the land. We’ll provide infrastructure, we want 6% ownership of your company. And we’ll give you discounted finance. So the Chinese partner, the Chinese, privately owned enterprise, they work with the state, then the state will say we’d like you to work with another company, a sister company, and so they’re matchmakers that put it together. This is this kind of ecosystem. If you want to compete in China, you have to be part of that ecosystem. And that we kind of refer to as the enterprise China It ecosystem. Right. Okay.

Gene Tunny  10:03

Now, this is yeah, this is interesting. I think I understand how they’re getting a competitive advantage. It’s because they’re getting some support from the state. Is that right? You mentioned that they might get land for a factory or there could be some rights, some incentives.

Allen Morrison  10:20

Right, but it’s more than that. It’s the ability to play in it to be in the game. Okay. So if you want to compete in China, you will be part of this ecosystem. You know, the, the Japanese had their model, the Keiretsu Model, the Koreans had the Chaebol Model, the old Hong’s of Hong Kong, it’s these interlocking ownerships and so on, the Chinese model is the enterprise China model. If you want to do business, you will wait for the signalling and the support of the government, the government or the there, they’re like the puppeteers controlling this. So it’s not just that we’ll give you a little discount on the financing, it’s not just that we’ll give you an old factory, it’s that if you want to play the game, here, you will listen to take direction from the subordinate to the state. One other thing many in the West don’t recognise is that companies in China with 50 or more employees must have on site and office of the Chinese Communist Party. They have a representative on site, medium companies, well, any company over 50 employees. So they’re all listening waiting for the signalling of the state. So it’s a matter of, you know, come almost arranged marriages and partnerships, that, that and I don’t want to say that that government is always, you know, always has tremendous foresight, they don’t. But even if the initiative is taken at the company level approvals, and a wink and a nod from the government, at the state, municipal level, are, are essential. Now I have to say, that’s a Chinese from a Western perspective, you have to think so what are we as are, what do we do about that? We want to do business in China? How do we integrate ourselves with that model? And that’s what much of our book is focused on? What do we in the West do about this?

Gene Tunny  12:29

Okay, okay. Well, I might ask about that, then, Alan, what do we do about it? I mean, I guess when you’re in Rome, you have to do as the Romans do, is that what you’re arguing in your book.

Allen Morrison  12:40

to some degree, it’s obviously not black and white. The first thing we look at in our book is, is we create a model or identify a model for strategy involving China. And on the one hand, one kind of strategy for China involves companies that are primarily focused on accessing China as the factory of the world. So I want to do business in China because I can buy, you know, my cheap couches or coffee pots, or whatever that is they become the factory that was so I’m interested in. That’s my, that’s my focus for China. There are other Western companies that are focused on the Chinese market. So I want to be in China because I want to access corporate or individual customer accounts. And in many industries, China is the second largest market in the world. And in many industries, it’s the biggest market in the world. So your approach to China depends in part on why you’re there. Most companies in the West there’s over a million companies in the West, doing business in and with China today, a million companies. Most of them are small, have a small, relatively inconsequential presence. They’re basically buying an option. They’re there, they don’t really understand why they’re there. They kind of burned the box checking business. Those companies are at risk. They’re at risk. So number one is understand why you’re there. Secondly, is to think very carefully about the industry you’re in because China has targeted 10 industries. Where if you’re a Westerner you’re going to be in deep, deep trouble. If you don’t think you know two or three steps ahead of the Chinese. These are the industries we typically think of associated with the Fourth Industrial Revolution, the kind of the industries of the future, robotics, pharmaceutical, aerospace, advanced materials. The Chinese have put a big umbrella up You know, and they keep reading, readjusting the definition. But these are the industries most in the West who would say, look, we’d really like to be there. In those industries, if you’re a Western company competing in those industries, the Chinese have been clear about this. They have identified market share levels, hurdles, and they go from 70, to 80, to 90%, domestic production domestic market share in these industries. So if you’re an aerospace, it’s going to be about 80% of the industry must be controlled by Chinese enterprises, period, doesn’t matter how good your technology is, doesn’t matter how good your service is, your market share it has been determined will be reduced to at most that 20%. But you’re gonna have to cut that up and share it with other Western firms. So be very cognizant of what the Chinese are after the Chinese are, after three things, they’ve been very clear about this, it’s been published, it’s not, you don’t have to be a spy and go in there and take pictures of their, you know, secret ID documents, their strategy is based on three steps. Number one, we want to become less dependent on the west, we want to reduce our dependency. Number two, they want to dominate domestically. And number three, they then want to go out into the world and lead the world to flip that dependency relationship. So we in the West are dependent on China. That’s that’s their approach. And they’ve been doing this for 30 years. And they have articulated it since the early 2000s. And so in the West, we need to be very aware of, of what we’re up against. That does not mean that China wants to decouple from the west. I think the worst thing that could happen to China is it would decouple from the west. And by the way, it would not be a good thing for the West to decouple from China. But they clearly have an engagement strategy and a strategy. That’s whose objective is to ultimately win and flip that dependency relationship.

Gene Tunny  17:28

So do you think that’s the main thing thereafter? It’s, it’s reducing that dependency, rather than? I mean, to what extent do they have imperial ambitions I suppose you could call it was one of the concerns we’ve had in or people in Australia have had is that there are concerns about espionage. And we blocked the telecommunications company, Huawei from being involved in our 5g rollout. So to what extent should we be concerned about that? It’s not just about them, wanting to become more independent. It’s a broader, it’s a bigger game.

Allen Morrison  18:08

You have a former, well, relative of mine, Morrison, who was the prime minister who lashed out on some of this. So yes, by the way, if we’re not closely related, okay. Don’t blame me. So look, I think that the Chinese to understand the Chinese you understand need to understand the history. Every country has its history. But China fresh in China’s memory is what happened in the 19th century when China was subjugated by the West by Britain, to a lesser degree, the US, but you know, that particular animosity visa vie, the Japanese, it was a last century is the century of embarrassment for them. A humiliation is what they refer to it, as they do not ever want to go back to that. They that is, even though it’s 150 years old, it is still part of the Chinese psyche. So they, rather than think of them as imperialist, I would think of them more than seeking respect and seeking a return to what they we all refer to as the Middle Kingdom of China. You know, for 900 years, China led the world as the world’s biggest, most influential, most prosperous economy. And they want to return to that. And so, you know, to the degree imperialism, you know, helps, sure, they’re not going to push back on that, but it’s not. They’re not culturally, an imperialist by mentality, as opposed to say the Russians. So it’s about respect. It’s about power. It’s about control. It’s about influence. More than I would think it’s about imperialism. Now, does that mean we shouldn’t be a lot smarter about it? We should be a lot smarter about how we think about China. And we’ve been, I think, pretty naive about the Chinese. And we’re starting to wake up in the West about what it means to contain the ambitions of China.

Gene Tunny  20:26

Right? And what does that mean for a company say that? I mean, there are plenty of Chinese companies that are operating in the West, does that mean we need to have closer there needs to be closer scrutiny? There’s a lot of talk about tick tock in the US, for example. Do you have any thoughts on that?

Allen Morrison  20:45

Yeah, I mean, that what you need, just think about the kind of mindset I hope we can communicate with with this book, is when you think about China do not think about it as Chinese enterprises, as individual entities, think of them as having an umbilical cord back to the state. So when you do business with Chinese enterprises, you are ultimately doing business with this whole ecosystem, and ultimately, with the state, so it doesn’t mean you can’t do business with them. But you have to recognise that whatever you share, whatever you give them will be absorbed and spread throughout the Chinese eco ecosystem. In terms of best practices. I think that one of the keys to the you know, for the West, is to understand how that model provides big advantages to China, but also provides some significant barriers and problems for the Chinese.

Gene Tunny  21:55

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

Female speaker  22:00

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Gene Tunny  22:29

Now back to the show. Allen, do you have any examples of companies that are engaging with China? Well, and then perhaps some that have been burned or that are doing it badly?

Allen Morrison  22:42

Yeah, absolutely. So the companies easily that had been burned or doing it badly. I think they come in a couple of different categories. The first stars are many of these tech companies, which have been pushed out of China. These are companies like Amazon and Uber, typically tap tech companies that have through because they’re threatened because of their target industries, their initial investments have been wasted, and they’re out of the country. So it’s not difficult to find those examples. Companies that have done it well, in China. I think I would, first we and we do this in the book identify kind of a continuum of what that means and how they’ve done it. But on you have companies like for example, Honeywell, Honeywell is approach to China has to basically go in with the following premise. That is, they want to be in China, for China. They’re not in China, you know, to suck profits out to invest in another part of the world. They are in China to look after the Chinese to as best they can to become an insider in the Chinese market. And because of that they’ve had a CEO who has become fluent in Mandarin. He just recently retired. They’ve been fully engaged with Chinese partners, ingratiating themselves with the Chinese ecosystem. And so other companies like Coca Cola have done the same. They have a myriad of partnerships in China. They every one of these has some tie in, typically with a municipal government. Their approach to China is to be in China, for China. Then you have a company like Yum brands, these are the guys who are Kentucky Fried Chicken, Pizza Hut. They went so far as to say if we’re really going to be in China for China, we cannot have ties back to the corporate parent.  And there are some reasons for that because of public relations because of oversight. And so they have determined that for them, they need to create a separate publicly listed company, Yum China, which is only focused on China. And there are some good reasons for that. By the way, it does protect the parent company, from Chinese behaviours that many in the West will find embarrassing. So we’re seeing companies that are having problems in China, are the ones who, despite making lots of money in China, are compromising some of their values to be there. We’re seeing examples, left, right and centre, whether it’s Daimler Dolce and Gabbana, or the NBA National Basketball Association, whether it’s Apple, Apple, which has a heavy overhang in China, heavy exposure to China, they have made in many ways deals that would be unacceptable were they to be brought to full light in the West. One of those, for example is their iCloud, basically data farm, in that they’ve created with a Chinese partner, which they had to do to bring on a partner in order to do this. But they then stepped out to let the partner manage it gave them the encryption codes. And this partner has ties to the state. So if you are using Apple in China, the state can access all of your data. And by the way, that includes a data that could compromise potentially your identity and your and your personal security. In the West, Apple would never engage in this kind of behaviour. Nor if it was really made public. With China, would Apple be able to survive? I think the torrent of negative press that that would overwhelm it. So I think you’re seeing a lot of these deals going on, to make peace with China, through apology tours, that in the West, are going to cause some problems. So working in that, you know, that model of in China for China is going to require Western companies to rethink some of their global values and the degree to which they need to cut the umbilical cord, just like we’ve seen with young China.

Gene Tunny  27:48

Yeah. Okay. One last question, Allen. Can I ask you about how sustainable you think this enterprise China model is given that economists would argue that this is not the best way to run a company or that it’s going to you’d have less efficient corporations? I mean, how sustainable is this and also, there are the issues with the lack of democracy in China, just how sustainable is this whole model in the next, over the next decade, two decades, etc.

Allen Morrison  28:23

You know, we have been more than happy to interpret China through the prism or the lens of the West, which may not be the most effective lens out there. And let me add the other caveat, we’ve been wrong about China too many times to to do predict with any accuracy, what’s going to happen. So here’s a couple of things that the Chinese have to deal with, which are significant problems. Problem number one is the shift from what we call vertical China to horizontal China. Vertical China’s a command and control going back to Mao the state controls everything, you know, why did your factory makes shoes you know, pairs of shoes because we’re only told to make the left shoe and not the right shoe. Just stupid things that come when the state controls everything. That’s traditionally been the model, horizontal China’s where we have empowered consumers educated informed with resources with money, the ability to travel, the ability to think for themselves. And horizontal China also includes municipal you know, mayors and governors, which are pulling and tugging, you know, and trying to fight the horizontal model of Xi Jingping. So there is that pressure out there. And that pressure is not going away. If anything, it’s going to get worse. Number two, despite China’s efforts to break the dependency curve, the dependency cycle, they have not been able to do that in the areas of highest technology, which, you know, I’m thinking semiconductors microprocessors, for their most advanced three nanometre chips. They are wholly dependent on Western technology, including Taiwan Semiconductor, which is, you know, across the straits. They don’t have the capability to do they barely have, they certainly don’t have enough capacity by indigenous Chinese firms even handle five nanometer technology at a level that would satisfy demand. They have not been able to do this. They’re several generations behind. They have committed $250 billion to kick starting this. But there are some reasons why I’d be concerned that they’ll be able to do this, I’m not sure they will be able to do this, because we in the West have increasingly stopped allowing the shipping of tools, foundry tools and so on for these plants. Number three, there are some phenomena in China called a byline, which translates to let it rot. That’s it. That’s this kind of younger millennials, the Gen Z age who are, you know, 28 years old, who are because of the clamp down on technology in particular, finding themselves unemployed, underemployed, and spend their days playing video games, and fighting and chafing against the state, the state with the motto in the West, translated, let it rot, we hope the whole system burns down. So there’s this anger palatable. I would also argue demographics are, are probably China’s worst enemy. We saw this exact model play out in Japan, where we saw the Chinese population peak in the 90s, has been on a steep decline. It’s paralleling that in China, Chinese population reached its peak in about 2007. Between now and 2050, China’s slated to lose about 230 million people, 230 million people, when the economy shrinks by that amount, the only way the economy can keep its own, if you will, is by dramatically increasing its productivity levels to offset declining population, or they can open the door and have all kinds of immigrants coming in. There’s not a chance of the second happening. And, so can they increase productivity? Not like they have in the past. They have many internal problems, those agrarian farmworkers who left to come to the cities, that’s all played out the ability tp increasingly used capital, that’s to drug jackup product that is decreased, particularly as the economy gets so big, this issue of the challenge of numbers. So China is facing some serious headwinds. And we haven’t even talked about the political blowback from the west restrictions increasingly blocking the transfer of technology. Huawei, you mentioned earlier, Huawei is in many ways, yes, absolutely world class company. But pretty much every major technology advanced made by China made by Huawei, was made outside of China at Huawei facilities outside of China. So China’s seem very adept at importing expropriating technology from the West, not the greatest at doing it in house. They are facing a lot of headwinds, China.

Gene Tunny  33:52

Right. Okay. So I mean, are you saying that we’ll look at there are a lot of challenges. So look, I mean, who knows what could happen? I mean, there is there is this growing dissatisfaction. That we’ve got the demographic issues. So yeah, the whole, so the legitimacy of that administration. Am I right, that it was based on strong economic growth since the 80s. Since the liberalisation and bringing hundreds of millions of people out of poverty that underpins the legitimacy of the administration. Right.

Allen Morrison  34:30

right. Yeah, it does. And, of course, COVID crackdown hasn’t helped. Yeah, I’ll just share one story with you. And maybe the the audience would be interested in this in the late 1980s, when I was in in Beijing, and we had all those demonstrations and martial law. I had dinner with a very senior university administrator, very senior, I don’t want to embarrass him or implicate him. And we were talking about These demonstrations and the tanks rolling and so on, I asked his opinion, his opinion it kind of shocked me, very informed guy. He said, first off, I doubt that the demonstrations really took place the way they’re portrayed in the West. Like, really? Secondly, he said, but even if you’re accurate, he said, What you fail to understand in the West is that in China, we don’t care particularly about democracy. I said, Really, that’s shocking to me. He said, Here’s the reason what I am one vote. In a country with over 1.2 billion people. My vote has no impact on anything. What I care about, is economic prosperity. That’s what I care about. And so when you look at this, from that perspective, where that stability and prosperity, what will propel the regime forward is prosperity, economic growth, and so on, when you start to make compromises, and when you start to say, no politics trumps prosperity, politics trumps economic growth, then you’re going to see this, you know, empowered middle class and upper class begin to change more and more and more, I’m by no means predicting that, you know, that we’re going to see a change in regimes in Beijing, what I am predicting is that tensions within China are going to continue to rise. And either the government will clamp down on that, or we’ll have to become more open. And I’ve taken great, you know, satisfaction and seeing Xi Jinping relaxed, some of those COVID restrictions, based a week or 10 days ago on kind of this groundswell of, of opposition. So I think the Chinese are in for a very interesting 5,10, 15 years going forward. I’m not predicting that, you know, we’ll see a groundswell of change. But I do think that the Chinese model will evolve. One final thing I will say about this is that, it would be a mistake to think that Western companies, by in large, are losing money are getting somehow hammered in China. Some of Western companies, most profitable businesses, one of the kind of ugly secrets out there, they’re coming out of China. There many companies are making embarrassing amounts of money in China. And the Chinese are fine with that. The Western companies are kind of hiding that obfuscating that through transfers, through creating, you know, trading centres in Malta or something, and funnelling money, very smart about this. Where the Chinese will get very upset is if you’re in one of these targets, very upset, and focus is your one of these target industries. And if you refuse to play in their sandbox in their ecosystem, you can figure out how to do that. And you can get out of the way of these strategic industries, China can and will remain or can be and will remain a very viable market for Western firms into the decades ahead.

Gene Tunny  38:37

Okay. Oh, that’s, that’s been great. I think it’s a well researched book, published by Wiley. Is that right? So very reputable.

Allen Morrison  38:46

Wiley and yeah, thank you. We love the book.

Gene Tunny  38:50

Yes, absolutely. So I’ll put a link in the show notes to it. So people who can get a copy. Any final thoughts before we wrap up?

Allen Morrison  38:58

No, I’m delighted you’re you’re talking about this. China’s a huge issue of the day. I will only say that our book steers clear of politics, and focuses on what’s happening with business and what business leaders can do to prepare their companies better in a world where China is not going away.

Gene Tunny  39:19

Okay, gotcha. Righto. Well, Professor Allen Morrison, thanks so much for appearing on the show. I really enjoyed the conversation.

Allen Morrison  39:27

Thank you so much.

Gene Tunny  39:30

Okay, so what am I big takeaways from my conversation with Allen? My first takeaway is that enterprise China, this close relationship between business and government has a wide reach, and it has huge implications for companies wanting to do business in China. In the words of Allen and his co author, enterprise, China extends far beyond this core cluster of state owned enterprises and includes virtually all privately owned enterprises of any significant size or importance. That’s pretty concerning if you’re trying to compete in China. This leads into my second takeaway, but it is very challenging for Western businesses to do business in China. Various Western companies such as Uber have lost a lot of money trying to break into the Chinese market. It couldn’t compete against enterprise China. I found a great quote from Harvard Business School professor William Kirby in 2016, about what happened with Uber. Uber is leaving China, not because of interference from its rivals, but because of interference from the state. It was worried about the prospect of unfavourable national regulations that would damage its business in China. Disney is another prominent example of a company which has had difficulties in China. As Allen and his co-author noted the book Disney’s 2020 Milan film was not only bad for Disney’s reputation in the West, because it was filmed in a region where Uighurs are oppressed. But the Chinese government shut down coverage of the film in China, so very few Chinese people ended up seeing it. The government apparently was concerned that a lot of the media coverage drew attention to China’s human rights abuses. Reflecting on what happened with Disney, Allen and his co author write in the book, beyond appeasing the Chinese state with carefully chosen words and at the ready heartfelt apologies. Western companies face an even larger challenge, responding to rules and regulations that are inconsistent with their home country values. Many of these rules govern the collection and sharing of sensitive data with the Chinese state. As an example, many Western executives in China report being pressured to facilitate China’s social credit system that uses data on such things as credit scores and parking tickets to determine social benefits, and even employment opportunities for Chinese citizens. Okay, that’s very concerning for sure. My third takeaway is that China faces some big headwinds, which will challenge the enterprise China model and the regime in the coming decades. These include China’s ageing and declining population, demographic changes will reduce the rate of economic growth. As I discussed with Allen, economic growth in recent decades has helped the regime stay in power. And I expect that as growth slows, the regime will become even more unpopular as an economist to expect that the enterprise China model will ultimately deliver inferior results to our more free market style of capitalism in western economies. Okay, those are my big takeaways from my discussion with Professor Allen Morrison on enterprise China. Do you think I pick the most important ones? Do you agree or disagree with my takes? If you’re willing to share your own takeaways from the episode, please send them to me via contact@economicsexplored.com or send me a voice message via SpeakPipe. You can find the link in the show notes. Thanks for listening. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

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Podcast episode

Chokepoint Capitalism w/ Rebecca Giblin – EP169

Corporations such as Google, Amazon, and Live Nation are allegedly taking advantage of chokepoints in the economy, earning excessive profits. That’s the thesis of a new book, Chokepoint Capitalism: how big tech and big content captured creative labour markets, and how we’ll win them back. The authors are Uni. of Melbourne Law Professor Rebecca Giblin and writer and activist Cory Doctorow. Show host Gene Tunny speaks with Prof. Giblin about Chokepoint Capitalism in this episode. 

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

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

About this episode’s guest: Rebecca Giblin

Rebecca Giblin is an ARC Future Fellow and Professor at Melbourne Law School, and the Director of the Intellectual Property Research Institute of Australia. Her work sits at the intersection of law and culture, focusing on creators’ rights, access to knowledge and culture, technology regulation and copyright. Using quantitative, qualitative, doctrinal and comparative methods, she leads interdisciplinary teams with expertise across data science, cultural economics, literary sociology, information research and law to better understand how law impacts the creation and dissemination of creative works.

You can follow Rebecca on Twitter: 

https://twitter.com/rgibli

Links relevant to the conversation

Where you can buy Chokepoint Capitalism:

https://amzn.to/3HohDFV

Website about the book:

https://chokepointcapitalism.com/

Transcript: Chokepoint Capitalism w/ Rebecca Giblin – EP169

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

Gene Tunny  00:00

Coming up on Economics Explored.

Rebecca Giblin  00:03

We’re sharing less and less in the value that’s that’s created by our work. And that’s happening because we’ve got these increasingly powerful corporations, creating choke points that allow them to extract more than their fair share.

Gene Tunny  00:18

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane Australia. This is episode 169 on choke point capitalism. That’s the name of the new book from University of Melbourne law professor Rebecca Giblin and from writer and activist Cory Doctorow. Professor Giblin joins me this episode to discuss the book. Please check out the show notes, relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Rebecca I have to say in this episode. I’d love to hear from you. Right now. It’s my conversation with Rebecca Giblin on a new book with Cory Doctorow chokepoint capitalism, thanks to the publisher scribe for sending me a copy of the book. And finally, thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Rebecca Gibson, welcome to the programme. 

Rebecca Giblin  01:00

Hi, Gene. 

Gene Tunny  01:01

Yes, good to have you on Rebecca keen to chat with you about your new book, Choke Point Capitalism: how big tech and big content captured creative labour markets and how we’ll win them back. So to begin with, Rebecca, could you explain what’s the meaning of a choke point? And why do you think capitalism can be labelled in this way? Or there’s a form of capitalism that is chokepoint capitalism?

Rebecca Giblin  01:40

Well, competition is supposed to be fundamental to capitalism. It is supposedly about the free exchange of goods and services. But you have this new orthodoxy that’s come out in the last 30 or 40 years. When you have Peter Thiel say competition is for losers. You have Warren Buffett salivating over companies that have what he calls wide, sustainable moats, which are barriers to competition that stop that, you know, lock in customers and lock in suppliers, and stop that free exchange. And once and this is now the orthodoxy that’s been taught in business schools, people are told that if you want to make a fortune, you don’t make something, don’t provide a service, but find a way to scrape off the value of other people’s labour. And these are the choke points. So it’s where you manage to lock people in. So you lock in customers, you lock in suppliers, you use, the power you get from that. And those increased margins you get from that to do a scorched earth approach where anybody in your kill zone gets eliminated so that there are fewer and fewer choices for those locked in customers and suppliers. And then ultimately, you shake everybody down for more than your fair share. And we see these choke pointed markets in throughout the culture industries in particular, that’s what we talk about in the book to demonstrate this problem. But they’re everywhere. We’ve started seeing the term getting used in the context of all different kinds of businesses. We’ve had people talking about on social media emailing us to tell us about it. One of the more interesting ones and somebody saying this is exactly what’s happening in the global ornamental plant industry is a big plant is a problem as well.

Gene Tunny  03:28

Ornamental what? Sorry?

Rebecca Giblin  03:30

Plants, Yes. Yeah, it’s a big problem in the plant market, we discovered. And, and what we’re really trying to demonstrate here is the danger of this. And the reason why so many of us are feeling squeezed right now. It’s not our imaginations, it’s that we are being and that we need to become really aware of it if we want to change the material conditions in which we live and work.

Gene Tunny  03:54

Okay, so by many of us, are you talking about creative professionals?

Rebecca Giblin  03:59

But it goes much beyond that as well. If you’re working, or if you’re a supplier to Coles and Woollies, for example, you are dealing with a similar kind of buyer power as what we talked about in the book. And so let me mention this. This book, we talk about monopoly a bit, which is, you know, we’re all familiar with that concept, because we got a board game for that one. It’s where you’ve got a seller, that’s really powerful. So Amazon, for example, is a really powerful seller. And its relationship with consumers because it controls so many consumer markets, including the market for books, but it’s also an incredibly powerful buyer. So if you’re a publisher or an author, you you you need to go through Amazon to reach those customers. And so it’s, it’s it’s got monopsony power as well, which is where you’ve got a powerful buyer. So if you’re a supplier to Coles and Woollies, you’re dealing with people. I have to say this word monopsony, it does turn a lot of people off. It did appear a lot more often in the book in the first draft and people begged us to take it out, but we do think we can make it sexy. Technically what we’re talking about here is oligopoly, which is probably even worse, which is where you’ve got a couple of very powerful buyers. But I’m going to use monopsony just for simplicity. But that’s what you’re dealing with if you’re a supplier to Coles and Woollies, in Australia or so many other companies that have increasingly come to control their markets. And the reason why we’ve got this increased corporate concentration throughout the world is largely due to the emergence of what we call Chicago School of Economics reasoning, this, it gets a little bit wonky at this point, but this consumer welfare theory, that suggests that we should only be concerned about corporate concentration, not just because it exists, but where it has the effect of, of harming consumer welfare, which is often treated as just looking at the prices people pay. There’s many problems with that standard. And we’ve seen them the consequences of that really starting to play out now. But one of the consequences is that it really ignores the fact that when you’ve got a powerful buyer, right, it may be that the prices that the consumer pays are not affected. But that buyer has its hand in the pockets of its workers and its suppliers. And you’re it’s a little bit of a stage magic, sleight of hand misdirection where you’re looking over there at the Consumer Price, and not noticing that you’ve got somebody picking your pocket on the other. And we think I mean, it’s exactly the same end result. If you’re if you’re having downward pressure on your wages, the salary that you bring, bring in the what you get paid for your goods and your services, it has the exact same end result as higher prices at the checkout, which is that you’ve got less and less capacity to pay for what you need. And what we’re really seeing now in the current environment. And a lot of these prices, we are seeing big price increases at the checkout. And partly those are inflationary pressures. But we are seeing as well, there’s a lot of evidence of companies, these powerful concentrated industries, hiking up their profit margins and using inflation as an excuse for that. So we’re seeing higher prices at one end, and also these companies having their hands in our pockets at the other. And so it’s no wonder that everybody’s feeling squeezed.

Gene Tunny  07:30

Right. Okay, so you mentioned a few things there. You talked about antitrust, and I’ve chatted with Danielle Wood from Gratton about this, this issue of you know, there was this consumer welfare standard. And that meant that there may be, there wasn’t as much antitrust enforcement. But now there’s been a change, you’ve mentioned, is it Lina Khan in the States? So there’s more of a, a willingness to look at antitrust as a tool. And can we, Rebecca can ask about what mean, what companies you’re talking about? I mean, are you talking, you mentioned. Well, it’s could, though, there could be companies in the sort of more traditional economy, but it’s, is it mainly big tech? Are they these are the companies that are exhibiting the characteristics of being a choke point, capitalist, what are some of these companies?

Rebecca Giblin  08:23

Okay, so the ones that we talk about in the context of the creative industries, they go all the way through the chain. So if we think about just music to begin with, musician has to deal with the big three record labels, who control almost 70% of global recorded music rights. They own the big three records, the big three music publishers, which control almost 60% of global song rights, they structure the deals in ways that benefit their executives and shareholders, and work to the detriment of these creative workers. Then the streaming industry, which is where most of the increasingly most of the money from recorded music is generated, the streaming we lots of people know that music streaming really doesn’t pay very well. But fewer people are aware that the reason that works, the way that it does is because this is the way those big three record labels, arranged things, the streaming platforms had to have to go through those records, those record companies in order to get permission to play the songs. And in order to clear those rights, they have to enter into these deals that again, favour those record labels, again, to the detriment of the artists, and that give those those those major labels who should be far less relevant and indeed are far less relevant today than they were 30 or 40 years ago because they no longer control all of the avenues to distribution, but because they’ve got these huge reservoirs of copyrights that they’ve acquired often through buying up distressed companies very, very cheaply, that’s given them outsized power to control the future of music. And so you can see that those, the copyrights themselves create a choke point, at one point, the incredible complexity of the licencing systems that we have in music, create other choke points, because it is only Spotify and the big tech music offerings that can afford to go through the, you know, these hoops to pay that what’s demanded by the record labels and also to comply with these complex regulatory rules and that keeps lots of other companies that that could be started by people who love music and want to support artists and passionately believe in alternative ways of getting music out there. It stops them from being able to start up any kind of meaningful competition. And then if you look, and you say, Well, that’s all right, people don’t really need to make money from recorded music. No one’s really made money from recorded music except a few outliers. People make money from touring. Well, then we start looking at Live Nation, which is the behemoth in that space. It controls nearly all of the world’s largest and most prestigious music venues. It also has a music management and promotion business. And it bought Ticketmaster a few years ago to, you know, in the face of many, many warnings that what has happened would happen, the Department of Justice in the United States still permitted this merger to go ahead. Now, just think about this for a moment. Imagine you are a company. So you’re a music venue, right? And you want to book acts, you will have Live Nation tell you well, if you don’t use us for your ticketing, you won’t be able to book our biggest acts that we control through our management, business and promotion business, or, or any other kind of incredible threat that they’ve made. In the book, we talk about this we are in, we looked in an incredible range of creative industries in our research for this book. And we always gave people the opportunity to be synonymous or anonymous if they wanted to. And I think nobody took us up on that. Even when they were talking about these other really big, really scary giants like Amazon, who’s also known for not playing fair, except the people we spoke to about Live Nation. Almost all of those said that they could not be named. And they were really genuinely terrified about what kind of retribution could come if it got out that they’d spoken to us about this company. But it has a voyeurs, voyeurs view at the businesses of all of its competitors, right? If you’ve got to use Ticketmaster or if you’re a venue, or you face all of these other consequences, all of these other things that you miss out on. But that gives Ticketmaster the ability to see, well, okay, so which other acts that you are hosting are doing well, who are the artists that look like based on the ticket sales, they’re about to break out, and maybe Ticketmaster, Live Nation can jump in with its promotion and management business and snag up those acts. Now, even though they didn’t do the early investment, they can just sneak in and grab them now that they’re about to start making lots of money. And, you know, all kinds of other, you know, extraordinary advantages this gives them and we’re really seeing this play out at the moment with anyone who’s listening. Is there is there much crossover? Do you think Gene in the economics explained audience and the people who are big fans of Taylor Swift, and been waiting in a queue for days in order to get tickets to her concert? You have

Gene Tunny  13:47

Look, I have no idea. I mean, I quite like Taylor Swift. I wouldn’t line up for days to get tickets. But yeah, who knows? Tell me more.

Rebecca Giblin  13:55

Look, the Department of Justice is investigating again, they did do an investigation a couple of years ago that we talked about in the book, where a bunch of venues who all had to be assured of anonymity in order to speak, we’re talking about Live Nation’s mob tactics and ways in which it was using its power to crush other people’s businesses. It got a fine that was just really a slap on the wrist and told really sternly not to do it again. But in this kind of context of fine is a price. The Live Nation is quite happy to pay that kind of fine in, you know, in order to get to continue its predatory behaviour. It will only be stopped if there is sort of meaningful enforcement. And the DOJ hadn’t done anything since until this Taylor Swift controversy came up. And and and we are seeing now there’s going to be another investigation. So hopefully, there’ll be some kind of more meaningful enforcement here and what we really need to see is Ticket Master broken up. That’s one of the main domain remedies were there. antitrust breaches. You can have structural remedies, which is where you break a company up or conduct remedies, which is where you sort of get them to pinky swear they won’t do anything bad. Now, unfortunately, those remedies are not particularly easy to enforce. Right. It took literally decades to break up AT&T In the United States. I was it was a Bell. I think it was Bell before it became AT&T. So there’s so many, the Bell System we concentrated. Yeah, concentrated firms the sometimes I get mixed up. And it can be incredibly expensive and lasts for decades to take these actions and we don’t have decades. And the other problem with those antitrust remedies or competition law remedies is that they work even less well when you’re dealing with monopsony rather than monopoly for various reasons. And so what we argue for in the book is remedies that we know do work in response to monopsony power. And that’s things like encouraging new entrants into the market, directly regulating excessive buyer power by limiting what they can do and by taking measures to build countervailing power in workers and suppliers.

Gene Tunny  16:21

Okay, well, I want to come back to that that point about the monopsony you said, it’s harder for antitrust act on monopsony if you meant I think you said that I’d be interested in that if you can explain why or, and also the, I guess, I’d like to ask about, I mean, is this really so bad? I mean, you mentioned that it’s, it’s captured creative labour markets. I mean, okay, I’m, I’m against a lot of the surveillance capitalism. And I think you know, where to the extent there are choke points, and they’re really bad business practices, or they’re they are, they’re relying on some. Yeah, I guess it’s IP, they’re relying on these relationships they have and they’re, they’re preventing competition from, from coming into the market. Yeah, I can see the problem with Ticketmaster. At the same time, I mean, I think a lot of these platforms have enabled a lot of people to make a living out of content creation, haven’t they? I mean, if you look at YouTube, and you look at all the podcasting platforms, I mean, there are many more people that are able to, you know, quit their jobs and become full time content creators, aren’t there. So, I mean, is there a risk that we, we, we undermine this system that has actually created a lot of benefits? I mean, how do you see it, Rebecca?

Rebecca Giblin  17:48

Let me answer that second part. The second part first, I think we are constantly being sold the idea that we can’t have the good things without the bad things, right. So Amazon is constantly telling us that we can’t have a good search engine without surveillance. But we can have a great search engine without surveillance. Google didn’t surveil us for the first several years of its existence, right. And it was a terrific search engine. We, with the access to digital technologies and the Internet, we absolutely can have global virtually instantaneous gloop at virtually costless, like zero marginal cost of distribution, supply of many kinds of creative work. So we’ve got this potential for the good things anyway, what we don’t have to have is the bad parts, the lock ins, right, these strategies that are used to create these hourglass shaped markets, so that you’ve got audiences at one end, and creators, the other and these predatory companies squatting at the NEC, were they using that power that they’ve artificially created by locking everybody in to extract more than their fair share? So that’s what I say in response to that. And getting, I’m so glad you asked me more about monopsony. Most people run away screaming from that pot. So some of the reasons suddenly tell you a couple of things about it. One reason why monopsony is so dangerous is that it accrues at far lower market concentrations than monopoly power does. So you know, when monopsony when when when a buyer controls even eight or 10% of the market, that already gives it quite outsized power over its suppliers. And that says that’s assuming that there’s no alternative buyer for that. And we saw that when Amazon started out one of its one of its as soon as it got power over the physical book market. It started exerting that to try and squeeze margin out of everybody else. And, you know, this is a famous Bezos aphorism. Your margin is my opportunity. He’s very clear about what he’s trying to do. But sometimes when you look at how the sausage gets made, it can be a little bit frightening. They created something called the gazelle project, which is exactly what it sounds like the way that a cheetah cuts out the weakest Gazelle from the herd, they went after the smaller and more vulnerable publishers to squeeze margin from them. One of them was Melville House, who lots of people have read books from. And the publisher they resisted, he said, look, if you I cannot, we cannot afford to give you what you’re asking for our business won’t be sustainable on that basis, we just won’t do it. And Amazon instantly retaliated by removing the buy buttons for all the Melville House books on its platform. Okay and now at that, at that time, I think Amazon only controlled about 8% of the market for those books. But nonetheless, Melville House was forced to instantly get virtually instantly given because without that, that eight or 10% of sales, it was just no longer sustainable. And so if you look at how much power Amazon had, when it had such a small market share relative to what it has got now, you can see how dangerous that’s become. And then if we look at other industries, in so many of them, you’ve only got, you know, one or two or three buyers that are available. And coincidentally, they often seem to have very, very similar policies and very, very similar abuses. And this is what this is what puts them in that position where they can extract so much from the people that they’re dealing with. Yeah, the other. The other thing about monopsony that I think is relevant here to why the remedies are not particularly effective, is that there’s real concern that when you regulate a powerful buyer, that maybe the reason why it’s so powerful is because it’s very efficient. And this is what Amazon argues it argues that it has this highly efficient structure, that it has these lower costs, which leads to attracts customers, which then attracts suppliers. And then there’s a better customer experience, which brings more in and sort of feeds this loop which Amazon calls its virtuous cycle, right. But what we see when we look at Amazon, and my co author, Cory Doctorow just did a terrific thread, or blog post on his pluralistic website about this a day or two ago, is Amazon increasingly is a shitty place to buy from, because most of it has been taken up by advertising. People, people know that Google and Facebook have big online advertising businesses, but not many people know that Amazon is a close third now. It shakes down the people that sell on it. For placement fees, and for the right to be shown first and for the right to be earlier in the search listings. And that means that you know, rather than getting the best search experience, the best customer experience, you’re just being inundated with ads all the time. They’re making billions upon billions of dollars from this. So the evidence is that in practice, it’s probably not from efficiency, but regulators are concerned that they might not be able to tell the difference. And that makes them hesitant, even more hesitant to intervene in cases of monopsony than monopoly.

Gene Tunny  23:24

And Rebecca, how do you respond to the argument that these companies are simply being rewarded for the innovation, they’re being compensated for the innovation, that they’ve undertaken to deliver new services to consumers, because a lot of these platforms are delivering value or consumer surplus to a lot of consumers. And, you know, providing opportunities for content creators. I’m just wondering how you respond to that argument, because as economists, I mean, we’re very much a lot of economists are sympathetic to that Schumpeterian idea of creative destruction, that wherever there are these, you know, the opportunities for profits that encourages innovation. And I mean, who knows? I mean, will these companies survive? Or will there be new innovative innovators who take over?

Rebecca Giblin  24:10

Let’s see, that’s the thing. This is another thing that we’re constantly being sold this idea, but look at Google, how much innovation does it actually manage? Alright, it made a great search engine, and a pretty good Hotmail clone, right? And nearly everything else that it’s ever provided that’s had any kind of success. It’s bought from other people who did actually innovate with its monopoly profits that it’s making on from these choke points. Right. And so, you know, Google tried really hard, and we talked about it in the book to create a Google video service, right? Absolutely failed with all of its resources and all of its smart people it could not, it’s almost ludicrous, how hard and how many ways it failed on that. And so it had to buy YouTube, right, which scrappy people above a pizza shop where they were actually doing innovation. And we see this time and time and time again, you know Facebook came to control the messaging market, and to control the way you communicate with your community and your family and your friends, not by innovating and creating the products that we want. But by buying up what’s happened Instagram for billions of dollars each when they had, you know, virtually no employees, because these tiny companies were the ones who actually doing the innovation, okay, so we don’t need not only do we not need these, these massive companies in their massive war chest to be innovating, they’re actually getting in the way of other people innovating. Because everybody knows what happens if you get in the kill zone, right? So it’s a risk, you either get bought up. And that’s like, that’s what many, many people are aiming to do. If they’re trying to innovate in this area, they know that the only exit is to get acquired by these companies, or crushed by them. And so it’s called the kill zone. And if you and venture capitalists know, we know that there is less VC investment in territories that are controlled by big tech and other powerful corporations, because of these kill zones. So Amazon, for example, burned, I think it was 200 million US dollars in a single month, undercutting and going directly up against diapers.com, in order to control the nappy market in the US. And that’s an extraordinary amount of money drove this innovative competitor absolutely under because it had access to these, these war chests from its monopoly profits and access to capital markets that this scrappy little innovator didn’t have. Now $200 million in a month to control the diaper market might sound like a lot of money. But it’s actually incredible value, because it didn’t just get rid of diapers.com it sent an incredibly clear signal to anyone else that was thinking of entering any space that Amazon has marked that you will be absolutely burnt out if you even attempt it.

Gene Tunny  27:04

Yeah, it’s a real gangster move, as they’d say, isn’t it? I mean, really?

Rebecca Giblin  27:08

Yeah, they would say no, no, it’s just it’s just it’s good, hard. It’s good fair competition. But it’s not is it? Right. And all of that. There’s extensive research on this, we see that there’s less investment, less innovation in areas where you’ve got choke points.

Gene Tunny  27:26

Okay. Rebecca, I think I should have booked you for longer. There’s been fascinating, and I’m enjoying the conversation. But yes, if, if there’s anything else? Yeah, I’d love to if you had any final points, you know, feel free to make them otherwise. We might have to, we can wrap up. And yeah, I’ll, I’ll try and connect with you sometime in the future. Because I’m sure there’ll be a lot of discussion about your book and this debate will continue on into the future.

Rebecca Giblin  27:55

Yeah, I guess the final thing I would say just to sort of sum up the ultimate message is that you know, creators, but also the rest of us are getting choked, that we’re sharing less and less than the value that’s that’s created by our work. And that’s happening because we’ve got these increasingly powerful corporations, creating choke points that allow them to extract more than their fair share. But we don’t have to put up with it. There’s lots of things that we can do to widen these choke points out once we see them for what they are.

Gene Tunny  28:25

Okay. Rebecca Giblin. Thanks so much for your time. I really enjoyed the conversation. Thank you so much.

Female speaker  28:33

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

Gene Tunny  29:03

Okay, I hope you enjoyed that conversation I had with Rebecca. Overall, I think Choke Point Capitalism is a book worth reading, although I disagree with some of its assertions. Regrettably, I didn’t book Rebecca Long enough to ask her all the questions that occurred to me from reading the book, so I’ll aim to get her back on the show next year for another conversation. The book includes many compelling examples of dubious business practices by big companies. So I must admit I am somewhat sympathetic to the choke point capitalism thesis. And if you’re a regular listener, you will know that I’ve covered surveillance capitalism and problems with big tech in the past. There does appear to be scope for some antitrust action against some of the badly behaved big tech companies for sure. That said, one reservation that I have about the book is that it appears to have a wider ambition than simply acting against the market abuses of big tech. In parts, it reads like a polemic against capitalism in general. For instance, the book concludes, we’ve organised our societies to make rich people richer at everyone else’s expense. I think that sweeping statement goes too far. Like some other popular economics books I’ve read in recent years, choke point capitalism adopts to negative view of our economic system. Capitalism, after all, has lifted hundreds of millions of people out of extreme poverty in recent decades. And it has fostered a bewildering array of innovative new services that have benefited billions of people. And we still have progressive tax systems in which the wealthy generally pay much more tax than the less wealthy. Of course, many wealthy people avoid paying tax I know. But I think it’s broadly true that we still have a highly progressive tax system, at least in Australia and European countries, possibly less so in the US. Okay. Despite some reservations, I’d still recommend the book for its vivid examples of so called choke point capitalism. The book makes a useful and stimulating contribution to the important debate over the regulation of big tech. So I’ve included a link to the Amazon page for the book in the show notes, so please consider buying a copy. Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

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

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

Modern markets for all w/ Wingham Rowan – EP167

In The New Yorker, Wingham Rowan was described as a “labor reformer” who “wants to reimagine labor markets for the digital age.” In episode 167 of Economics Explored, Wingham talks to host Gene Tunny about the potential of Public Official e-Markets. Wingham is a former British TV presenter who is now the managing director at Modern Markets for All (MM4A), a non-profit seeking to advise governments on the possibilities of new market technologies. 

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

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

Links relevant to the conversation

Wingham Rowan’s Modern Markets for All website:

http://modernmarketsforall.com/

TheMM4A non-profit:

https://www.mm4a.social

New Yorker coverage of Wingham’s work:

https://www.newyorker.com/tech/annals-of-technology/should-gig-work-be-government-run

CIGI article by Wingham in which he argues “Market platforms are a natural monopoly; governments should dare to think about how they might initiate an alternative version for citizens and businesses.”

https://www.cigionline.org/articles/its-time-to-build-public-utilities-for-essential-digital-services/

Modern Markets Initiative: https://www.modernmarketsinitiative.org/

Articles on workforce scheduling tools:

https://www.businesswire.com/news/home/20151116006112/en/Kronos-Workforce-Central-8-Fastest-Adopted-Product-Release

http://modernmarketsforall.com/wp-content/uploads/2022/06/210120-Kronos-briefing.pdf

NB Kronos has subsequently rebranded as UKG: https://www.ukg.com

On the growth of irregular work hours: 

https://www.nytimes.com/2017/05/31/business/economy/volatile-income-economy-jobs.html

Quality Jobs Index from Cornell University: 

https://qz.com/1752676/the-job-quality-index-is-the-economic-indicator-weve-been-missing

The UK government program (then called “Slivers-of-Time” working): 

https://www.theguardian.com/politics/2010/nov/14/welfare-reform-working-slivers-of-time

The fate of the Universal Credit program which the program was eventually folded into: https://www.theguardian.com/commentisfree/2018/jun/15/universal-credit-colossal-catastrophe-national-audit-office   

Website about MM4A’s gig work markets: www.BeyondJobs.com

The Californian platform in action: www.cedah.video

The local website about the program: www.WorkLB.org

Wikipedia article on the Tobin tax which Wingham mentions a few times:

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

Transcript: Modern markets for all w/ Wingham Rowan – EP167

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

Gene Tunny  00:00

Coming up on Economics Explored.

Wingham Rowan  00:03

The problem I have talking about platforms gene is that our conception of platform technologies at the moment is so distorted by the business models that work for Silicon Valley. They have nothing to do with the potential of these technologies.

Gene Tunny  00:23

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 167 on public official E-markets. This episode’s guest Wingham Rowan is an advocate for the creation of such markets. Wingham is a former British TV presenter who is now the managing director at Modern Markets For All, a nonprofit seeking to advise governments on the possibilities of new market technologies. In the New Yorker magazine Wingham was described as a labour reformer who wants to reimagine labour markets for the digital age. Please check out the shownotes relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Wingham or I have to say in this episode. I’d love to hear from you. Right oh, now from my conversation with Wingham Rowan on modern markets for all. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Wingham Rowan, welcome to the show.

Wingham Rowan  01:26

Not at all. Kind of surprised to be here. I’m I’m not an economist. I’m just someone who sort of stumbled into what looks like a potentially very exciting area of economic policy.

Gene Tunny  01:38

Oh, excellent. Yes, yes. Well, I’ve seen your bio, and you’ve been described as a former British TV journalist and now a self identified policy entrepreneur. Could you please tell us how, how did that journey take place, please?

Wingham Rowan  01:55

Yeah, I was a television journalist in Britain in 1994, the ITV network, our main commercial network, was looking to do a show, a nighttime show, a bank software and gaming. And I said, No, no, there’s this newfangled thing coming out of America called the Internet. We need to do a show about this. It’s going to be really exciting. And I convinced them and I produced it, and I hosted it for five years. And in those days, the Internet was all about sex. And it’s often hard for people to understand, but you can actually get bored of working life full of foot fetishists, adult babies, alien abductees, voyeurs, exhibitionists, people who do odd things with champagne bottles. And so, I began, and I’ve always been a bit of a social justice warrior. And I’ve just got fixated on this idea of what is this tech potentially going to do, in terms of economic inclusion, economic opportunity for people on the fringes. And that led me to a think tank in London called Demos, which I was already a member. And I persuaded them to kind of convene a group of experts. And we began to address this. And we eventually came up with a realisation, that you could have online platforms for economic activity, that would be extraordinary in their ability to drive a more inclusive, dynamic, responsive, climate friendly form of capitalism. But it also became clear thinking that through that, governments would have to have some sort of role in initiating them. And we can get into that, and therefore it’s a public policy issue. And over the years, we have refined that public policy. And yeah, after a while, it just became very clear that sooner or later, something like this needs to happen. And somebody’s going to have to be doing the thinking to get it all ready and figure it all out. And that kind of fell into my lap as sort of group organiser. Plus, I really was getting too old to be interviewing people with bizarre sexual fetishes on late night TV.

Gene Tunny  04:10

Right. Yeah, that’s fascinating. So, so back. So how would you describe the the internet? I mean, now, I mean, in terms of what you saw back then, the promise that you that you saw, then the possibilities, we still have to unlock it. Is that that’s what you’re trying to do?

Wingham Rowan  04:31

Absolutely. Yeah, absolutely. Absolutely. And I think what I have to explain is, what with hindsight seems like extraordinary naivety. But back in 95-96, when we were figuring all this out, before I wrote the kind of definitive book about it. It just seemed so obvious. It almost wasn’t worth talking about because it was so obvious that someone else was going to do it. Someone else will pay for someone else, better placed, but broadly if you can imagine a platform for all forms of economic activity that regular people and small businesses engage in. So if I’m an ordinary regular guy, I might want to sell the hours that I want to work today and I might be good at gardening, I might be able to drive a van, I can operate a switchboard, I’ve got a talent for pet care. I’ve been trained to work in a warehouse, and so on, you know, I have a whole range of skills that defy siloing I might have have sold assets that I want to trade, I’ve got a bike I don’t need this afternoon, I’m only going to rent it out to people are completely reliable, someone else will have to handle that checking in and checking it back, because I haven’t got time. But I could get a few dollars for that. And I need a few dollars. If Australia has barbecues don’t they? Well, is there a market you know, where people will want to rent an extra barbecue? What about toys? What about video consoles, beauty aids, all this sort of storage and you stare in the cupboard? You know those massive assets that people could monetize? What about sums I want to lend? I’ve got $30 I don’t need until Monday, how do I lend it not not in some hideously complex login register, create a profile just seamlessly all in one platform that does it all in one place. And I need to be able to do this with data on where my opportunities are, I need a market that supports interventions and investment in my development as gaps in the market become clear. It all needs to be extraordinarily low cost and so on. And what I’m talking about is the public utility, like the electricity supply, the water supply, like roads. I’m not talking about a sizzling Silicon Valley investment opportunity. It’s the antithesis of the model that Silicon Valley eventually came up with. So as I say this all seemed utterly obvious. But no one else seemed to be saying it. So a group of us in London sort of knocked it together, I put out a book for Demos in 97, that sort of fumbled towards some of these conclusions. And then Britain’s, at the time most famous futurist Charles Handy, got involved, very helpful. And through him, I got an international book deal. And a book came out about it all for me in 1999.

Gene Tunny  07:26

Right. And so what was that book Wingham? And have you been a policy entrepreneur since then? Was that what launched you into…?

Wingham Rowan  07:33

No, I still had a day job hosting racy late night TV show. Well, so the first thing to say is the book sank without a trace. So it came out in February 1999. I’m kind of embarrassed to mention the title because it’s now seems so outdated, but it was called Net Benefit. And it was published by Macmillan in Europe, and St Andrews Press in the US and various other publishers around the world. But it absolutely sank like a stone. And by I think April that year, a book called I think Dow 36,000 hit the shelves, and it predicted like the internet is gonna be this explosion of wealth for shareholders. And that dominated the charts for a while. And then a few months later along came Dow 50,000, which said sort of the same thing with a bit more hyperbole. And then I think December that year along came Dow 100,000 by which point? I mean, these are all these books were off in their projections. But they were absolutely right about their core thesis, which is, which was the internet is just going to unlock huge amounts of wealth for investors, it’s not going to turn, it’s not going to be harnessed to create sort of economic platforms for the benefit of people at the economic base. So they were right, I was wrong. But it doesn’t go away. Right? We absolutely need this. And it’s very interesting. When you look at the history of I’m going to call it technology driven public utilities, you see a pattern of decades in the wilderness, and then suddenly it all begins to happen. And that has both fascinated and sustained me in my post television career.

Gene Tunny  09:26

Okay, we might talk about this in a moment? I’ll read from your, you wrote an article didn’t you in the Centre for International Governance Innovation that’s on the web, I’ll put a link in the show notes. Market platforms are a natural monopoly, governments should dare to think about how they might initiate an alternative version for citizens and business. So yeah, be keen to talk about that. One thing I’m wondering is what do you think of the current platforms that exist because there are certainly sharing economy, or whatever you call them, or two sided market platforms that exist. We’ve got Airbnb and then we’ve got Upwork, and Fiverr, and all of that. So what’s your view of the current state of play? And where we need to get to? And why do you think what you’re proposing is superior to that please Wingham.

Wingham Rowan  10:24

Existing platforms suck compared to what’s possible, they really, really do. And so if you want to understand what economic activity platforms can do, and I’m sorry, I have to use quite clunky language, because otherwise we get mixed up with social media and so on, which is outside the scope of this discussion, as far as I’m concerned. So if you want to know what economic platforms can do, look at what’s happened to Wall Street in the last 20-25 years, they have moved from kind of phone based trading and shouting across trading floors, to two platforms that trade with unimaginable precision with virtually zero costs, where risk is all but mitigated, where they have tools like collars on their losses, where they can trade across asset classes instantly, and fluidly. Governments have provided the regulatory background that allows those markets to thrive, these are in almost inconceivably broad, deep platforms, they have powered financialization, the, it’s now so efficient to invest 100 million in the financial markets, and we’ve got this huge suck up out of the mainstream economy. So that’s what’s possible. And when you look at what regular people have to sell, our key economic asset for 99% of us is that time, it’s what employers pay for. So what about markets for selling their time for people selling the time, they’re very different markets, they need very different functionality, they happen to be much more complex. But we do not have anything like markets that approach Wall Street’s level of efficiency, opportunity generation, risk mitigation, and so on. So you mentioned Airbnb, and so on. Uber is another great example. So Uber, as a platform has displaced taxi companies. Well, I talked about Uber because they’ve been subjected to unusual levels of scrutiny. So we know for example, that Uber has systematically missed this. So I’m sorry, when you evaluate an economic platform, don’t focus on what it does for buyers, cool new ways to buy stuff, don’t shift the economic dial, it’s what they do for sellers of whatever is on offer that we need to focus on. So focus on Uber not as a transportation app, but as a labour market, because that’s what it is for a lot of people. Is it a good labour market? No, it sucks. It’s, they take about 30% of your earnings. And they need to do that because they massively subsidised rides when they arrive in a new city to build critical mass and they’ve got to recoup that money. They have been caught systematically misleading drivers because they need an oversupplied market, you get very little data, you get marginal control. You know, Uber decides what, where you’re going, what you’ll be paid. You can’t build a regular client base, you can’t innovate. All the kinds of things that a dynamic market would allow. Uber doesn’t allow, and it’s a silo, you are stuck driving. There’s no progression pathway. You could be driving an Uber this year, and you’d be driving an Uber five years from now, where’s the movement? You know, what, where’s my ability to sell my other talents? That’s what I mean by the breadth of the market now in Wall Street, you know, that, that asset classes can be merged. Because they have the tools that dive into deeply regulated markets across all sorts of asset classes. So no, the existing platforms are awful. They are better than the old way we used to do things classified adverts, adverts in newspaper, sorry, adverts in newsagents windows, but that doesn’t make them the best markets possible. We need to focus on the best markets possible for the economic base. And have we got and we absolutely haven’t. We’ve got hideous inequality of markets. And it’s mostly out of sight. So you read you hear an awful lot about the gig work apps. They’re awful, most of them fail. There’s a famous HBR, Harvard Business Review article called a study of 250 platforms reveals why most of them fail. And when they fail, you know, the entrepreneurs who set them up can write that off to experience. What about the people who were selling their time? You know, when Homejoy the market for home cleaning in the US just collapsed overnight. That just left a whole load of people with their immediate flow of work cancelled their relationships with people who buy their labour canceled, that track record wiped. And so that is the problem, let’s call it market inequality, that people at the top, the big institutions at the top of the economy have trans transition to unbelievably efficient markets and we barely understand them. And people at the bottom have been that I’ve had to follow the buyers of their labour or whatever, into markets that are typically skewed around commoditizing. The workforce driving down labour costs, keeping the market over supplied, locking people into a narrow silo. And you really need to look at, and not so much the gig work apps, but at work for scheduling systems, which run monopsony markets, where one corporate buys the time of their employees, these things have exploded in the last few years get very little coverage, not very well understood, negligible transparency. That’s the world of markets today. You know, these platforms run markets, for labour, for capital, for services and for goods. And markets are totally fundamental to a capitalist economy. And they’re getting more and more so because so many drivers are fragmenting economic activity. And the more you’re driven towards fragmented economic activity, the more you’re in and out of the market. Yeah, sorry. Did I did I go off on a bit of a rant?

Gene Tunny  16:22

No, that was good, that was good. What are the workforce scheduling apps? What ones are you thinking of?

Wingham Rowan  16:30

Well yeah, the most famous, which came out I think, in 2018, is called Kronos Workforce Central Aid. They’ve rebranded subsequently to UKG and their website is full of photos of happy smiling, presumably workers. But there’s actually some documentation, I’m very happy to share it with you that they were using, which they would take to Corporate Finance Directors, presumably, and it would use phrases like manage your workforce without limits, no boundaries. It’s fantastic. It’s an unbeatable proposition. If I’m the finance director of a supermarket chain, hotel chain distribution company, my God, you know, staffing is my biggest cost. And these tools can absolutely box it in and minimise it a lot. Sign it with my needs. But the risk the all the problems are just dumped on low income workers, who often don’t know if they’re gonna go into work today. And if they’re not, they’re left scrambling for extra hours elsewhere. They still got to put food on the table tonight. It’s pretty hideous. And what really motivates us at this end is look at what’s possible. You know, and I think that is the key problem here is politicians and policymakers and think tanks, and economists are focused on well, how do we try to make Silicon Valley play nice. Yeah. And they’re engaged in these endless Whack-A-Mole battles with big tech that, frankly, they’re never going to win. And we can go into why that is. And then instead, they should be asking a completely different question, which is, have we got the best markets now possible in which our citizens and local businesses can pursue their economic potential? And if not, could policy change that?

Gene Tunny  18:28

Right, okay, so are you suggesting we need a common we need common market platforms, we need some sort of, we don’t need separate upwork and a fiver, we need a common platform. How would you describe it?

Wingham Rowan  18:47

Yeah, absolutely. So let’s, can I use a quick historical analogy? Because that’s the easiest way to understand that these things are always easiest to see in hindsight. So every so often, throughout history of the last two centuries, a technology has come along that needed the government to do something that only governments could do to get that technology to its full potential. So one of my favourite examples, for instance, is pumping. Industrial pumping arrived in about 1820, a whole bunch of small companies sprang up to pump river water in cities like London into well off households. And they made quite a bit of money, it was a lot more convenient than going to the river with a bucket. But meanwhile, the poor were just dying of cholera. And a bunch of people said, actually, you know, if we use this technology in a different way to create reservoirs, we could pump clean water 24/7 to everyone, but only government can make that happen because only government can forcibly buy valleys. evict people who live there, flood the valleys and then dig up everywhere to put in trunk water piping. 1848 public health care In Britain, essentially initiated that process, every country in the world copied. So you can see something similar in electricity, rail, roads, broadcasting telephony, air traffic control, gas canals, and so on. Every so often there’s a technology that needs something that only government can do. And governments for all the right reasons are slow to do it, you know, governments should not just intervene on a whim, there needs to be an absolute clear cut case of market failure. But eventually, one does, and one government gets it right. And, you know, got modesty aside, Britain and British was, has done pretty well at this. And then when the first country gets it, right, others follow. And eventually everyone does. So every country has a coordinated postage system, a coordinated currency. And right now, government has dictated this possibility when it comes to economic platforms. They really are, you know, this, what’s happening now with economic platforms would be akin to the British government in the 1840s, trying to beat up these little water companies, and there were hundreds of them and get them to be more inclusive, get them to pump clean water, well, they couldn’t pump clean water because they couldn’t stop other people using the river as a sewage outlet. Only government could put people in jail for chucking sewage in rivers. So it wouldn’t have worked. They needed to start with, what is this technology need to deliver its potential? what can government do to deliver that? And the answer is it needs reservoirs. And for that, you need compulsory land purchase rights, which even the most ambitious startup doesn’t have. So in answer to your question, don’t focus on the existing ones, the existing platforms, they’re kind of interesting. They’re not bad people. But their job isn’t to create an inclusive version of capitalism. Their job is to maximise return for their shareholders, and some of them are doing reasonably well at that. It’s we elect governments to create equitable economy, inclusive, dynamic, efficient economy, that minimises public assistance costs. It’s government that needs to start asking these questions. That’s what’s missing.

Gene Tunny  22:26

Okay. And so this is what you’re you’re trying to get governments to, to do something. Are you Wingham? Could you tell me a bit about what you’re doing in California at the moment? What’s your mission?

Wingham Rowan  22:39

Yeah, so take this notion of that we call modern markets for all this idea that just as government provides us routinely with its government’s responsibility, generally, to make sure we have electricity, that we have clean, drinkable water, that we have a coherent road network, and so on all these facilities that we just utterly take for granted as part of a modern economy. So what we’re saying is this now, the latest on this list is a platform for economic activity. And just like all the other public utilities, it needs to be completely inclusive, it needs to do a whole set of things that the private sector can’t do or has no incentive to do. So. Yeah. If you take that as the kind of guiding spirit here, once we’ve kind of figured this out, the worry. And once we realised that actually, it wasn’t obvious that other people weren’t going around saying it at the time. We, the question became, so what are we going to do about it now, and what we didn’t want is what I’m going to possibly unjustly called the The Tobin tax syndrome, where, as I understand it, the Tobin tax is a very elegant idea that could do a lot of good, but it’s never been implemented. And Tobin has toured the world economic conferences talking about it and won a lot of applause for his work. But it’s never been done. And we don’t want to be in that category. We wanted to get something going. So we tried to figure out which bit of this huge sort of public utility vision could we just bite off and get going? And the answer is, markets for what’s now called gig work. So about 35% of adults cannot work regular hours. They have complex parenting needs, medical issues that fluctuate day to day, family caregiving commitments that are unpredictable. They’re studying on a fluid schedule increasingly, their numbers being swollen by people who are partially employed and never know their work schedule. So you’ve got this huge mass of adults who need at work that fits around other things going on in their lives. And so that’s it over here, over there, you have what are called government employment services, job centres. I forgotten what they’re called in Australia. But typically, in America, they are called America’s job centres. And the government invests hundreds of millions a year in this infrastructure to create equitable labour markets. It’s bipartisan, nobody doubts it’s worth it. It grows the economy, it gets people off public assistance, it upskill the workforce, it brings in investment, it’s just a good thing all around. But these government employment services do nothing for people who don’t fit into the neat pigeonhole, of having regular availability for work. People who have complex lives, who just aren’t lucky enough to be able to say, Yeah, I can do 36 hours every week at the same time in the same place. So the small mission, the small vision, as we call it, at this end is extend government employment services, so that they bring everything that they aim to do for job seekers, too. We don’t like the term gig workers, because it’s it carries too much baggage. And it only describes a small proportion of the people we’re aiming for. So we use the phrase non standard workers. So the British government actually got off his butt and funded this. And I was appointed to lead the initiative, we built a platform that is all about protections and control and progression for people outside of standard employment. It was launched by 20 city governments in Britain, it was what seemed like really good news at the time, but turned out to be a disaster. It was then made a cornerstone of ambitious programmes to completely overhaul Britain’s buys and time welfare regime. And it was all these city pilots were shut down, it was all incorporated into this big amazing programme called universal, universal benefit, a sort of Universal Credit. Anyway, you’ve probably heard in your line of work, Gene, but Universal Credit has turned into an absolutely epic disaster. And opinions are the contributors own not not an official statement from the British government. But it’s something like five years behind schedule on four times over budget or the other way around. Anyway, they began shedding everything that wasn’t core and included us. And so we suddenly find ourselves looking around the world and realise, well, no other countries done anything like this. We’ve got this sophisticated platform. And we talked to the British embassies, philanthropist took over paying my salary and said, we’ll go figure this out. We put the tech in a nonprofit for open source into the world. And we talked to the British embassies and they said, go to America. They’ve got something called the public workforce system. They invest billions of it a year. It’s consists of 2400 local workforce boards. And we did and I toured various workforce, public workforce boards around America, and we ended up launching in California with public agencies funded by national philanthropies like all these workforce systems around the world, America’s federally funded workforce dollars can only go on traditional job creation and retention. It’s just a rather 20th century view of the world. But there is this the Franklin’s sort of guerrilla operation within farsighted workforce boards, who realise Yeah, why am I turning away people just because they’re trying to make rent on Friday, rather than because, you know, they want to be upskilled to a better job. And why am I throwing them at the mercy of these, frankly, rather unpleasant Silicon Valley companies that will treat them as cannon fodder. And yeah, I don’t want to paint a picture of this is easy and we’re on a meteoric trajectory. It’s three steps forward, two steps back public sector led innovation is always difficult. But we are steadily making the case that, yeah, Public Employment Services can sustainably scalable expand, to embrace people who are not fortunate enough to have regular availability for work. They need a platform to do that. It’s going to be very different from the platform that silicon for kind of platforms that Silicon Valley churns out, our platform is called Good Flexi. Yeah, I mean, you could have it for Australia. It’s just we don’t have the resources to engage anyone in the Australian Government.

Gene Tunny  29:52

Yep. So you’ve got, I just want to make sure I understand all the facts properly. So you’ve got your non-for-profit, Modern Markets For All. Is that what it’s called? 

Wingham Rowan  30:00

Yep. 

Gene Tunny  30:05

Okay. And you’re, you’re working with California, is it the California state government?

Wingham Rowan  30:10

No, it’s public workforce boards at local levels.

Gene Tunny  30:11

Oh, public workforce boards at local levels.

Wingham Rowan  30:16

It’s narrow, it’s expanding outside California.

Gene Tunny  30:19

Good one, okay. And you’re encouraging them to extend their services to people who are in non standard employment. So you’re encouraging them to offer is it training or advice on the workforce of connecting them with opportunities.

Wingham Rowan  30:35

all the above, okay, you want all sorts of interventions and non standard workers are an incredibly diverse bunch. They have different needs different aspirations, they’re on different pathways. But the core of it is if you are to systematically sustainably scalablely support these people, you have to have some sort of platform. This is such a fiddly complex part of labour markets. And when you go to a horizontal model, all types of work because that’s how you get progression, you need people to be able to move along from one type of work to another, that’s better paid higher skilled and keep moving up the ladder. Once you do that, it gets more complex. Once you make everything legal, once you make everything what’s called in America, a w-2, essentially, someone with employee status and protections not an independent contractor, it gets exponentially more complex, when you want to give everyone the data they need, it gets very complex. So you need a completely different kind of platform. And that’s what the British government created. It’s been Americanized with philanthropic funding. And yeah, it’s it’s now launched and the battle is, is persuading this huge system to pioneer something like this, given that all their federal funding and their targets, and their assessment is geared towards their ability to create jobs and keep people in jobs. And if you’re a workforce director in America, you are strongly disincentivized, from bringing non standard workers into your customer base, because they will drag down your outputs. Because somebody who only needs eight hours of work a week is bad news, if you’re being marked on your ability to get people into full time or formal part time work. So yep, so that’s the implementation at the moment. But what’s interesting Gene, from our point of view, is the kind of crisis of capitalism. I suppose, you know, 40% of Americans think socialism is a good thing. Now COVID, I can’t remember there’s some survey about the number of people who want to go back to pre COVID capitalism, and it’s something like 7% of the population. Now, and then you’ve got what capitalism is doing, as it currently can, constituted what it’s doing to the climate. So the drivers sense that somewhere there is going to be an ambitious politician who says, I got it, you know, I’m not going to fight in the old trenches of tax versus welfare and all this sort of stuff. Let those battles raged on. I am going to colonise a whole new era of political thinking, and it around, I am going to articulate what’s wrong with the new plumbing of capitalism. And what we need to what the questions we need to ask to get it right. And at the moment, I really would stress for a politician that the the policy space to be grabbed just involves asking questions, you don’t need to commit to do anything to be a trailblazer here, this is all this growth of platforms, and what they’re doing, particularly to people at the economic base, is kind of, I mean, we all know there’s something not right there, but it’s not being coherently articulated. It’s very poorly understood. So that’s what we’re trying to do. But yeah, we wanted to do something real. We didn’t want to be in the Tobin situation. And so, for what it’s worth, we dived in and you know, we’ve made mistakes, we’ve gone down cul de sacs. We’ve had disappointments, but my God, the body of learning around all this is fascinating. I mean, what, what platforms could what platform technologies could be doing? With a different structure with a different set of incentives is mind blowing.

Gene Tunny  34:42

Right. So you’re good? Was it Good Flexi you were talking about?

Wingham Rowan  34:47

Yeah, that’s what we call the platform for non standard employment. Yeah. Which is kind of think of it as a proof of concept for something much bigger. That is, it spans the entire range of micro economic activity rather than just people who need very fluid work?

Gene Tunny  35:06

And what sort of numbers have you got on that at the moment when I’m able to disclose that?

Wingham Rowan  35:11

Yeah, I mean, it’s small. I can tell you it’s in the hundreds. It was due to launch in Easter 2020 in California, focused on hospitality and elder care. Originally, I don’t need to tell you what happened to those sectors as COVID hit, we were refocused around responsive child care for essential low income essential workers. So we have a pool of childcare workers who could be booked as required. They’ve all vetted and everything. And then that was funded largely with COVID money. And then there was public funding to expand across all sectors. And that’s what we’re now doing in Los Angeles County. And meanwhile, philanthropies come forward to fund expansion into other cities. So right now, in terms of number of people transacting today, it’s in the hundreds. You know, this, you’ve caught this story early. It’s not a story of wow, I’m blown away by your Facebook like growth. It’s, I can tell you the procurement hurdles, the legal barriers, and the complexity of getting big blocks of demand from flexible, flexible labour into a new platform are formidable. And we have to turn to the public sector demand for flexible labour, school districts, Parks and Rec departments, public services, because we cannot, in the early stage tempt the big private sector buyers of flexible labour, retail, hospitality, distribution, care building, and so on, out of their workforce scheduling systems, which are so cost effective for them. If you’re running a workforce of 1000s. In a monopsony market, where you are the only buyer where you your system decides who’s called in and who’s sent home when, in the exact line with your needs, where anybody who gets a pity, you just tick a box and never see them again. Why on earth should you move that demand for labour and your workers into a platform that’s going to expose those workers to a whole range of other opportunities is going to systematically work to get new boundaries and new skills to monetize a whole range of each person’s unique abilities? Why would you do that? You’re not. You’re not going to do it in phase one. Now if we can build the demand from public sectors, by have flexible labour and government in aggregate is the biggest buyer flexible labour in any economy, then we’re going to leave you as the supermarket chief, finding his workers migrating into the public sector platform in unless you come in and offer to buy them through the platform that is going to be advancing them and giving them data and showing them where their new opportunities are, and so on. So that’s the challenge. And it is three steps forward, two steps back, it requires patience, it can be frustrating, but my God, it’s needed.

Gene Tunny  38:26

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

Female speaker  38:32

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Gene Tunny  39:01

Now back to the show. So this platform, do you envisage it? It has to be publicly funded?

Wingham Rowan  39:11

No, absolutely not. So it is partially publicly funded at the moment, and not with Federal workforce dollars. But that’s because it’s small vision, small scale, if we go back to the Big Vision, so let’s assume for a moment that the Australian Government says we’re gonna take a worldwide lead on this, we are going to instigate a policy of modern markets for all we are going to assume that it’s government’s role to ensure that everybody has access to the best markets now possible, not the best markets, Silicon Valley wants to give the best markets now possible in which to pursue their economic potential. So the Australian Government says that they then say, well, we’re not going to fund this because that would be politically unpalatable. And it’s all got to be based on choice. We are just here to give people a choice of economic infrastructure, we’re not going to shut down eBay, or Airbnb or Uber or DoorDash, or Postmates, or any of these 1000s of platforms that are out there. Now, we’re just going to give everyone a choice. They can use the public utility if they want, use it a bit, use it not at all, totally up to them. It’s the same with electricity. Nobody forces you to connect to the public electricity supply, go and buy your own generator. So assume the Australian Government says that, what do they do? And the short answer is, and there’s a huge amount of detail behind this. But you, you want a concession. It’s the model that governments typically use to create lotteries. So government has key features, key facilities that it alone can bestow on any platform for economic activity. So first of all, it can direct its huge spend on things like labour through the new platform. So that’s nurses, teachers, everything. Secondly, it can allow the platform to interface into all the official databases. So I say I want to be, I want to sell my time as a truck driver, I want to rent out my room for which I need to prove I’ve got a fire certificate. The platform will say to me, Well, do you give me the platform permission to look up your truck driving licence on the official government register of driving licences. And then once it’s done that I can sell my time as a truck driver. You want the government’s promotion channels, you want to be promoting the platform to tourists, to businesses, to taxpayers, to welfare claimants, to students, to all the people that the government routinely reaches, you want to interface into the courts. So if let’s say you hire me to come and drive a forklift truck in your warehouse today, and I drive through a wall and the warehouse collapses, and it turns out that I was high on drugs, that you don’t have to pursue it. Well, no, take a less dramatic example, you know, I back the forklift into some unit and damage it. You don’t have to sort of tediously begin a whole process of getting me downgraded and everything. The platform allows me to tell my side of the story and captures yours. It’s kept my payment in escrow, so it’s taking the money from you and held it. But ultimately, if the platform cannot push us to a resolution, it can put it into the courts, and the courts can downgrade me in the same way that the courts have the unique power to downgrade our driving licences. So I have an officially backed record of trading reliability that is really useful to me, and I can’t go market to market to market. In the public markets, there is only one official track record. It’s a bit like your driving licence, if you get, you know, six points in a disqualification, you can’t go to someone else to get another driving. That’s it, you can’t use the government roads, which are all roads effectively. So these are the kind of benefits there’s a whole set of obligations that need to be enforced as part of the concession I can go into those to ensure that the platform really is driving micro economic activity. That’s fair, it’s equitable. It’s fully featured, that it’s federal, it’s not got concentrated power, that it’s truly independent, and so on. And it charges a flat percentage markup on each transaction to fund a return for the operators. Because they’re going to fund the whole thing, design it and build it. And then you say, right, this concession is for 15 years across the whole of Australia. In that time, no one else will get these government awarded benefits. And whoever whichever consortium will build, fund and operate our platform for those 15 years for the lowest percentage cut of each transactions value gets the deal. And you do the modelling and the figure. It might be a bit higher for Australia, but it’s a random 1.5- 2% markup. It’s not 30%, which is what people at the base of the economic pyramid tend to be paying as a benchmark now. Yeah, so that’s it. We call this platform Poems, Public Official E-Markets. It is just a public utility that’s regulated. It’s there to use if you want, and if you don’t, that’s fine. You might choose to use it to get a haircut, get your lawn cut, and so on. But you choose not to use it when you want to book childcare or when you want to sell your time as a bookkeeper. It’s if it doesn’t work, the shareholders of the consortium are backed it takes a huge hit. If it works, it will massively grow economic activity. At the base, and the shareholders will be getting 2% of what could be billions and billions of dollars of new economic activity that they took all the risks they designed. No capital mass, good luck to them. They deserve it.

Gene Tunny  45:14

Yeah. Okay. So that model, that financial model, you’re talking about where you’re estimating, you could actually just have a 1 to 2% markup, there’s no, you’re not assuming any community service obligation paid by government.

Wingham Rowan  45:29

No, yeah, there is a public service obligation. Yeah. So nearly all public utilities have a non revenue component, you know, cyclists use the road network without paying road tax. Broadcasters have to carry religious and preschool programming, without advertising. So yeah, in this case, yes, there’s a range of things, once you’ve got the infrastructure to do this, that is able to check people’s identity, constantly keep monitoring it, if they wish. Yes, you might want to use it for things like voting, forming social networks. So connecting isolated elderly, people, volunteering, things like that. So yes, that is a community service obligation within that,

Gene Tunny  46:19

Okay. And then there would have to be a payment from the government to this.

Wingham Rowan  46:26

Not necessarily so you think if government says, where we want a platform that does X, Y, and Z across the base of the micro, the whole micro economy, and we are going to give that among the benefits we’re going to give that platform is we’re going to direct all public spending down to community level through that platform, that’s 30-35% of GDP in most developed countries. That’s a heck of a business opportunity. Now, if you’re going to say, as a government. Oh, and as part of that, you’ve got to fulfil certain community service obligations. Yeah, I as a consortium bidding to run your Poems or whatever it’s called platform, it’s just going to price that in, frankly, the infrastructure I’m going to have to build to monetize all these assets in the micro economy can run a, a plebiscite on whether, you know, a bunch of neighbours want to shut the road to traffic this weekend, so the kids can play in the road with no problem. I mean, we are talking about something a platform that will be hugely, hugely sophisticated, that will cost billions to build. That’s why you need a kind of 15 year concession, you’ve got to give them a chance to recoup that investment.

Gene Tunny  47:46

Yeah, well, I think it’s a great vision. One thing I’d like to ask you about is, how constrained are you by regulations that exist at the moment. And I’m thinking particularly in the labour market in Australia, we’re currently having a debate about the Fair Work Act and check possible changes to that. There’s, there are awards and there are all sorts of rules around hiring people, and what minimum shift lengths are that are just frustrating for employers? And I mean, I think that they’re, they are limiting people from taking on opportunities. I don’t think they’re in the best interests of workers necessarily. But then you’ve got the unions, you’ve got a political party here, that is very closely tied to the union movement, that I mean, I’m not sure exactly what they would think of this this type of thing. I’m, I’m concerned that the way that we do things in Australia, and I mean, this is something that I mean, regardless of the party that’s in government. There’s, we’ve got, we’ve had a highly regulated labour market, is that a barrier to the rollout of Poems?

Wingham Rowan  49:12

It isn’t necessary. So it goes without saying that the Poems platform has to enforce the law. And if the law is you have to have a minimum shift length of six hours. That’s what it will do. Personally, because I’ve spent an awful lot of time with people who are in non standard work. I think regulations like that can be very cruel. If I’ve got an injury that means I have back pain that comes and goes day to day and I’m waking up every morning thinking, well can I work today and the answer might be I’ll have to decide after lunch. I certainly can’t at the moment, depending on if my back pain goes away, depends if I get my parents into the Alzheimer’s centre, depends if one of my siblings can look after my disabled kid this afternoon. So the intention behind these rules is undoubtedly good. And it is undoubtedly true that big employers are using these aggressive workforce scheduling systems to push people into very precarious work, which is incredibly debilitating of their family, finances and their mental health even. So, I totally support the reasons that people are doing this. Unfortunately, a lot of these acts don’t work. And I mean, just to digress for a moment, what’s happened in America, where they’ve been having these Fair Work Week acts in some cities for some time, is that you then get a whole crop of companies that spring up with what’s called Tap the app staffing. So they will go, typically imagine a store manager, who’s told we’ve got to schedule the staff in your supermarket for weeks ahead. And these companies will say to the store manager, when you don’t know how busy your store is going to be, you know, this afternoon, let alone four weeks from now. So why don’t you just sort of let employees go. And we’ll just have a pool of temporary workers. And you just tell us how many you want each day, just tap the app in the morning, we’ll put it out to bed, we’ll see who will do it, we’ll send them along to anyone you don’t like just tap next to their name. And as I say, you’ll never see them again. And some of these apps will algorithmically calculate the lowest wage they need to pay to get the required number of people into your store today. So don’t underestimate the deviousness, the deep pockets, the aggression of the companies that are driving this, it really you we really need to think about what’s an alternative model, because in a healthy market, a healthy labour platform. You give people far, far more choice. So if the employer is bad, I might be flipping burgers today. And the employer might be awful. But if I’m proving reliability, and I’ve got all this data? Well, you know, there’s a real short, you know, we noticed you like you’re using the platform to spend time in an amateur soccer team. Well, did you know that there’s a chronic shortage of a system soccer coaches at the moment? Do you want to start doing some of that work on Saturdays, we noticed that you’ve got a qualification in gardening from when you were at school. Did you know that there are landscape crews now staffing up for the summer rush in public parks? Do you want some of that work, and eventually, you’re going to be able to turn off the burger flipping, which means the burger company that’s such a rubbish employer is now going to be constantly in churn. They’re just constantly onboarding people who build some sort of track record of reliability, and then they’re off up the ladder. So I mean, I need to make absolutely clear that unions in a democratic society have an absolute place in any platform. And there’s all sorts of new services and new models that the platform can enable for them. So there is absolutely you know, please don’t assume that when I talk about a platform, it’s synonymous with very short term, churning relationships sort of work. The problem I have talking about platforms Gene is that our conception of platform technologies at the moment is so distorted by the business models that work for Silicon Valley, they have nothing to do with the potential of these technologies. They aren’t just about maximising profits for, you know, the corporate operator or the owner of the market platform. That’s very different from running a public utility.

Gene Tunny  54:00

Yeah, yeah, absolutely. Okay. So to wrap up, when would you be able to talk about your next steps? And anything? Well, guess what’s where to from now? Well, and then I guess, in the next year or so, what are you hoping to do?

Wingham Rowan  54:17

Fascinating question, Gene. Absolutely. Fascinating. So I banks, I’m almost tempted to banks the question back to you, okay. We, if you look at this history of public utilities, they’re often a key part played by individuals who then pretty much get forgotten by history. But what we now take for granted as the public road system was pretty much invented by a New York property manager called William Phelps, you know, in the 1890s. And everyone opposed him and that was just the people who didn’t completely ignore him, and it took him 30 years before there was recognised that oh my god, if the government initiated a system of roads, it could be so much better than the sort of dirt tracks and random toll roads that we’re all using now. And the public water supply was pretty much the brainchild of a civil servant called Edwin Chadwick, a school teacher in the English Midlands called Rowland Hill, pretty much invented what we now call the Postal Service, but which he called Penny postage, and his model was copied around the world. So my question, my philosophical point that I discuss with people all the time is, what’s the 21st century equivalent of that? You know, these people badgered away for years in total obscurity, well, we got that under the belt. And eventually, they kind of made their argument through reason and luck, and they plugged into the right person at the right time. So New York State was the first to recognise government had a role in creating a coherent road network. And then the government of France. Europe was next. So it’s pretty random. But how do you do it in the 21st century? How do you do it when politics is so polarised when there is 1000 times the attention that is paid to platform issues is paid to the issue of what kind of bathrooms transgender kids use, you know, when men leave it to the schools and get back to focusing on what really matters here? Why isn’t this issue? Getting the attention it deserves? Yeah, if I was going to be really cheeky, Gene, I’d say, well, why don’t you use your clout to assemble a group of Australian policymakers and let’s do some sort of webinar and test the waters on it, because sooner or later, somebody who can move the dial is going to come across all this, and kick the tires and realise there’s something here, you know, us at this end may not have got it completely, right. But this notion that government could now initiate platforms for economic activity that would solve so many problems that are out there at the moment, isn’t going to go away, somebody is going to do the political land grab and get the kudos for it. And we’re just looking for that person plus, just to be completely transparent and honest, we’re also looking for resources. You know, this is a very cash strapped operation, because people typically don’t really don’t understand what we’re doing. They would rather be pouring money into fighting Silicon Valley. Yeah. So they aren’t. Let me ask you, what could you do? We’re ready to explain it. We, we, we’ve had the tires kicked in multiple scenarios, we have not connected to the right people yet in terms of policy leaders, or the people with the resources to say, You know what, here’s a million dollars, just go and talk to the world, you know, get a team together and go and talk to the world’s governments and start to move on this.

Gene Tunny  58:11

Yeah. I like the idea of a webinar to start with. And there’s certainly people I know who would be interested in this. One of my colleagues, Nicholas Gruen and has written a lot about digital public private partnerships. So I think he is of a similar mind, in the potential of, of the web, have the technology just been underutilized at the moment? So I think, I think you’d have a lot of potentially a lot of interest in this. So yeah, but it’s something you’ll have to leave with me

Wingham Rowan 58:49

I’ve completely put you on the spot.

Gene Tunny  58:51

That’s fine. I think it’s a good question.

Wingham Rowan  58:54

There is this tendency to say, Oh, that’s really interesting. And we’ll talk about something else next week. And what I’m trying to find is the people who say, actually, this is really interesting. And we need to seriously get the people together who can do something about it. Because otherwise it just stays in obscurity. And we’re all fighting the old battles and trying to battle with the Silicon Valley behemoth. And we’re not getting anywhere.

Gene Tunny  59:21

Yeah, yeah, I think it’d have to be this concession model that you’re talking about. And because I think if the proposal came up, that we’d have this new platform and the government had something to do with it, then people would be concerned because we haven’t had a great history in Australia in the last couple of decades of governments building platforms like that.

Wingham Rowan  59:45

You absolutely don’t want government building, running or funding the platform. It would be terrifying. It’d be like government running broadcasting. You just don’t go there. You absolutely want the government to use its leverage to create a new private sector organisation consortium that hasn’t, but the legislation that creates it has to make sure it has no incentive to do anything other than massively grow economic activity at the economic base. That is the only way they can make their return. You’ve got to block off air all the dirty tricks that Silicon Valley plays at the moment. They’ve just got to grow the economy. And if they get very rich from getting everyday Australians more and more employment and opportunity and monetizing their household assets, good. We’re very happy for them. And if they can’t make it work, they’re gonna lose a lot of money. But frankly, who cares? It’s not Australia’s problem.

Gene Tunny  1:00:45

Yeah. Okay. So we’re gonna, how can we find more about your work? So I’ve got I do have listeners all around the world, but I do have a lot here in Australia. That’s probably in terms of any one country I’ve probably got the most from Australia, followed by The States. How can people learn more about what you’re doing and connect with you if they’re interested in having a further conversation?

Wingham Rowan  1:01:06

Modernmarketsforall.org. Modernmarketsforall.org?

Gene Tunny  1:01:12

Okay, very good. Well, okay, so we can all get onto that. And yeah, I’ll, I’ll see what I’ll be certainly talking to people about this and sharing the episode, and we’ll see what comes of it. So that’s, that’s been terrific. So Wingham Rowan, thanks so much for your time. I really enjoyed that conversation and, and learning more about your proposal, and I thought that was great. I thought we got into quite a lot of the tricky things I was always concerned about. So I really appreciate that. Thanks so much.

Wingham Rowan  1:01:45

Not at all, likewise.

Gene Tunny  1:01:48

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

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

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

ESG: Useful concept or greenwashing? w/ Rachel Baird & Stephen Howell – EP145

ESG, short for environmental, social, and governance, is proving difficult for companies to implement in practice, and some have been accused of greenwashing. What exactly is ESG and has it come to the end of its useful life, as the Financial Times has suggested may be the case?  

Joining show host Gene Tunny in episode 145 to discuss ESG are some highly experienced corporate governance experts: Dr Rachel Baird and Stephen Howell, part of HopgoodGanim Lawyers. Both Stephen and Rachel advise boards on ESG matters and Rachel is currently facilitating the Law & Sustainability short course delivered in partnership between Pearson and Oxford University.

In this episode you’ll learn how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts pushing their own agendas. 

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps.

Links relevant to the conversation

Dr Rachel Baird, GAICD, FGIA – Director – IcebergSRC | LinkedIn

Stephen Howell – Director – Effective Governance – Part of the HopgoodGanim Advisory Group | LinkedIn 

Origins and Consequences of the ESG Moniker (paper mentioned by Rachel in the episode)

Who Cares Wins 2005 Conference Report: Investing for Long-Term Value

Tim Paine scandal a mess of Cricket Australia’s making — and it will get worse – ABC News

How ESG investing came to a reckoning | Financial Times

Effective Governance

Transcript of EP145 – ESG: Useful concept or greenwashing w/ Rachel Baird and Stephen Howell, Effective Governance

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  00:01

Coming up on Economics Explored…

Rachel Baird  00:04

We don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; you know, there’s movements about green steel. We don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing.

Gene Tunny  00:22

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 based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 145 on ESG, short for Environmental, Social, and Governance.

According to Investopedia, ESG criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly. But ESG is proving difficult for companies to implement in practice, and some have been accused of greenwashing.

What exactly is ESG? And has it come to the end of its useful life, as the Financial Times has suggested may be the case? Joining me to discuss ESG this episode, are some highly experienced corporate governance experts, Dr. Rachel Baird and Steven Howe, of effective governance, part of HopgoodGanim lawyers. Both Stephen and Rachel advise boards on ESG matters. And Rachel is currently facilitating the law and sustainability short course delivered in partnership between Pearson and Oxford University.

In this episode, you’ll learn about how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts, pushing their own agendas. In the show notes, you can find relevant links, corrections and clarifications. You’ll also find details of how you can get in touch with any questions, comments, or suggestions.

Please let me know what you think about this episode. And if there are any topics you’d like me to cover on the show. I’d love to hear from you. Right now, for my conversation with Rachel Baird and Steven Hale from effective governance on ESG. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Rachel Baird and Steven Howell from effective governance part of Hobgood Ghanem Lawyers, welcome to the program.

Rachel Baird  02:26

Thanks. Great to be here.

Stephen Howell 

Yeah. Great to be here, Gene.

Gene Tunny  02:29

Yes, it’s good to have you back on again, Steven. We chatted about corporate governance a while back and I reached out to you because I’m interested in this issue of ESG. And you mentioned that Rachel is an expert on ESG. So, I thought, that’s great. Let’s bring her into the conversation. So, Rachel, it’s good to have you.

Stephen Howell  02:51

It’s good, Gene, because, in our practice, we recognize the importance of the Australian; ESG is not just Rachel’s area of practice, she does right across the governance advisory work, but she does have an interest in ESG. So, that was one of the main reasons that we brought Rachel into the business to assist us with that. Because of the increased activity, particularly from boards.

Gene Tunny  03:21

Right. Okay. I’ll be interested to hear about that. Rachel, could you just tell us a bit about your background? When I spoke with Stephen last time, I learned a bit about Stephens background at ASIC and, and before that, in the Police force. I’d be interested in your background; you’ve been in the law, haven’t you?

Rachel Baird  03:43

I have, but I actually started my legal career in the defense force. So, Stephen and I share that; we come from, I guess, regulatory backgrounds, which is good for governance. And I was a lawyer in the Airforce and decided that I needed to have more challenges and got out into the masters of environmental law. And that led to practice at Clayton Newts, which was great; big law firm, lots of exciting work. And then, children came along and I ended up doing academic work and did my PhD in International Environmental law with Gillian Triggs, who was a great supervisor. And I’ve always had this very strong interest in ESG. And even in the late 1990s, that corporate social responsibility concept was starting to take seed. In a way, I feel like I’ve written this wave where environment wasn’t accounted for on the financial pledges, and now it’s very firmly on the board table conversation. And I’m really excited about that. And obviously, of course, social as well, and we’ll unpack that acronym soon. But yeah, I have a strong sort of academic and practical background in environmental social issues. I’ve worked on big oil and gas projects, I’ve been exposed to the social impact, I have done large projects as well.

Gene Tunny  05:02

Right, okay; very good. Let’s get started.

Rachel, would you be able to tell us what ESG is exactly? You mentioned corporate social responsibility; is this a successor to that concept? What is it exactly?

Rachel Baird  05:20

You could say it is. I guess to start with, it obviously means something, because there’re some estimates that, by 2025, around US 53 trillion dollars, will be held in ESG assets, whatever that could be. And it’s a very nebulous term. And I think it’s an acronym with a huge remit. And, I could be cynical and say that it’s like, avocado on toast, or soya balls; it’s the big fad. But I don’t want to be that cynical, because ESG is very, very important. But you can trace its roots back; I think the first time it was mentioned was 1999, the UN came out and they were more forward looking. And they talked about this global compact where they wanted big business and banks and government to be part of a social conscience. And so, there was a report that came out of that global compact, called Who Cares Wins. I guess that was by James Bond,

Gene Tunny  06:23

Yes, yes, very good.

Rachel Baird  06:27

So, Who Cares Wins, and buried in this report was a statement that said, “better inclusion of environment, social and corporate governance factors in investment decisions from there and its use.” Well, that was the statement, sorry; “better inclusion of environment, social and corporate governance factors and investment decisions would lead to better outcomes.” But from there, its use really grew in investment decisions and investment circles. So, for a long time, it was spoken about in investment circles. And I think that’s borne out by a lot of the standards about, climate change related disclosures, financial disclosures, you know; are there climate change related risks or litigations that are going to impact the financial bottom line of a corporation? But gradually, it sorts of crept out of the investment circle.

So, in 2005, there was a UN report that linked ESG factors to financial performance, and that was increasingly being recognized. So, it wasn’t just nice to have that, it was actually proving its worth looking at environmental issues, social issues, and corporate governance, decision governance issues.

Gene Tunny  07:37

So, what was this report, again?

Rachel Baird  07:39

In 2005, the UN report, I’m sorry, I don’t have…

Gene Tunny  07:43

That’s okay. But they were making the case that it does improve financial performance.

Rachel Baird  07:49

And I think that’s been accepted. Well, and truly now, with 17 years later, there’s a definite link between improving your environmental and social and corporate governance factors. I mean, Stephen…

Stephen Howell  08:01

I think it links back to good, or highly effective governance processes and procedures in place. We know from other reports, we know from a lot of research that’s been done, we know from our own businesses, and our own business activity, that, investment decisions often relate to good governance practices within corporations. Investors will look for those good practices; investors will be turned off by those bad practices.

So, good, solid governance frameworks, good processes in place, good controls in place, having the right people with the right skills sitting around board tables, having the right people with the right skills, in the executive teams making those decisions, always attracts investors and investors nowadays will go out of their way to seek out good companies to invest in based on their governance practices. And that’s what Rachel was saying. By having; investors will now look towards those organizations that have good ESG practices in place.

Gene Tunny  09:37

Yeah, they mean to have a closer look at those types of studies because the skeptical economist is going to wonder, to what extent is the correlation rather than causation? or to what extent is it; is it the fact that it’s something else? I mean, it’s the fact that these companies are better run, they’ve got all of these other processes and then they adopt ESG because they like to have that suite of policies and procedures and it may not necessarily be ESG that’s improving their performance. It’s the fact that they’re well run in the first place.

Stephen Howell  10:12

Some really game commentators will talk about percentages of increase in performance levels, based on good governance practice. I think that’s a bit dangerous to do that. Because, it sends the wrong message. And but, I think a lot of it, Gene, is also based around government policy, particularly around particularly the regulators; we’ve got a lot of regulators in this country, we talk about ASIC, our company regulated when we got our pro rail, prudential regulator, we’ve got the ACNC, charities regulator, and all those regulators always talk about the; sorry, not so much, talk about they articulate the level of scrutiny of companies that aren’t abiding by good governance practice. And they will highlight the fact that they need to have the people that are able to make the right decisions. The people that have the background and experience. It’s a big push from regulators at the moment to ensure that directors and executives for that matter, have the right skill, they’re the right people to make decisions that are going to affect shareholders, stakeholders, consumers.

Rachel Baird  11:47

I think economists can be encouraged by the fact that the term ESG started in investment circles, okay? So, it’s earned its chops so to speak, because it’s proven that it relates to a better financial performance. But it’s true that the better organized you are; the better your governance structure is, the better equipped you are to take advantage of opportunities. Some people talk about ESG is a risk, but it’s an opportunity. So, if you’ve got a really well operating organization, then you can go; let’s take advantage of the opportunities that an environmental and social strategy provide us. So, if you just look at environmental, and we’re talking about this before, it’s becoming a requirement of government tenders to show that you’ve got an ESG strategy.

If you don’t, you’re straightaway cutting yourself out of those opportunities to get the government work. We also know with our young workforce, the millennials entering the workforce, they want an organization that’s aligned to their values.

A research shows that employees want to work for companies that have a strong environmental and social moral license, whatever that means. But then you’re going to have more engaged employees, you’re going to have theoretically lower attrition rate, a higher discretionary effort. There’s also benefits to your bottom line where you’re operating more efficient processes; there’s a lot of economic benefits to be gained. And I used to say to my environmental law students years ago, when we get very idealistic, and they go, why does environmental social issues; why do they always lose out to the Big E economy? And I’d say, it’s time will come when it will have a financial value and I think that time has come.

For the ASX 200 companies would not be involved in ESG because it’s voluntary in Australia still. If there wasn’t a financial benefit to doing it, because they still at the end of the day, have shareholders to be responsible.

Gene Tunny  13:46

Okay. I mean, it’d be good to explore that a bit later. And to what extent they’re doing it because it is of economic value, or to what extent is it just for PR, or is it so called greenwashing, that sort of thing? So, we can we can chat about that? There are a couple of things I want to pick up on what you’ve said.

It’s ESG; and you mentioned the statement relates to environment. Is it society or social? Social issues and then corporate governance. So, to create the ESG abbreviation, they’ve dropped the C because ESG sounds better than ESCG, presumably. So yeah, that makes sense. Environment, social, and corporate governance. What typically are these issues; what are the big ESG issues, Rachel?

Rachel Baird  14:37

Okay. Well, before I go to that, I’ll just talk a bit about how I think the term can be misused or misappropriated. So sometimes it’s used for investment analysis and a lot even more and ASIC has made some comments that we can talk about later. Some say we’re ESG friendly, whatever that means. It can also be used from a risk management point of view, opportunity point of view; it can be used in what I call corporate social responsibility context, which is really values-based or morals-based. And then it can also be just its trend, like the vibe of people want to go to the movie, the castle, it’s the vibe.

So, I do sometimes get a bit cranky that people misuse the term or bandied around and don’t know what it means because it’s complex. And so, when people get, I just want an ESG strategy as well, I want one piece. What do you really want from your strategy? And it goes down to what your business is.

So, short climate change, greenhouse gas emissions reductions, sea level rising, they’re huge, big-ticket items, from a global point of view. But your local florist is not going to have much of an impact on that. What does ESG mean to them? So, then you have to really translate it to them and go, well, what are your environment impacts? Are they waste to energy use transport suppliers? What are your social impacts? What’s your supply chain? Are you employing staff properly? There’ll be micro level but, to them, don’t make a difference. And then also, what’s your what’s your governance impact? So, a florist who’s running a chain of florists might say, well, how governance impacts or compliance or decision making policies about employment or whatever they are, but you relate it to the florist.

But then if I move to say, a suite of health, transport operations, they would have completely different E, S and G issues. I guess, there’s no one size fits all, you can’t just roll out a roadmap or a playbook to a company and say, we’ve got your ESG sorted, because it will depend on their level of maturity, where they are in the businesses; some businesses might be so broken that until they get their governance framework sorted, people throw around diversity is a governance issue. Yes, it is. But if you if your governance framework is so broken, I can’t even talk to you about diversity until you get the governance framework working.

I’m working with an organization at the moment, who going on; we need women on the board, we need women on the board. I said, yes, you do. But governance is not static, it’s dynamic – it’s a journey. So, let’s sort out your basic hygiene first and your policies. And then you can talk about diversity on the board. And I think with ESG, people try and promise too much, as in, over promise and under deliver. And I think they really need to be realistic and going, what can we actually deliver? And that goes to greenwashing which we’ll talk about but don’t over promise and under deliver because that’s greenwashing territory.

Stephen Howell  17:34

I think it’s really interesting, Gene, with the activity that we’re seeing, at the moment. Yes, ESG is a big issue. But some of the questions that were being asked, as you know, in my role as the Principal Advisor for effective governance, I spend probably about 95% of my time working directly with boards. And the questions that I get asked all the time by boards is, those questions that you’ve posed today, what is ESG? How do we deal with it? Should we be dealing with it at board level? Should we be just ensuring that we’ve got the right people with the right skills in the management team? Or do we need people on the board? And if we do need people on the board with those skills, where do we get those people from? How’s that going to affect our business? How do we report on that? So, they’re asking all the right questions.

I’m talking about boards in the listed area, in the unlisted area, the public companies, even governments, of course. You know we do a lot of work with government and corporations, and we do a lot of work with charities, which is really interesting; the big charities around Australia. And they are asking those questions, because that’s going to improve their governance footprint, if you like. Particularly when they’re talking to funding bodies, about how they might be operating the hospitals, that we do a lot of work in the hospital; health sectors. in working imagine the ESG implications for within hospitals.

Rachel Baird  19:29

I was just going to say charities are; they’re going to have the biggest impact on the SRP – ESG. Because their whole purpose; their purpose driven for social impact and social change. So that’s where we’re going to see a lot of a lot of good work.

Gene Tunny  19:46

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

Female speaker  19:51

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Gene Tunny  20:20

Now back to the show.

So, one of the criticisms of, I think it’s a criticism of ESG, or maybe it’s a criticism of the whole sort of woke concept in the States, particularly is that there’s this concern by some commentators, particularly on the right, that companies such as Disney, and well, I think Netflix has pushed back on it recently, we chat about Netflix, perhaps. But other companies, Nike, they’ve gone, so woke, so to speak, and that they’ve embraced particular sort of positions. They’re promoting diversity. And I mean, I think diversity is great. But it looks like they’re taking political positions. To some extent they might be; Disney will be changing traditionally, male characters into female characters. There’s a huge debate about all of this. And that, I mean, there’s an argument that it’s gone too far. I’m just wondering to what extent is what you’re seeing in the States, I don’t know, maybe it’s a bit of a beat up? I don’t know. You’ve seen similar things in Australia? Is this something you’re concerned about?

Rachel Baird  21:34

Yeah, it’s really good question. And before I get to that, Steven mentioned something about the boards asking lots of questions. There’s a real dearth in ESG talent. Okay? So, what I worry about and it goes to your question, is there’s not enough people who have the skills to talk about this in an informed and intelligent way. So, and we can’t just call someone a sustainability officer, okay. So that they are so if you’re sticking someone in a big multinational and saying, drive sustainability, if they’re a young generation person, they might drive it from a me too lens because that’s all they know. Or if they’re a greeny who; I shouldn’t say greeny. It’s not in a pejorative sense. But if there’s someone who recycles and, and it has zero waste and doesn’t use plastic and all that, they’re going to drive it from an environmental sense. So, you’ve got to be really careful about what the corporate strategy is.

So, Nike, for example, their purpose is people, planet, profit. And so, they are going to go out and make comments about; and a lot of companies go people, planet, profit, because the planet is environment, people are social and profit is still their shareholders. Like I said before, there is the risk that the term gets misappropriated to drive different agendas. So for example, if we’re going to say that we’re going to have more animated characters – female because there’s been a dearth, and it’s been to male, that goes to gender diversity and social. But is that really part of ESG? Is that really the roots of ESG? And that’s where; you could be debating about that the whole time. But it probably has lost its way. And there’s a really interesting article that I’ve got with me, written by an American academic, where she out of the Wharton School, University of Pennsylvania, and it’s a really good one. It’s called the Origins and Consequences of the ESG moniker by Elizabeth Pullman. And it explores how the term evolved and has been appropriated.

Gene Tunny  23:29

Okay, I might put that in the show notes. I’ll have a read of that. Okay. Good stuff.

Rachel Baird 

I’ll send you the link

Stephen Howell  23:35

From the Institute of Law and Economics, Gene.

Gene Tunny  23:39

Oh, good. Excellent. So, another thing I wanted to chat about was, you mentioned the younger cohorts. I mean, we’ve got, millennials have come into the workforce. And now, we’re getting what came after Millennials or Gen Zs; they’re coming in.

Rachel Baird  23:58

I forgotten I’m a Gen X. I’m just sandwiched between the baby boomers who spend my inheritance and my children who inherit it.

Gene Tunny  24:05

Yeah, same here. But I remember when I first entered the workforce, I mean, I don’t think anyone cared what I thought about. I wouldn’t have been presumptuous enough to try and change the culture of the, the organization of the company. I don’t know. But yeah, it’s extraordinary. It’s become an issue in the States because I think, it was Netflix; there were some employees at Netflix who complained about the Dave Chappelle special. I don’t know if you’re aware of that. Or was it, Josh Dave Chappelle the comedian and Ricky Gervais has had a controversial special on recently, and whether they’ll make comments that upset some of the people working because the people in the organizations think that they’re not respectful of the rights of marginalized groups or whether it’s gays or whether it’s trans people. And yes, there was some pushback internally, and then Netflix, I think, put out a memo that said, ultimately, we have to make the business; the business has to work, and we have to produce content people want. Just settle down people, was basically what they were saying. I thought that was interesting, because ultimately, these companies have to make money. They do have an obligation to shareholders, don’t they?

So, how do companies balance these considerations? Because the traditional economists view and what Milton Friedman argued, in that infamous Newsweek article in the early 70s, was that companies just owe an obligation to their shareholders. And so, they’ve just got to maximize profits. That’s what they do. They should abide by the law, but they shouldn’t go beyond that and do much more for the environmental social issues, and that they should just maximize profits. That’s how they’ll maximize well-being.

But is that right? That companies still owe an obligation to shareholders, don’t they? And how do they balance all of these things?

Rachel Baird  26:04

It’s a double-edged sword because this new phrase of stakeholder capitalism has been gaining traction. And then it’s, well, how long is a piece of string? Because shareholders are stakeholders, but so are the community that you operate in. So, if you’re operating in a developing country, they’re stakeholders. So are your employees, so are your suppliers, so is the government. So, how do you keep all of those stakeholders happy? It’s a huge balancing job. And I think the key is to be really strong on what your strategy is, so that you’re not doing what I call the 24/7 news cycle, knee jerk reaction, that if someone says something, you go; I’ll be better put out a press release to keep them happy. The board goes back to its strategy and goes, well, look, we can’t keep everybody happy all the time. But our strategy is this, we’re happy with it, we’ve deliberated on it, we in a moment of quiet deliberation, we agree this was our strategy. So why in a moment of crisis, would we deviate from our strategy and make some kind of knee jerk comment? A bit like I guess, if you want to say cricket, Australia, when they handle the Tim Payne thing, stick to your strategy.

Gene Tunny  27:18

Can you elaborate on that?

Rachel Baird  27:20

I don’t know a lot about it. But I just think that they probably acted in the heat of the moment when they decided to part ways with Tim Payne rather than sticking to; and again, I wasn’t in the boardroom, sticking to a strategy and going, we don’t need to feed the 24/7 news cycle, we can take a moment, we can issue a press release that talks about strategy. So, the Netflix one sounds like they’ve done something where they’ve gone no, this is our pathway. We’re not going to keep everyone happy, but as long as we’re not being egregious, we’re being socially and environmentally, sustainable and responsible. We’re not going to apologize for who we are. I think that’s where boards are the second guessing themselves a bit trying to think well, we just got to keep; so I think really, Cricket Australia was trying to stay on the right side of the me-too movement. But if you ever try and stay on the right side of a movement, you’re never going to be on the right side of it.

Gene Tunny  28:13

Gotcha. So, Tim Payne was an Australian cricketer. And I’m trying to remember the circumstances; did he have an affair with someone who was working at Cricket Australia?

Rachel Baird  28:21

I think there’s something about that incident, messages exchanged or something. Okay, even the facts aren’t really relevant. It was I was more raising my eyebrow about how it was managed.

Gene Tunny  28:33

Right. Okay. I’ll put some links in the show notes. Can’t remember the facts.

Rachel Baird  28:39

And he was ultimately stood down as captain of Australia for something he did several years ago.

Stephen Howell 

Several years prior.

Gene Tunny  28:46

Right. Okay. I’m interested in the companies that are asking for this. You talked about a wide variety of companies; there’re public companies, but what about private companies where the owners have a strong control over the operations of the company? I can see why charities would want something like this because they’re trying to achieve some social purpose. But what if you’re an Elon Musk or something; actually that’s not a good example, because these companies are public, aren’t they? But he’s been trying to privatized Twitter, but what about private companies? Are they immune from this or they’re not? Do they want ESG as well? what’s driving…

Stephen Howell  29:33

They might not want it now, but particularly, I always think about the private companies being some of the big building corporations, some of the big builders that are building not just homes;

Rachel Baird  29:51

We’re getting commercial work that needs to comply;

Stephen Howell  29:55

They need to comply. Yeah. It’s really interesting. Yes, the private companies are going to be involved as well.

Rachel Baird  30:05

They’re slower, they’re definitely slower than public companies. And I’m seeing in Europe because I’m, I’m involved in this course that’s run by Oxford University. But I’m employed by Pearson, I’m not allowed to say I’m employed by Oxford University even though I teach the university course. And I’m seeing talking to all my students who are from all around the world, that I mean, environmental law really started in Europe anyway, and those streets ahead of Australia, and we’ve been following the lead of the Europeans. And the private companies are jumping on and realizing they have to comply with ESG requirements as much for their customers, their employees, and also to be competitive, definitely. They might not have the stakeholders who are shareholders, but I’ve got all the other stakeholders.

Gene Tunny  30:55

Okay, so this is something that will you mentioned, the younger, potential employees, it’s something that they care about that if you want to get the best people, you need to show that you’ve got ESG. Right? That’s interesting.

Rachel Baird  31:11

You’ve got everything, so you care about your staff, you’ve got good leave programs. You do waste recycling, and you give them leave days to do like, say, a law firm, pro bono, or whatever it is. You’ve got a social conscience, what does that mean? it’s defining it for the firm. Like you said, when you join the workforce, it was just you just turn up and work and do what you’re told. But now it’s like, I know, I want to have a work life balance, but I also want value in the work I do.

The worst thing my son told me was, I don’t want to grow up and be like you because you just leave the house and you look sad, and you go to work, and you come back and you’re tired. I really do enjoy my work when I’m at work. But they seem to think there’s a utopia out there in the workplace. I don’t know; it is still works.

Gene Tunny  32:02

Yeah. Well, ultimately, if you’re in business, you need to make money, you need to make a profit to keep going. just with this regulatory requirement or this requirement intenders, that you need to demonstrate your ESG credentials. I know for government that’s right; is it also corporations that are pushing this on their suppliers as well? Are they pushing for ESG?

Rachel Baird  32:32

It’s becoming more evident. I was talking to a very large company, I won’t say what industry they’re in, or it might be easy to pick them. But they found out dealing with other commercial providers that they were needing to show that they had an ESG strategy. If you think of it as like a food chain or supply chain. If they’re tendering for work, they needed to be able to demonstrate that the suppliers that they deal with how socially responsible. So, it goes up that whole ecosystem.

Gene Tunny  33:08

Gotcha. Yeah. Okay.

Stephen Howell  33:11

Also Gene, as I mentioned earlier, the push; there’s a significant push from government and regulators, and my experience is that when there’s a push from government, when there’s a push from regulators, boards and corporations will take note because they need to take note; because government and regulators don’t have a heightened scrutiny in particular areas for no reason. They do it based on  what’s driving that, and it’s normally driven by shareholders, the people, those investors and the general public who want to see higher levels of  ethics and responsibility in organizations. So, that’s what’s normally drives it.

And so, boards and organizations will take note of what the regulators have to say and as we were saying earlier about the; yesterday, ASIC made a press release in respect to that whole issue of what’s described as greenwashing. particularly Australians, the Australian Securities and Investments Commission, and, who are responsible for Australian or most of Australians companies.

It’s interesting that they targeted superannuation funds and managed funds. There’s a similar push from the corporate ring at the prudential regulator, ASIC being the corporate regulator; APRA, the Australian Prudential Regulation Authority, being the prudential regulator, the ones that the regulator looks after the financial institutions. Being, of course, some of the super funds and managed banks and insurance companies. And, in fact, I was only talking to a life insurance company this morning, one of their clients along the similar lines about skills that are needed in particular areas, and this particular area came up.

It’s all about what the regulator is saying, what ASIC is saying is that, these firms need to be very careful about how they represent their financial products, or their investment strategy. Particularly around being environmentally friendly, sustainable and ethical. If they market their products as being ethical and sustainable and environmentally friendly, they need to be able to show that that’s in fact, correct.

What ASIC is saying today is, these promoters need to use clear labels and they need to clearly define what sustainability terminology they’re using, they need to define that. What does that actually mean?  This product will help maintain a sustainable, organization or product. But unless you properly describe it, it doesn’t make much sense, and clearly explain how sustainability considerations affected in to the investment strategy. How does that all work? How do you actually factor all that into any investment strategy?

They made it clear; the regulators made it clear that it’s what they call it a priority area of focus. And they’re going to be looking at it and monitoring the market.. And they specifically highlighted that any misleading claims about ESG and sustainability will come under their notice. What I’ve seen of recent times, Gene, is how the regulators making these sorts of comments about monitoring, and about how they’re going to be, really watching the market clearly. So, it’s not just ASIC, it’s APRA, and it’s the ACNC – the charities regulator,

Rachel Baird  37:54

Even the securities [exchange] ASX has come out and said, companies should check their sustainability claims. But what’s interesting is I think, this comes off the back of litigation. So, Australia is a bit of a hothouse of litigation. But in America, there is a shoe wear company called Allbirds. And they manufacture wool; they’re called slippers, but they’re not slippers. They are like soft linen, sunlight pleasure shoes, and their statement was that their wool was sustainably sourced. Now somebody in New York who had a lot of time on their hands delved into that and challenged that in a New York court and found that their wool wasn’t sustainably sourced or their statement was greenwashing. And I think everyone in Silicon Valley was wearing Allbirds shoes.

But then in Australia, we’ve had Santos; there was a federal court claim made by the Australasian Centre for corporate responsibility, alleging that they engaged in misleading and deceptive conduct saying that they would produce clean energy and had a clear pathway to net zero emissions. So that was what I mean about over promising because, they were tested and then the Commonwealth Bank, a shareholder, must have been a large individual shareholder, made a claim in a federal court, and they ordered that he be given access to documents in the bank’s premises to, I guess, scrutinize the bank’s decision to finance oil and gas projects. So, more and more claims are being challenged to be verified the accuracy of those claims. And so, as Steven mentioned, the ASIC information sheet that just came out, came off the back of ASIC’s own review. They just looked at a sample of superannuation funds and found there were some areas for improvement.

We’re not at the stage yet, as the UK and New Zealand where they have actually; the government has mandated there’s got to be disclosures of financial related climate change, material risks or material disclosures. We are not there yet. But I think the change of government, they’re probably testing the mood of the public. I don’t think we’re that far away from some kind of mandatory reporting or tighter scrutiny. And the ASIC guideline is enough to put every single ASX company on notice to go. We can’t be cavalier anymore about ESG and greenwashing and just say, those terrible shows you see where you have marketers ago, just put that out that will do. This can’t happen anymore because it will be scrutinized.

Gene Tunny  40:38

I better make sure I understand what the actual requirements are now. Is it under the Corporations Act and other countries would have, I mean, the UK would have a Companies Act? And the US has got some legislation for corporations, but companies are supposed to look after the interests of shareholders or obligation to shareholders. I guess we’ll talk about Australia, given you’re working in this jurisdiction? What are the requirements for reporting on environmental and social and governance issues at the moment? They don’t have any, do they?

Rachel Baird  41:09

Directors have a responsibility to exchange due diligence in relation to climate change.

Gene Tunny  41:13

Due diligence in relation to climate change? That’s included in the corporations act, is it?

Rachel Baird  41:20

There’s no requirement to produce an ESG report, for example. There is a preference from shareholders, that any such report was integrated with the financial report, because a lot of companies are doing standalone reports, but there’s no requirement to do; just a financial disclosure report, is all that’s required.

Stephen Howell  41:39

So, directors just generally have a duty of care and diligence. Like, that’s one of the fundamental wrong to govern, with due care and diligence in the interests of the organization. I just think that we really do need to; I will be advising my clients to be very careful about how they label and explain any of their products, because any misinformation that will erode investor’s confidence in the Australian markets, is going to be looked at very, very closely by the regulators, and by the market supervisor, the ASX.

Gene Tunny  42:33

Yeah, I have to look into that provision about climate change, because I’m going to be the skeptical economist again. Because, the government saying you’ve got to give due diligence, or you’ve got to pay attention to climate change. But what’s wrong with a company just abiding by the law? And if there’s no carbon price imposed? What do you do? I mean, how do you know what to do? I mean,  what if you do too much, and that adversely affects your company and the viability of your company? I mean, you’ve got employees, what if it affects our competitiveness relative to other countries?

Anyway, I know, these are big questions, and we can’t answer them today. But it just strikes me as just over the top to have that in the act at the moment.

Rachel Baird  43:21

It relates to financial disclosures. So, you’re obligated to make financial disclosures, material risks of climate change might be material risk. You’re not obliged to make non-financial disclosures. Does that makes sense?

Gene Tunny  43:34

It’s not imposing an obligation to do anything in a positive sense, to get to net zero? I misunderstood what you are saying.

Rachel Baird  43:43

There’s no obligation. And again, I don’t have it right in front of me, but I know that there’s been talk about; I wish I could remember the name of it. But some kind of safety mechanism, it might be called the safeguard system for over 200 Children 21 large emitters in Australia, those companies to help them transition. So even if there is something that comes in, there’ll be a recognition that you can’t require, say AGL for example, or Santos to suddenly pivot and stop emitting greenhouse gases, because otherwise we’d all be sitting around in the dark.

There’s got to be that pragmatism that we want to move to; not just net zero but just reducing our footprint waste use. Food waste is one of the worst contributors of carbon emissions and people don’t even talk about food waste. So, there’s all sorts of ways we can reduce our carbon emissions.

Stephen Howell  44:47

I saw a great thing, talking about food waste; I saw a great innovation just recently, one of our colleagues showed us, was in here in Brisbane or around and all the public hospitals, you can only just imagine the food waste within public hospital systems. And it all traditionally just gets delivered out to a waste disposal facility somewhere. What they’ve been doing is there’s a company been gathering all waste food up and turning it into fertilizer and putting it into carryback packaging and selling it as fertilizer. It’s just amazing. Rather than take it all the way and dispose of it, turn it into something that’s going to be useful and, and making money out of it as well. So, turning it into fertilizer

Gene Tunny  45:45

That’s useful, particularly because the price of fertilizer has been spiking, hasn’t it because the cost of the inputs;

Stephen Howell  45:54

I thought that was a very innovative, sort of a process; deal with what would otherwise be a total waste of product.

Rachel Baird  46:05

And that reminds me like ESG, you can take it really, really high and say okay, what’s Wesfarmers doing about ESG? Or you can take it really, really low and say what’s Rachel doing about ESG so in where I live, I can have my little worm farm and my little recycling compost thing and I cannot use plastic; that’s the thing, it’s such a huge term that can go across all these layers of human activity.

So, if your listeners, I’d encourage them to say well, what can you do to ensure you don’t have a net zero? Some of my students at Oxford are talking about an individual passport, so when you buy something you get to choose, you might go and the product actually has a little ESG rating like the heart smart or the energy rating you can go I’m choosing that loaf of bread because it has a lower carbon footprint. Yeah, and that goes onto my little smartwatch and I can show everyone that my carbon footprint, kind of gamify which the young people would like but we’re not there yet.

Gene Tunny  47:02

Just as long as this doesn’t end up going to some government agency…

…We’re going to have to start wrapping up. This is a good conversation.

Stephen Howell  47:29

Isn’t it the smallest garbage bin you’ve ever seen in your entire life, Gene?,

Rachel Baird  47:34

Does that makes you rethink? That’s the bin in our office.

Gene Tunny  47:37

It’s slightly bigger than a Rubik’s Cube.

Stephen Howell  47:46

That’s what I was thinking. It’s the size of a Rubik’s Cube.

Gene Tunny  47:49

Yeah, that’s tiny. I was just going to ask you about Wesfarmers; that owns, is it Coles? One of the major…

Rachel Baird  47:57

I think they’ve diverted from Coles, they did okay. Bunnings and Officeworks.

Gene Tunny  48:03

Right. Okay, so they’ve got some retail businesses in Australia.

Rachel Baird  48:07

And then, they got the chemicals part in their fertilizers partners, WesCEF.

Gene Tunny  48:12

I know that at least one of the major supermarket chains is trying to have it all of its energy, renewable energy, by some date, and I think they’ve signed some agreement with the clean energy company here in Queensland, if I remember correctly, I’ll try and find some information about that.

Rachel Baird  48:29

That’s really smart because you’re going to get customer loyalty. So, a lot of my friends who don’t work in law at all, but they ring me up and they say, oh, shop here, because that’s an environmentally friendly company. I don’t always take it on face value. I like to investigate and make sure they actually are. But it’s a great PR tool if you’re accurate. If you’re not accurate, you could be in front of the court.

Gene Tunny  48:52

That will cost you …I mean, if you’re making bold claims, like Volkswagen years ago, I mean, they got into trouble for what they were alleging about emissions, didn’t they? They were doctoring or they were manipulating their test results on the diesel engines, okay.

 I’ll just ask you finally, about this article that Stephen and I both found independently, it was published in the Financial Times, and then it was picked up by the Australian Financial Review; how ESG investing came to a reckoning. This is the sort of thing you expect to see in the Financial Times – very good paper. The term ESG is less than two decades old, but it may already be coming to the end of its useful life. Have you had a look at that article at all, Rachel? And any thoughts on that?

Rachel Baird  49:48

I did. Steven, do you want to start?

Stephen Howell  49:49

I think that’s just a way; what I read into that, Gene was that it was a way to, once again, highlight ESG, to say, it’s been around for a long time, we haven’t really sort of made too much of a movement. But really, we have. This what I read into it that it was a way to heighten the level of understanding of ESG. I don’t agree with that comment that it’s not going to be around, I think it’s going to be around for a long, long, long time. And it may even change shape in some way. But I think, from the way I look at it, Gene, from a governance perspective. And as a forensic accountant coming out in me, looking at the evidence and looking at the impact that ESG will have from a governance point of view, I just think it’s just that another level of good governance practice.

Gene Tunny  51:06

Okay.

Stephen Howell  51:07

That’s the way I’d describe it.

Gene Tunny  51:09

Yeah. I just thought I’d ask because this article is getting shared around a lot, and particularly by economists, who say, I’ve been saying this all along.

Rachel Baird  51:18

That’s interesting, because a couple of weeks ago, there was a Financial Times conference, where a very senior banker at a bank whose name escapes me, made a comment about how those hysteria carry on and it’s the same as like Y2K, and I think he got stood down, didn’t really test the waters. So, this might be the Financial Times way of saying, it’s a movement that’s come and gone. I think it’s not, there’s so much to do, like, we don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; there’s movements about green steel, we don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing. And every time we have a decision to reduce our impact, we don’t know what the trigger is for more impact.

This is not why we’re here and we’re aware. I mean, we can say that we’ve evolved as a species. And going back to my polar exploration, when mankind, because it was men first started exploring, they just left their rubbish in Antarctica, that didn’t take it back, right? So it’s taken years and years to clear those rubbish dumps from Antarctica, because it doesn’t degrade, right? There’s nothing to degrade it. So, we’ve just evolved as a species to understand that we can’t just keep polluting our environment, and keep abusing our people. That’s not going to go anywhere.

Gene Tunny  52:47

Yeah. And that’s why we have regulations and laws.

Stephen Howell  52:54

It’s like that concept, Gene, that I’ve been sort of, looking at closely recently about the consequences of decision making. And, the decisions that you make in respect to whatever the issue might be, what are the consequences? What are the likely consequences into the future? And so, we’re talking here about, ESG and environmental issues, what are the consequences, many decisions that we make in respect to our environment. The consequences of the decisions that we make in respect to the social impact within Australia and also corporate governance issues. I think you might be aware, I just said, there’s a fabulous book that I’m reading at the moment called Leadership by Algorithm.

Gene Tunny  53:45

Yes, my mother bought it for my birthday based on your recommendation.

Stephen Howell  53:57

It’s written by Professor David de Cremer. It’s all about artificial intelligence, but he does talk a lot about the consequences of your decision making. And he relates it to real life stories. It’s really interesting stuff.

Gene Tunny  54:16

I’m going to read it. It does look great. And I’ll see if I can get him on the program.

Stephen Howell  54:26

I think it’d be great to; he told a fabulous; I went to a conference that he spoke at, he related that to a to a decision that was made by the Singapore government, in respect to the COVID app.

Gene Tunny  54:49

Yeah.

Stephen Howell  54:52

And the COVID app in respect to identifying where people might be at any point at the time, so that they could be tested, etc. And then what happened there in Singapore is that the Singapore government then decided to go one step further and use the information for law enforcement. I am sure it happens in other jurisdictions as well. But it was only the Singapore government got caught. I’m sure we got closer in Australia, there might be something similar. It’s interesting, isn’t it? We think that okay, the government is going to do this for us, to help us, but we had no idea that we’re going to move further and use it for war enforcement purposes.

Gene Tunny  55:44

Yeah, okay. I just thought I’d bring up that FT article, because it has been shared around a lot. And I’ll put a link in the show notes, unfortunately, as paywalled, though, but anyway, I’d recommend getting a subscription to the FT if you don’t already have one, if you’re if you’re listening. I just what I did want to point out was that, one of the factors is this war in Ukraine, which is arguably making it more difficult for companies to meet ESG goals. I’ll just read this out before we wrap up.

On top of the allegations of greenwashing at the industry’s highest levels, there is the impact of Russia’s invasion of Ukraine, which is forcing companies investors and governments to wrestle with developments that at times appear to pit, the E, the S and the G against one another. For example, governments in Europe are reneging on environmental goals by turning to fossil fuels to reduce dependence on Russian gas in order to fulfil ethical goals because they don’t want to buy it from the Russians. They’ve got someone who’s a managing partner at Lombard od air is it? I probably mispronounced that.

The war in Ukraine is an incredible challenge for the world of ESG says Hubert Keller. This conflict is forcing the questions; what is ESG investing? Does it really work? And can we afford it? And that’s what we’ve been talking about today, Rachel.

Rachel Baird  57:07

I know; what it goes to that whole social issue, if you really want to take the high moral ground and the UN’s involved, and we’re not political. I’m not being political. But if you’re saying what Russia is doing in Ukraine is hugely immoral socially, because of the civilian casualties? Then that’s highlighting a failing of the whole international community to try and do something for social good. And I mean, I know you can’t just stop the war because you can’t take action against Russia, because then you’d have world war three. But you can see how ESG can just apply to any conversation, right? So don’t think it’s failing. I think it’s just showing how complex it is. Because there’s so many levers and there’s so much human interaction.

Gene Tunny  57:50

Exactly. And there are tradeoffs. And I mean, this is what economists would say. And ultimately, the companies have to be sustainable financially, so they can keep people employed, they can keep operating, and so if you can do these other things, and then that’s great, but fundamentally, that’s what they need to do. They need to produce products that people want to consume.

Rachel, we should wrap up. Any final words, I mean, anything you’d like to say anything you’d like to push back on anything? If you want to push back on anything I’ve said? Or if you’ve got other points you did want to make that haven’t been made, then please make them now.

Rachel Baird  58:27

No, I think what I’d like to; if your listeners if there’s anyone out there go, where do we start on this ESG journey? Is to just get the right advice from the right people who actually have the right credentials. Because there is a lot of; there’s a vacuum, we need skills on ESG, and the vacuum has been filled, and it’s not being filled equally, if you know what I mean. So, if you want to start embarking on this journey, or you want to have a critical conversation on ESG, do some reading yourself first, but then really test the credentials of the people that you’re talking to. Because you can’t afford to make a misstep on this now that we’ve got the heightened scrutiny by regulators and also stakeholders, which are not just shareholders on what you’re doing. So, I guess, I get a bit cynical that there’s the people who suddenly go, Hey, I’m an ESG expert, and I’m going, yesterday, you were, like a corporate lawyer. You can’t just be an ESG expert overnight. So, people please, look for someone who knows what they are.

Gene Tunny  59:26

So, you need the experience?

Rachel Baird 

I think you do.

Gene Tunny 

Do you need specific training?

Rachel Baird  59:30

Not necessarily. I’m talking to some people at the moment who are experts in greenhouse gas emissions measurements, right. So, it’s a huge ecosystem of talent from environmental scientists to accountants, who are forensic accountants to lawyers to bankers, so pick the person for the problem you’ve got at the time. So, it’s not particularly credentials, just matching. So don’t think you’re going to get one person to solve your whole ESG problem. It won’t happen

Gene Tunny  59:59

Okay.

Stephen Howell  1:00:02

That’s why we have an expert in Rachel.

Gene Tunny  1:00:06

I’ll put links to effective governance out of the hub good Ganon. Lawyers here in headquartered in Brisbane, but you work or live in Australia, you probably work internationally as well.

Rachel Baird  1:00:19

Yeah. I’ve practiced in most, a lot of different states in Australia, because we have environmental law, is state based, is Commonwealth based, it’s international. Again, you’ve got to understand how they operate. It’s quite complex.

Gene Tunny  1:00:35

I have to come back to environmental law. There’s so much of our law that’s driven by these international agreements and rams are and all of that, but that’s a topic for another time.

Okay. Rachel Baird and Steven Howell from Effective Governance; I’ve really enjoyed this conversation. Thanks so much for your time and your great insights. Really appreciate it.

Stephen Howell  1:00:59

Always great to be with you.

Gene Tunny  1:01:01

Thanks, Stephen.

Rachel Baird  1:01:03

Thanks, I really appreciate the chance to talk about something that I’m passionate about.

Gene Tunny  1:01:08 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to EP145 guests Rachel Baird and Stephen Howell, to the show’s audio engineer Josh Crotts for his assistance in producing the episode, and to Peter Oke for editing the transcript. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

The virtues of the free market w/ David Bahnsen – EP132

Renowned US financial advisor, author, and podcaster David Bahnsen argues the best way to defend human flourishing against dangerous economic thinking is to relearn time-tested economic truths. David talks about his new book There’s No Free Lunch: 250 Economic Truths with show host Gene Tunny. David and Gene also talk about David’s previous books on the crisis of responsibility afflicting our societies, Elizabeth Warren’s economic policies, and investing in a post-crisis world.

You can listen to the conversation using the embedded player below or via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps.

About this episode’s guest – David Bahnsen

David L. Bahnsen is Founder, Managing Partner, and Chief Investment Officer of the Bahnsen Group. He oversees the management of over $3.5 billion in client assets. Prior to launching The Bahnsen Group, he spent eight years as a Managing Director at Morgan Stanley and six years as a Vice President at UBS. He is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times (2016-2021).

David’ Bahnsen’s 2021 book There’s No Free Lunch: 250 Economic Truths.

Relevant links and a transcript are below.

Links relevant to the conversation

David Bahnsen’s previous books:

Elizabeth Warren: How Her Presidency Would Destroy the Middle Class and the American Dream

The Case for Dividend Growth: Investing in a Post-Crisis World

Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It

David’s podcasts:

Capital Record

The Dividend Cafe

Radio Free California

Other relevant links:

The Great Debate: Edmund Burke, Thomas Paine, and the Birth of Right and Left by Yuval Levin

Edmund Burke (1729 – 1797)

Transcript of EP132 – The virtues of the free market w/ David Bahnsen

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  00:01

Coming up on Economics Explored.

David Bahnsen  00:04

There’s no question that whether one accepts my religious assumptions or not, that the free market properly aligns incentives better than the Marxist or central planning, collectivist vision for society that strips away incentives and does not provide the framework for best serving a customer by meeting human needs.

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 based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 132, featuring a conversation with economist and investment manager, David Bahnsen. about his new book, There’s No Free Lunch: 250 Economic Truths. We also talk about his previous books on Elizabeth Warren, his approach to investing, and what he calls the crisis of responsibility.

David is the founder, managing partner, and chief investment officer of the Bahnsen Group, a US national private wealth management firm, with offices in Newport Beach, New York City, Nashville, and Minneapolis, managing over $3.5 billion in client assets. David is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times. He is a frequent guest on Fox News, Fox Business, CNBC and Bloomberg. And he’s a regular contributor to National Review.

Please check out the show notes for links to materials mentioned in this episode, and for any clarifications. One that I know that I need to make relates to the statesman Edmund Burke, who I shifted forward in time by a century. Silly me. You can find the show notes via your podcasting app. And please check out our website, Economics Explored, where I’ll post a transcript of the conversation as soon as I can. That’s economicsexplored.com. If you sign up as an email subscriber, you can download my recent e-book, Top 10 Insights from Economics. Please consider getting on the mailing list. If you have any questions, comments or suggestions, please either record them in a message via SpeakPipe – see the link in the show notes – or email me via contact@economicsexplored.com. Righto, now for my conversation with David Bahnsen, Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. David Bahnsen, founder, managing partner and chief investment officer of the Bahnsen Group, welcome to the programme.

David Bahnsen  02:53

Well, good to be with you. Thanks for having me.

Gene Tunny  02:56

Oh, it’s a pleasure, David. I’ve come across your work recently. A mutual acquaintance of ours, Darren Brady Nelson, mentioned you to me and I’ve been reading your great books, There’s No Free Lunch: 250 Economic Truths. You had a book on Elizabeth Warren, the Democratic presidential candidate, how her presidency would destroy the middle class and the American dream. And you’ve got a couple of others.  I’m really keen to chat with you about your views on economics. You’re someone who has had a very successful career as an investor. And you credit that partly to your understanding of economics, so yeah, really keen to understand your views on economics as someone who’s really proven the relevance and the importance of economics. First, I’d like to ask, with your book, There’s No Free Lunch: 250 Economic Truths, what was your guiding principle for selecting those economic truths? How did you go about it? And what do you think of the major truths, David?

David Bahnsen  04:01

Well, I tried to divide the book up compartmentally by categories, and I start with the belief that economics is about human beings, and not fundamentally a mathematical science or a political science. And so out of the social realities of mankind, if we’re to understand economics out of that truth, then it forces us to discover or inquire what we believe about mankind. And what we know about the human person can then inform us more about economics, if we believe in the premise that economics is the study of human action.

I believe distinctly anthropological truths about mankind, about how he was made, about the characteristics he was made with. And those beliefs serve as a kind of starting point to what I believe about what we consider economics. And so you then go on to certain a priori assumptions that there is scarcity in the world. And economics becomes the study of how humans act around the allocation of scarcity, their scarce resources. And so I’m very convinced that most people are trying to get their economic opinions out of their political beliefs, instead of getting a lot of their political beliefs out of their economic worldview, and particularly in certain policy assumptions. And so the policy beliefs and biases and so forth, I think need to be informed by a coherent economic worldview. And that’s what I’m trying to provide in the book.

And for a lot of people, I think that the book will serve as a reinforcement of things that they instinctively believe, but there may be an impulse to some of these free market assumptions, but not necessarily rooted in a deeper belief system. And that’s what I’m trying to point people back to is those foundational beliefs that can help inform a comprehensive understanding of economics.

Gene Tunny  06:32

Yeah. Look, I found that fascinating. That was something I really found valuable about your book. I mean, you reference great thinkers in economics, such as Adam Smith and Hayek, and Mises. What I really liked was your commentary as well.  You’ve got great quotes. And then you’ve also got your commentary. And one of the things you wrote, I found very profound. I want to make sure I fully understand it, because I’m not a deeply religious person.  I think I know what you’re saying here. But I want to make sure I understand it. You wrote that, “Our case is not that mankind’s fall is suspended when he transacts in the marketplace, it is that the marketplace best tames are fallen nature. The fallen nature, is this what you’re talking about with understanding where we’re coming from, people fundamentally? But is that a religious concept or is it a psychological concept? Could you explain what you’re driving at in that passage, please, David?

David Bahnsen  07:35

Yeah, it’s entirely religious. It is entirely theological. And yet, I’m perfectly content for someone to interpret it only psychologically. But the underlying teleological meaning of it, the purpose is rooted in a belief that mankind does not come in the world perfect. Mankind comes in a world where they fall in moral nature. And this is, to me, the fundamental divide between most political divisions, philosophical divisions, and I also believe economic, is if we believe that mankind is fundamentally good, and then can be corrupted by injustices amongst race or class or gender, things like that, or those who believe that mankind comes in what we in the Christian tradition refer to as the doctrine of original sin, and that we want institutions, family, communities, church, synagogue, the marketplace, to provide a sort of moral formation, and that mankind cannot become perfected. The great socialist and utopian vision is rooted in a belief that mankind can become perfectible. And this is against my own religious assumption.

But the economic relevance to it is that we are trying to solve for a system of social organisation that recognises certain assumptions. And one of my assumptions is not only the imperfectibility of mankind, but also that mankind is created in a certain way, and that that creation that I am asserting involves mankind’s rationality, their reasonability, that there is both a physical, material, and a spiritual dimension. And so those things end up having significant economic implications, because I reject the belief that our need in forming economic policy is to merely meet the material needs of mankind, to give them some sort of water and food and sustenance and call it a day. I believe that mankind has that material dimension, and that to ignore it is wrong. But I believe that they also have a dignity, that mankind is superior to the animal kingdom, intellectually, morally, their use of rational faculties, their use of self-interest, and their capacity for problem solving. But fundamentally, as moral beings, mankind is capable of doing right or wrong and is accountable for doing right or wrong. This ends up inviting non-material dimension into economic wellbeing.

And so because I believe work is the verb of economics, is a line I use at the end of the book, I reject the Marxian notion that work is dehumanising. I think work is dignifying. But why do I care if mankind is dignified or not, let alone if work as an instrument for doing such? Well, I care because I view mankind as created in the image of God. And that’s a religious belief. That’s a theological belief. And if I didn’t believe that, I would believe something different about economics. And so my rejection of a Darwinian view of economics, my embrace of a Burkean notion that there is a moral dimension to how we cooperate in society, these things are rooted in some of these worldview assumptions that I don’t know how I can escape their religious nature.

Gene Tunny  11:40

Okay. Yeah.  Burke, you mean Edmund Burke, the Anglo Irish statesman from the late 19th century?

David Bahnsen  11:50

That’s right. I guess sometimes doing American interviews I take for granted, because I consider Burke America’s foremost political philosopher, but of course globally, his name and reputation would maybe have a different context. But Burke, really known, much like Adam Smith as the Scotsman was a sort of religious or moral philosopher with great economic relevance in classical economics, and Burke was a political philosopher, but again, who brought a sort of moral dimension to his work.

Gene Tunny  12:25

Yes. I’ve been reading this great book, The Great Debate by Yuval Levine or Levin. I’m trying to remember. I might put a link in the show notes as well as links to your books, because Burke, he was involved in that great debate about what’s the goal of politic or what’s the best way to run society, and you don’t want to go and radically transform things, because there might be a reason that your institutions are the way they are in the first place. And so you have to be very careful with meddling.

I just want to chat more about this fallen nature idea. Is this related to the concept of self-interest? The great thing about the market is that it takes advantage of people’s self-interest. There’s a famous quote of Adam Smith, about how we rely on the baker for our meals and on the candlestick maker for the candles, not out of any social concern they have, but out of their concern for their self-interest. I think I’ve butchered that quite. But that’s the basic idea. Is that the idea, so it’s taking advantage of that and getting the incentives right? And if you’re in, say, what you had in the Soviet Union, then all those incentives are the wrong way. To get something for yourself, you don’t necessarily have to create value for another person. And that’s the great thing about the market. It’s that mutual exchange, that you’re creating value for the other person, for them to pay you. That’s roughly on the right track, is it?

David Bahnsen  14:12

Well, I think those things are all very consistent with the assumption, but one of the things that I’m doing from the worldview I’m speaking, which is different than the way Ayn Rand as an objectivist would approach it, and in fact, many secular economists. Secular economists would describe it descriptively, that descriptively one can do better for themselves by serving their customer better. And Adam Smith’s allusion to reference to that self-interest is what they’re referencing. And it’s almost indisputable. It’s the way the world works.

But what I’m adding is the prescriptive, not merely the descriptive, not just that you will do better by serving your neighbour better, but that you ought to serve your neighbour better, and that in so doing, we cultivate more trust in society. Commercial transactions are entirely dependent on trust. And so they’re not merely in micro transactions like the brewer or baker a candlestick maker with a customer. But on a macro level, the greater sense of moral sentiment in the society, which, of course, was Adam Smith’s other book, we couple these two coexisting realities of human nature together, which is mankind rationally working in their own self-interest, providing for their family, and at the same time, their need and requirement to have that sort of moral capacity of service. And so I think that Burke referred to this as enlightened self-interest. And I believe it is the ideal for what I’m after in a framework of economics.

There’s no question that, whether one accepts my religious assumptions or not, that the free market properly aligns incentives better than the Marxist or central planning, collectivist vision for society that strips away incentives, and does not provide the framework for best serving a customer by meeting human needs, providing goods or services that we believe people care about. But I do believe one can make an argument – and I think that this is the straw man that a lot of socialists today are arguing against – that if you don’t care about the moral wellbeing of society in your economic worldview, and that all you’re saying is that pragmatically your wellbeing will be best served the more you serve your neighbour, all we have to do is find a case where that isn’t true, and it would be okay. And most certainly, it sometimes isn’t true, because as long as you can get away with it, cooking the books can help you and hurt your neighbour. And again, you have to be able to get away with it. But a lot of people can get away with fraud, a lot of people can get away with theft.

This Darwinian view that is more driven by the best outcome for oneself, and only relies on serving others as a mere pragmatic supplemental convenience to the process, I think it falls apart in reality, because we apart from that framework that still honours service to others, then one loses the kind of holistic nature that has been the traditional case for free markets. And I would argue more or less that the outcome, that when we look at the great fruits of poverty alleviation and human flourishing that’s come out of free markets, we have never been in need of divorcing that from a moral framework. In fact, it requires a moral and a legal framework, rule of law, enforcement or private property. These are all concepts that have roots in the very 10 commandments of themselves. Coveting what someone else has is sort of the heart of Marxism. And believing in protection of private property is the heart of what we call capitalism. And yet those are moral commandments. Thou shalt not steal, Thou shalt not covet.  

I think that that synthesis between the moral nature of markets and the aspirational vision of society and the self-interest that Adam Smith talks about are entirely consistent, and in fact, not only consistent, but they’re optimised. They work best in conjunction with one another. They each work with one hand tied behind their back apart from the other.

Gene Tunny  19:22

That’s great, David. It’s given me a lot to think about, because maybe I’ve approached economics too much as a technical field, and I need to think more about the philosophy. I really value your thoughts in helping me think more philosophically about it, so that’s great. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  19:55

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Gene Tunny  20:24

Now back to the show. I might move on to your book about Elizabeth Warren. I guess this follows on from some of the points you’ve made. Now, you’ve written that her presidency would destroy the middle class and the American dream. She’s not president, but there’s some of those ideas, they’re out there, and they could be picked up in the future, whether by maybe AOC one day if she ends up very senior position, in a position of power.

One thing that I’m wondering is, how do you think about the balance between market and state? There needs to be some role for government. And there are countries that seem to be doing relatively well with a more interventionist state, such as the Scandinavian countries, Australia to an extent. One major difference between Australia and the United States is that we have what you would call a single-payer health care system. And that is reasonably popular. Well, I think it’s very popular. No opposition party, nowadays they would no longer campaign against it. Once upon a time they did. Political parties would campaign against it. It’s widely accepted. How do you make that balance? And what do you think is so bad about policies just to inject a little bit of what you might call socialism into the system to try and make the political system more stable? How do you think about that?

David Bahnsen  22:02

I haven’t seen an example yet of where a little bit of socialism brings more stability to the political system. I don’t recall there being anything in my Elizabeth Warren book that I would take back or rewrite or don’t still believe. But I confess, it strikes me as a little less relevant because of the implosion of her candidacy, as it pertains to her. But as you say, people like AOC, Bernie Sanders, they’re meeting hard left figures in many other countries besides my own. She just happened to be a failed political candidate that I wrote a book about that became obsolete very quickly, because her candidacy imploded. But there does still seem to be some persistence in the idea of a Green New Deal, a wealth tax, forgiveness of student debt for all. And to the extent these ideas persist in the United States, or in other countries, they remain horrifically bad ideas, even if they’re not connected to the name of Elizabeth Warren anymore.

Now, with that said, when you ask why not just a little bit of socialism to come in and kind of maybe temper things a bit, we hear that expression a lot, to sort of smooth out the rough edges of capitalism. And I love the analogy, because it always sort of implies that capitalism is like a bowl of soup, and it can get a little bit too hot, and if you just add a little cool water on top – and that cool water, in this case, is the loving, all-competent arm of the federal government – then we can cool down the soup a little bit, still get a good warm bowl, and enjoy it and have it feed our appetite, but not scalding hot, burn our mouths. And of course, frameworks of thought and of governance and political and economic philosophies don’t work like a bowl of soup.

I am a Hayekian to the core. Friedrich Hayek told us why that can’t work, that the central planner, whether they’re coming in to do a lot, or whatever it is, a little – I would, by the way, debate the idea that they are ever content to do a little. But even apart from the very reality of slippery slope, there is the knowledge problem. And there is the incentive problem.

The reason why I cannot ask Washington DC to come in and smooth out transactions between me and another economic actor that would freely transact with me in business is that the government has no chance of having the knowledge and the time and place circumstances necessary to be a party in a transaction between me and another person. And the reason why I can’t ask the government to come in and smooth out the rough edges of two free human beings voluntarily transacting with one another is because the government can’t possibly have the incentives. They don’t have skin in the game. They don’t hurt economically if it goes poorly, and they don’t benefit economically if it goes well. It’s none of their damn business.

The government’s intervention on a macro level into the affairs of society must always be limited to its role in protection of private property, settlement of civil disputes, this very rare but nevertheless important function of a civil magistrate. The Warrens and Sanderses and AOCs of the world would have the government take on a role of a central planner. And the Keynesian vision of economics is that the government can play a role on a macro basis in smoothing the difficulties of a business cycle. But of course, my belief is that such interventions not only likely don’t solve the problem they seek to solve, but they inevitably create two new problems. And so the reason for rejection of that vision of government’s role in economic affairs is that I believe that government lacks the knowledge to transact or to have planning jurisdiction over transactions in a free economy.

Gene Tunny  26:36

Fair point. And, yeah, the whole slippery slope thing, potentially there is there is some sort of slippery slope, because the government just keeps ever expanding. And one of the problems we’ve got here in Australia now is that the government’s committed to having what we call a national disability insurance scheme, which is essentially trying to provide a level of care for disabled people, but the definition of that’s expanded a lot and the costs are blowing out. It’s a big challenge. You still got a little bit more time, David, or you got to –

David Bahnsen  27:08

Yeah, I’m okay. Go ahead.

Gene Tunny  27:09

Good one. Excellent. I’d like to ask, you’re also a host of a podcast, Radio Free California, is that right?

David Bahnsen  27:19

That’s one of my podcasts, yes.

Gene Tunny  27:23

Oh, you’ve got another. Great.

David Bahnsen  27:25

Capital Record is my podcast focused on free market, economics, defence of free enterprise, defence of capital markets. And I host. It’s a National Review podcast called Capitol Record. But Radio Free California is a more political podcast that focuses on the dysfunctions in the great state of California where I was born and raised and have lived most of the last 48 years.

Gene Tunny  27:53

Yeah. Could I ask, what’s your take on, just how bad are things in California for business at the moment?  I’ve chatted about this with Dan Mitchell. And Dan pointed out just how many people and businesses are leaving. Is this something that you’ve thought about, or are you concerned about the policy settings for business in California?

David Bahnsen  28:16

Of course I’m concerned. Anybody who cares about the preservation of one of the largest economic bodies in the world, and obviously the largest economic body within the United States, should be concerned. I hear a lot from the political and economic left that they care about the middle class. Yet it sure seems that they are perfectly happy with a policy framework that hollows out the middle class. And a state like California is case in point, where very wealthy people can live in California quite comfortably, and very poor people might be fans of the welfare state or what have you, but there is a kind of middle ground by which policies, school systems, crime becomes very, very unpleasant. And California seems to me to be ground zero for this laboratory of America, what we call blue state policies. And that’s what our efforts are primarily focused on is exposing the folly of blue state policies. And then as Dan Mitchell and others have well documented, it is leading to an incredible migration of mostly middle-class people out of the state of California to go to more business-friendly environments. And I think it’s a tragedy.

Gene Tunny  29:53

One of your other books is Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It. Now, what I found great about that book is you had a really interesting take on the financial crisis. I knew the basic facts, but I hadn’t thought about it in that way. But you argued that there was a failure of moral responsibility in a way, when people were simply walking away from houses where they had negative equity, which I found a really interesting take. And am I getting that right? Am I remembering that correctly?

David Bahnsen  30:39

You’re absolutely getting that right. And that, I would argue, was one of many moral failings in the financial crisis. But it was conveniently the one that was entirely ignored in the narrative. Ultimately, the desire for many of us on the right to put blame with the government, with Fannie Mae, Freddie Mac, the Federal Reserve, we were willing to look past Main Street’s faults, and the desire of those on the left to blame greed of Wall Street, of the banks, various familiar bad guys in their societal narrative, they were willing to look past the iniquities of Main Street. And I think it was entirely absurd set of stories told us about the financial crisis that chose to ignore Main Street’s culpability. And you reference those with negative equity. There’s simply no question that in the end, the pile on of foreclosures, and what really represented this purging of bad investment, that then had the domino effect into the overly levered credit and financial system. What the initial dominoes were to tipping that over-levered credit system over was the fact that people stopped making house payments when they were upside down on their houses.

And so although I would argue the very first act of moral culpability that led to the crisis was people’s Keeping Up with the Joneses mentality, and irresponsibility, and taking on a commitment they couldn’t keep, the lack of necessary protective equity in their home, dishonesty about their own income documentation. There are a whole lot of things that went into this game that was being played, that many people played well for a lot of years, until the music stopped playing. And when the music stopped playing, this house of cards fell.

And my book was attempting to say, I know what Wall Street did wrong, and I know what the government did wrong. But it is simply untrue that Main Street did nothing wrong, and in fact, that Main Street is a victim of this whole thing. That’s the way the story was being told. And I feel like five years later, my book has done a good job in telling the story that needed to be told about the financial crisis.

Gene Tunny  33:25

What do you see as the solution? Is there a solution? I think you’re right, in that there is a problem that that people are reluctant to take responsibility. I think you’ve you have diagnosed a problem. How do we solve this, David? Is there a solution to it?

David Bahnsen  33:49

Well, I think that the book goes into a whole lot of ideas. If I remember correctly, 10 of them are written to the individual person and sort of micro suggestions for a reaffirmation of personal responsibility, and 10 or macro, more of a policy level. I have a critique of the college student loan system, a critique of how we go about thinking about housing in our society.

Fundamentally, if you’ll allow me to go back to the kind of prior conversation about the religious and moral framework of a society, if people can get away with irresponsibly borrowing to buy a home and then walking away unscathed, if people get away with it without any moral compass, I don’t know why they wouldn’t keep doing it. But my belief is that fundamentally, we need a kind of restoration of basic cultural norms. This was really the whole point of the book, that people should be ashamed of what they did, but it isn’t just that they did it. It’s that they were proud of it, that other people congratulated them. Look how smart you are. You pulled one over on your bank. They could brag about it on Friday night with their friends, rather than being ashamed of the fact that they failed in their responsibility.

Paying back debts that one owes is the hallmark of a civilised person. And I think that we desperately need to restore the kind of traditional value system that would never tolerate someone being a degenerate and being so incapable of basic… I’m not referring to people in extreme hardship. We’ve always had that. We always want ways to help those who have genuinely run into very difficult times. But the notion of just simply being able to run away willy-nilly from things, heads, I win, tails, I don’t lose, this is no way to manage a society.

Gene Tunny  36:04

That’s another great example of a book where you’re thinking… Maybe economists wouldn’t normally think about these issues. I’d recommend that as well. Also, you’ve got a book on the case for dividend growth, and this relates to your investing. And I’ve just started that, but the way I’m interpreting it is you’re emphasising look for stocks with good dividends and don’t necessarily buy into all of the fantasies about you’ve got these stocks which will just grow ridiculous amounts in the future, the big tech stocks. I take it that that’s the general view in that book. Is that fair, David? Is that your philosophy in investing is looking for good earning stocks, good earning companies?

David Bahnsen  36:59

Well, dividends are simply what one is doing with good earnings. There are plenty of companies that don’t pay dividends that have wonderful earnings. But our belief is that not only do you want really good earnings, you want confirmation of the earnings, the legitimacy of them and the repeatability of them, and the growth of them, that is validated through the dividend payment to the shareholder. The dividend payment becomes a mechanical benefit. You’re monetizing your investment risk as you go. If you’re reinvesting those dividends, you’re constantly averaging and compounding your return. If you’re withdrawing the dividend for income, you’re satisfying a cash flow need, so that there are mechanical benefits to dividends. But then fundamentally, they represent proof of the profits and earnings of the company, and a vote from management in their own confidence about the sustainability of those earnings. And so dividends are just as much a benefit as they are a signal. And we want both and. That’s our view of dividend growth investing from a risk-adjusted standpoint, producing a much smoother result for investors over time.

Gene Tunny  38:22

Good stuff. Finally, David, I’d like to ask you about Alex P. Keaton, who you’ve identified as a role model. I remember watching Family Ties in the ‘80s here in Australia, and Alex was certainly someone who was very notable. What was it that you found inspirational, or I guess what did you learn from Alex? What are your thoughts on –

David Bahnsen  38:58

Just as a very young kid, I… Here there was this contrarian character on a sitcom on American television that was focused on ambition, on goals, on patriotism. He had a certain love of America, a love of self-determination. And so there was a lot of comedy associated with it and lightheartedness. And yet, at the same time, he was a character who just sort of had a personality that was similar to my own quirky personality as a young person. It’s many years ago now. It’s true, Alex P. Keaton and that character on Family Ties was a big part of my childhood.

Gene Tunny  39:53

Okay. Very good. Yeah. I think there’s a photo of you on your website as a young lad. You’re dressed as Alex P. Keaton or dressed in that –

David Bahnsen  40:04

This is true. I think I was probably nine or 10 years old. That’s correct.

Gene Tunny  40:09

Very good. Okay, excellent. David, this has been terrific. Are there any final points that you’d like to make, any thoughts on your book? Anything that you think it’d be important for us to take out of it?

David Bahnsen  40:24

I appreciate the time. I appreciate your thoughtful questions. There’s No Free Lunch: 250 Economic Truths, and it’s really intended to give people a little something to think about around the different major categories of economic thought.

Gene Tunny  40:38

Okay, thanks heaps, David, I’ll put links to your website and your books in the show notes. David Bahnsen, managing partner of the Bahnsen Group. Thanks so much for your time. Really appreciate it.

David Bahnsen  40:52

Thanks for having me, Gene. Really enjoyed it.

Gene Tunny  40:55 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to EP132 guest David Bahnsen and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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EP103 – Ayn Rand, Self-esteem, and Three Minute Therapy with Dr Michael Edelstein

In Economics Explored Episode 103, Dr Michael Edelstein explains why Ayn Rand’s concept of self-esteem is unreasonable and unhelpful. Program host Gene Tunny asks Michael to explain his Three Minute Therapy approach, which is solidly based in Rational Emotive Behavior Therapy (REBT).  

About Dr Michael Edelstein

Michael R. Edelstein, Ph.D., has an in-person and telephone therapy practice in San Francisco. He is the author of Three Minute Therapy, a self-help book for overcoming common emotional and behavioral problems, for which he has been awarded Author of the Year. The book was a Quality Paperback Book Club/Book-of-the-Month Club Selection, a Behavioral Sciences Book Service Book Club Selection, and an Albert Ellis Institute Selection. His 2009 book, Stage Fright, includes interviews with Robin Williams, Jason Alexander, Melissa Etheridge, Maya Angelou, and others, relating their personal experiences and wisdom in coping with performance anxiety.

Links relevant to the conversation

Michael’s website – http://threeminutetherapy.com/

Michael Edelstein – Why Ayn Rand’s Self Esteem is Unreasonable [Capitalism & Morality Seminar 2015] – https://www.youtube.com/watch?v=pMHFGfVnZQ0

‘Fountainhead’ a good read beneath the controversy http://brandeishoot.com/2012/01/27/fountainhead-a-good-read-beneath-the-controversy/

William F. Buckley Jr. speaks with Charlie Rose about Ayn Rand’s Atlas Shrugged – https://youtu.be/5KmPLkiqnO8

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

EP88 – Evolutionary Economics with Brendan Markey-Towler

In Episode 88, Dr Brendan Markey-Towler returns to Economics Explored to speak with host Gene Tunny about the important insights of Evolutionary Economics, a sub-field of economics which owes a lot to Joseph Schumpeter’s perspective on economic growth emphasising creative destruction. Brendan is the co-author of the 2020 book Economics of the Fourth Industrial Revolution Internet, Artificial Intelligence and Blockchain, published by Routledge. He has a PhD in Economics from the University of Queensland.

Links relevant to the conversation

What is evolutionary economics – Brendan’s Medium article

Books with chapters on Schumpeter:

Grand Pursuit: The Story of Economic Genius

The Great Economists

The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers

Nelson and Winter’s 1982 classic:

An Evolutionary Theory of Economic Change

Veblen’s article:

Why is Economics not an Evolutionary Science?

Please send through any questions, comments or suggestions to contact@economicsexplored.com and Gene will aim to address them in a future episode.

Joseph Schumpeter (1883-1950)
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