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Concorde’s economic lessons: a closer look – EP131

The British-French supersonic airplane Concorde soared through the skies at Mach 2 in the years 1976 to 2003. Its history illuminates several important economic and business lessons. Is a supersonic airplane simply uneconomic or will commercial passengers fly supersonic again? In Economics Explored episode 131, show host Gene Tunny and his fellow economist Arturo Espinoza Bocangel discuss.

British Airways Concorde aircraft

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A transcript and relevant links are below.

Transcript of EP131 – Concorde’s economic lesson: A closer look

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.

Arturo Espinoza Bocangel  00:04

In probably France and Britain, they wanted to show to the war that they are able to produce this kind of supersonic airlines.

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. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is Episode 131, a closer look at the Concorde. And joining me to chat about Concorde is Arturo Espinoza, research assistant at Adept Economics joining me for the first time. Arturo, great to have you on the show.

Arturo Espinoza Bocangel  00:50

How are you? I’m really glad to be here with you.

Gene Tunny  00:53

Excellent. Yes, Arturo, it’s good to have you on. Arturo, you’re an economist too. You’re helping me out with economic research on various projects. And you’ve previously worked in the trade ministry in Peru and you’ve got a master’s from University of Queensland in economics and you’ve also got a degree from the Catholic University in Lima, haven’t you?

Arturo Espinoza Bocangel  01:19

Yes, that’s right.

Gene Tunny  01:21

Excellent. Excellent. Yes, you’re well qualified to chat about economics, so pleased to have you on. Excellent. Why I’m looking at Concorde, Arturo, is because in a recent episode I did with Tim Hughes, who I occasionally chat with on the show – Tim’s not an economist, he’s providing the man on the street view of things – we talked about my top 10 insights of economics. And one of those insights was about sunk costs. One of the key lessons from economics is to ignore sunk costs. Bygones are bygones.

And in illustrating the sunk cost, what’s often called the sunk cost fallacy – the fact that people too often don’t ignore sunk costs, they throw good money after bad – an example that’s often given is Concorde, because it was colossally expensive to develop. And the British and French just kept throwing money at it, even after it looked like it wasn’t going to be a commercial proposition. Often, they talk about the Concorde fallacy.

Now, I mentioned this in the show, and Tim and I had a bit of a chat about it. And I said, look, I think Concorde was always going to be a difficult proposition. It’s probably something they shouldn’t have invested in just because of the economics of it. And then, in the conversation, it became clear that I probably needed to do a bit more research on what the underlying economics of Concorde were.

One of my listeners, so Todd, he wrote in and he sent me a passage from an article. Based on that it looks like the there are multiple issues affecting Concorde and the economics and viability of Concorde. This passage he sent me is, “Aviation regulations mandated that Concordes would have to fly more slowly overland to reduce sound disturbances over the ground. This hit French Concordes particularly hard after the post-9/11 dip in air travel. The already struggling birds were even less in demand and therefore less profitable.”

Okay, so I thought we could have a chat about Concorde and just all of the issues involved, because there are multiple issues. There’s regulations, there’s the actual operating costs, because of the cost of oil. There was the fact that there was the Air France crash in 2000 at Charles de Gaulle, where 113 people died. There are multiple issues with Concorde. Are you happy to get underway on the Concorde, Arturo?

Arturo Espinoza Bocangel  04:17

Of course, Gene. Given all those facts behind the Concorde operational activities, I think there is an important issue, which is an externality. When we talk about economics about externalities is when one activity transfer those calls to third parties. Those third parties, they are not involved in that activity. They must assume that cost. Definitely, if we talk about this case of Concorde, and the most important negative externality was related to the noisy. The takeoff of Concorde, very noisy. Also when this type of supersonic flies affected possibly private properties. For example, in USA they found that some properties were affected by Concorde flights in terms of broken windows.

Gene Tunny  05:24

Seriously?

Arturo Espinoza Bocangel  05:25

Yes, so that’s why at that moment USA government banned Concorde flights in between cities or inland. That’s why at that moment Concorde flights only focused on transatlantic flights between New York, Paris, and UK. That’s why I’ve seen behind that, it was a very important limitation for potential demand of Concorde flights or Concorde airliners. Definitely that was a huge impact on potential demand for Concorde airliners.

Gene Tunny  06:14

Yeah. There are those regulations which would prevent Concorde if it were still operating. Neither Air France nor British Airways, which were the two airlines operating Concorde, they haven’t operated Concorde since 2003. But there are regulations that would prevent inter-city flights across land. And so therefore, you are restricted. They were restricted to just those transatlantic flights, so from Heathrow or Charles de Gaulle in Paris, to JFK in New York City. That really meant that it just limited the scope of those Concorde operations. I think that’s a good point.

We might chat about what Concorde is, I just want to make sure that if you’re listening and you’re unfamiliar with Concorde… I’m guessing you probably know a little bit about it, because it’s such an iconic aircraft. It’s such a beautiful design, really sleek, and the delta wing, and that nose that… It’s like a beak, isn’t it, like the beak of a bird? I think they called it a droop nose, because it can move around. Depending on what stage of the flight you are, it will either be in the standard position or it will drop down. I think when they were coming into land, they would drop it down just to improve their visibility. It’s got an interesting nose there.

As you mentioned, it’s supersonic, so it can travel faster than the speed of sound. I think it actually travelled about two times the speed of sound, so at Mach two. It’s supersonic. When I was chatting with Tim, I said, “Oh, is it hypersonic?” No, it’s not hypersonic. Tim corrected me. It was supersonic. Supersonic is faster than the speed of sound, and hypersonic is five times the speed of sound, at least. I think there are some hypersonic missiles that have been developed that I’ve seen in the news reports.

It was a joint project. It was a joint venture in a way between the British and French governments. And the name for it came from an agreement that they reached in the early 1960s, I think. A treaty was signed on 29th of November, 1962. And so what you had was, this is something that came out of the 1950s. There were British and French companies that were investigating supersonic air travel. I think the Americans were looking at it too, but the British and French, they reached an agreement whereby there would be a joint project, because there was a British company that was looking at it, the British Aircraft Corporation, and that was being funded by the British government. They were providing funds for research and development by that British aircraft corporation. And there was also a French company, which was state-owned, Sud Aviation, which later became Aerospatiale. They were looking at it too. And so the two governments got together and decided to enter this joint venture for Concorde, whereby they would jointly develop this aircraft. They’d share the development costs. They would split the production of it across Britain and France with a view to creating jobs and all that. It was a British and French government project.

I would argue that this is a good example… There’s a few economic principles which come out of the whole Concorde experience. And we talked about the sunk cost fallacy, the fact you should ignore sunk costs. One principle, or close to a principle, I would argue, is that governments need to be very careful about going into business. Governments really shouldn’t be picking winners or picking projects. They should be doing the core business of government, national defence and the justice system, and arguably some assistance for health and education, rather than trying to develop a new supersonic aeroplane. When you’ve got governments making these decisions and funding R and D for this sort of thing,  it’s probably more likely it’s not going to be a commercial proposition, and it’s going to be a waste of money. That would be one thing, I would argue. Do you have any thoughts on that, Arturo?

Arturo Espinoza Bocangel  11:18

Of course, and that is an interesting point. In order to see what is the real scope of the government, definitely the government should focus on other issues that are more relevant for people, instead of promoting this kind of investment that, as we have seen, was a failure in terms of economic business perspective.

Gene Tunny  11:53

Who knows, maybe if things went right and the oil price didn’t increase three or four times over what it was previously after 1973, maybe the economics of the whole project would have been better and it could have been more of a mass market proposition. I think the problem that they ended up having was that it became a real niche product. It was really only wealthy people, pop stars and CEOs of Fortune 500 companies who could actually afford to fly on Concorde, as we can talk about later. I think tickets ended up being about, in today’s dollars, I think over 10,000 US dollars, really. Expensive tickets. You really have to have deep pockets. You have to be someone who really doesn’t care how much they’re spending or it’s just absolutely time critical that you need to get from New York to London or the other way or Paris to New York, you need to get there in three hours or so, because it could fly incredibly quickly.

Now, I think the figures I’ve seen is that, so this thing’s flying at basically two times the speed of sound, whereas a Boeing 747 flies at .84 times the speed of sound. It’s not supersonic. The Boeing 747 can fly about 900 kilometres an hour, whereas the Concorde could fly at 2,172 kilometres an hour. Just incredible. And at 60,000 feet too. Wouldn’t that be amazing to have been up that high?

And so it really ended up just becoming a transport option for the rich and famous in a way. One example of that, have you have you heard the story about the Live Aid concert and Phil Collins, how he used Concorde to fly from the Live Aid concert in London at Wembley Stadium? He performed at Wembley, and then he hopped on the Concorde. He got a chopper from Wembley to Heathrow Airport and hopped on the Concorde, and then got the Concorde to JFK, and then he ended up getting –

Arturo Espinoza Bocangel  14:32

Wow, that was tornadic. Wow.

Gene Tunny  14:35

It’s a huge logistical job. Where is it?

Arturo Espinoza Bocangel  14:38

Wow.

Gene Tunny 14:39

He took a British Airways Concorde flight to New York City before taking another helicopter to Philadelphia, just so he could perform at the stadium in Philadelphia, which I think might have been JFK Stadium in Philadelphia. That was in 1985, July 1985, so the big Live Aid concert for… I think it was to raise funds to help address or alleviate the suffering of people in famine in Ethiopia, if I remember correctly. That’s one of the famous examples of the use of the Concorde.

And another example of the sort of rich and famous, there’s a photo. And I’ll put a link to the article in the show notes, if you’re interested in seeing it and some other photos of the Concorde in operation. There’s a photo of Sting, the rockstar Sting, pouring a glass of champagne for Piers Morgan, so the noted media personality, editor of various newspapers that Rupert Murdoch owned. He was on Good Morning Britain. He’s doing something in Australia at the moment. I’m not entirely sure what. He’s anti-woke or he’s trying to cancel cancel culture, if I remember correctly. Big personality. He flew on a flight that they had in, I think it was late 2001. It was the first British Airways flight that they ran with Concorde after the crash at Charles de Gaulle in 2000.

There was a terrible crash when it was taking off from Paris, in the airport in Paris, and 113 people in total, so all of the passengers on the Concorde that had 100 passengers and nine crew. Then there are four people on the ground who were killed as well. Just an awful crash. There was an issue with the Concorde that meant that they had to sort of stop flying them for a while and just check that everything was okay and do some modifications to ensure that sort of thing didn’t happen again. And so what happened after that, you had that incident, and that means that fewer people want to fly on Concorde. I think that’s really what then led to both British Airways and Air France just not running Concorde again after 2003.

Concorde was launched in early 1976, in January 1976, and the final commercial flight was in October 2003. And it looks like what happened, so according to The Economist… The Economist did a good article on this in 2003, which I’ll link to in the show notes, although it may be paywalled. It looks like in 2003, they figured out that there was this cost associated with refitting the Concorde aircraft. A study commissioned by British Airways of the case for a 17 million pound refit of the supersonic aircraft showed the viability had ended with the turn-of-the-century stock market boom at the start of 2003. Airbus, the modern incarnation of the Anglo French manufacturing partnership that created Concorde, told Air France and BA, the aircraft’s only operators, it could no longer provide technical support for the aircraft at anything like a commercial price. Air France, which never made as much from Concorde as British Airways, stopped flying it in May. But BA said it would keep Concorde going into October simply to please its fans.

I think what they’re alluding to with the stock market boom is that after the share market crash in the early 2000s… In the late ‘90s you had the dot-com boom, and then there was a recession or a downturn in the early 2000s, associated with the dot-com crash in the US. And I think what they’re suggesting is that that meant that after that downturn, companies and wealthy people were less likely to splurge on a Concorde. And then there was the Air France crash, and that meant that not as many people were flying Concorde. That really just destroyed the viability of it on an ongoing basis.

Now, what I think’s interesting is that – and this is something I didn’t know until I had a closer look at Concorde for this episode – is that for a few years, Concorde was actually profitable for British Airways and Air France. It didn’t look like it was making huge amounts of money, but it was actually profitable from about the mid ‘80s and possibly up until that Air France crash. It wasn’t profitable for the governments that had invested in it originally because the cost of it just blew out massively. If we go back to the development costs of it, the cost of the British and French government’s ended up being, I think it was over one billion pounds before it even went into service. And in today’s dollars, that’s over 11 billion pounds, because it was reported as 11 billion in today’s dollars in – sorry, pounds, 11 billion pounds in today’s pounds, in 2003 by The Economist. That was 10 times what was budgeted for. The cost of it was just colossal.

It would never have been a commercial proposition if you tried to recover those R and D costs. But what happened was that the governments essentially wrote off those costs. After they’d already invested all this money, they basically let the company, so Air France and British Airways, buy the Concordes at a discounted price, so that they didn’t have to pay back or they didn’t have to pay for the cost of having the Concorde developed. The R and D costs of the Concorde weren’t actually included in the sale price of the Concordes, as far as I can tell.

What you’ve got as a situation where this huge R and D cost, it’s written off by the government. In a way, that’s the other side of the sunk cost proposition, that yes, this has already happened, this money’s already been spent. In a way, the Concorde is a gift from the governments of Britain and France to the aviation industry. It’s already developed. The technology is there. Then what matters for the aviation industry is can it make a profit with those Concorde planes as they are now? The aviation industry never had to make substantial enough profit to cover the original R and D costs, and so in that sense, Concorde was profitable for several years from the mid ‘80s.

It’s extraordinary. There was there was an AP, so an Associated Press report in 1986. Where is it? It’s basically saying that Concorde is an unexpected success, but it’s only unexpected or it’s only a success if you do ignore the fact that all of that billion pounds of research and development costs are written off, that you just accept that taxpayers aren’t going to get that money back. It ended up being an unexpected success for British Airways and Air France for a while, although not for the governments of Britain and France.

“Concorde, an unexpected success, marks 10th anniversary. London, 10 years after its detractors branded it as an enormous white elephant, the Concorde is the fastest, most luxurious, and to many the world’s most beautiful airliner. It makes money too. After years of losses and a $2.8 billion government development costs that has been almost completely written off, financial winds have turned in the plane’s favour. The Concorde brought a $17.3 million profit to British Airways last year, and a profit of 8.8 million to Air France in 1984. British Airways didn’t record profits from the Concorde until 1982, and Air France and until 1983.”

I found that quite interesting, and that was something that I wasn’t aware of. And I guess it sort of makes sense, because they wouldn’t have kept operating it for a couple of decades – because it did operate from 1976 to 2003 – they wouldn’t have done that if it wasn’t at least making a profit for those airlines. That sort of makes sense, but there’s no way in which the Concorde ever recovered the R and D costs that were paid for by the governments. Therefore, if you were back in the ‘60s looking at this project, and you’re in the British and French governments, and you had perfect foresight as to what would happen, you would have gone, “Okay, we’re going to stop spending money on this because we’re never going to recover and costs the blowing out. Let’s just cut our losses now.” Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  25:18

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Gene Tunny  25:47

Now back to the show. Does that all make sense, Arturo? Is there anything confusing there?

Arturo Espinoza Bocangel  25:54

It’s clear, everything about the factors behind unsuccessful operation of the Concorde. Perhaps the main objective of that project wasn’t to have the best economic successful in producing those airliners. I think probably France and Britain, they wanted to show to the world that they are able to produce this kind of supersonic airlines, that they had the best technology to share to the world. I think possibly that is another explanation and why they wanted to continue with operate.

Gene Tunny  26:48

That’s true. There’s that national prestige element involved. There was a cost-benefit analysis, a prospective cost-benefit analysis done in the early ‘70s before the Concorde was ever in operation. Do  you know that study? And I think the economist who did that, was it Woolley, he was arguing that okay, there’s actually a loss in economic terms to the governments of Britain and France from Concorde, of I think it was a negative 100-and-something million pounds, I’ll put a link in the show notes to the study so you can have a look at it if you’re interested. But he was arguing that okay, this means that the governments of Britain and France value these other elements, all these intangible elements of the Concorde project, which could include the national prestige, national pride, they value those elements as at least this much money.

And this is a point I made when I was chatting with Tim. This is a time when the great superpowers… The superpowers at the time were the US and the Soviet Union. And they were the ones who, they were in the space race. Britain and France were probably never going to get in the space race. Britain and France were once the great powers in the world, in the days of Nelson and Napoleon, the great powers in the… And I guess Spain as well. But yeah, France and in Britain were once great powers. And this could have been a way, they could have seen this as a way of getting back into that game. I think that’s a really good point.

I’m just trying to think what I should… Other things I should talk about, the operating costs of the Concorde. they did have higher operating costs per passenger than say 747. I think what I saw is that even though you’ve got 100 or so people on a Concorde versus more than 400, 400 to 500 on a Boeing 747, I think you need almost as much jet fuel. The cost per passenger per mile on a Concorde… There are some figures. There are various sources for figures. Wikipedia has got a great article on Concorde I’ll link to, and it has some figures in that. From what I can work out, Concorde had nearly twice the operating cost per passenger than a 747. It was never really going to be a mass market proposition.

I think certainly the oil shock in 1973 when the Arab nations restricted supply of oil… I think that was in response to the Yom Kippur War, where the Israelis pushed back the Arab invasion. And I think what happened was, because those higher oil prices meant that it was never going to be a mass market proposition, what you saw was that through the ‘70s, all the aircraft companies, the airliners that had previously expressed some interest in Concorde, other than Air France and British Airways, they just said, “Look, we’re no longer interested.” Partly that was because of higher oil prices. It could have been that they’re crunched the numbers and just worked out, we’re not going to make money on Concorde. The Boeing 747, it came out in I think it was 1969. And it was just such a great aeroplane. You could fit so many people on it. It’s just such a fantastic airline plane for international travel. And so I think they just worked out oh, look, Concorde’s not really going to work. Qantas here in Australia, I think it was looking at getting Concorde at one stage, but worked out it wasn’t gonna work. The only companies that ended up running it were Air France and British Airways.

Because of the higher operating costs, you needed to have a higher ticket price. And so you needed to appeal to those wealthy buyers. What I found, and this is something you notice too, Concorde, it was super quick, you’d save hours on your travel time, but it wasn’t a really luxurious experience, was it, flying Concorde, from what I could tell.

Arturo Espinoza Bocangel  31:50

Yes, that’s true. It was not comfy. I think due the design of the airliner, the people must be seated closely. It wasn’t too much comfortable to be there. I think that was one of the problems. You compare that airliners against Airbus or Boeing, those airliner offer you a better experience as a passenger?

Gene Tunny  32:26

Yes. I think I was reading that they didn’t even have enough room for on-flight movies. You’re really enclosed. You’re really close with other people. And in a way, that could be good, if you’ve got Paul McCartney or Sting or someone on the plane with you. That’s pretty special.

Arturo Espinoza Bocangel  32:48

Of course.

Gene Tunny  32:49

But otherwise, it wasn’the super comfortable. And I guess they tried to compensate for that by having the freely flowing champagne and caviar. But look, there’s only so much that only goes so far. If you’re on a business trip, you need to watch how much champagne you’re consuming. The combination of attributes that had only appealed to certain types of wealthy people. They might have wanted to impress or maybe they really did need to get – it was just absolutely time critical that they needed to get from London to New York or Paris to New York. And I think we’re talking about a really elite segment of the population. And then what happened was that after the Air France crash, a lot of those people decided well, okay, look, I’m not really sure I want to fly on the Concorde anymore.

That Economist article I mentioned before, it writes… In The Economist article it has, “In its heyday, Concorde typically flew three quarters full, earning BA about 20 million pounds in operating profits from 35,000 passengers a year. When it returned to service, paying over 8,000 pounds to fly supersonic had lost its appeal. BA could attract enough business for only one transatlantic flight a day, instead of the previous two. And even then, the aircraft was often carrying only a couple of dozen paying passengers.” You’ve got more than half your plane unfilled. Actually, three quarters of your plane if you’re only carrying –

Arturo Espinoza Bocangel  34:40

That is a loss.

Gene Tunny  34:41

“Extra seats were often filled by upgrading subsonic first-class and business-class customers. Delays and diversions due to bits falling off and engines faltering began to tarnish Concorde’s image and emphasise its age.” That’s part of the problem.

Apparently Concorde was quite fragile. And I saw one estimate that for every hour, it was every hour of flight time, it needed 18 hours of maintenance or something like that. It had this issue of needing all of this maintenance, and then they would have needed to have done a refurb of it, a refit in the early 2000s. British Airways and an Air France just looked at the numbers and thought, ah, that’s not gonna make any sense, so let’s just discontinue operations.

That’s a fascinating story. You’ve got this combination of the oil price, you’ve got a combination of it being… It wasn’t a mass market proposition. It had to become a niche, luxury proposition or for the business elite and the entertainment elite. Then that market was compromised by a downturn in the economy, people being less willing to splurge, and also the Air France crash, which hugely concerning. You really worry about Concorde.

Maybe if it was more mass market, if there was a larger number of Concordes in operation, maybe they could get more efficiencies in the operations of Concorde. They wouldn’t have the problems finding someone to service the Concordes. I just wonder if that would have meant that it would have been more viable if there were more of these planes. Certainly the British and French governments intended originally that there’d be many more Concordes in operation. I think they thought they’d be selling hundreds of these Concordes. I think I saw an estimate they were expecting by 1980, 350 or 400. I may have misremembered that, but I’ll try and put it in the show notes. And that cost-benefit analysis we saw, it had projections based on Concordes in the hundreds, whereas there are only ever 20 Concordes built, ever built. And only 14 of them were an operation. Six of them were for testing, were prototypes. It’s quite extraordinary.

Arturo Espinoza Bocangel  37:21

That’s crazy. Wow.

Gene Tunny  37:23

I think economics ultimately defeated the Concorde. Certainly the crash and the regulations contributed as well. The regulations we talked about, the fact that it couldn’t go supersonic over the land, that certainly affected viability, particularly for the French, for Air France, because I think it had to travel further overland from Paris to New York than you probably would… Maybe I’m wrong about that. Anyway, apparently it affected the French Concordes particularly hard, as that passage from Todd quoted. Then there’s the fact that you can’t do the cross-continental. You couldn’t go from New York City to Los Angeles. You couldn’t go from London to say Moscow or wherever or Beijing or something. I don’t know. There’d be a whole lot of other routes that you could travel if you didn’t have to worry about the sonic booms.

Arturo Espinoza Bocangel  38:28

The thing told you that USA government banned those kind of inland flights of the Concorde.

Gene Tunny  38:34

Right, of supersonic planes, yeah.

Arturo Espinoza Bocangel  38:38

Due to those negative impacts on private properties and people as well.

Gene Tunny  38:42

Yeah, I’ll have to look up the exact regulation. That makes sense to me. A couple of other interesting facts I thought would be worth talking about is that the Soviet Union or the Russians actually had a supersonic airliner too, the Tu-144. It had a different design from the Concorde. It looks similar, wasn’t as beautiful though, wasn’t as elegant, but it had similar features. I think it had the delta wing too, and it had the drooping nose but it just wasn’t as beautiful or as smooth as the Concorde was. And one of the problems it had, it was using an afterburner through the flight to go supersonic. And that meant that the cabin was really noisy, about 90 decibels, which I think is equivalent to a hairdryer. I think I read that.

Arturo Espinoza Bocangel  39:37

Wow.

Gene Tunny  39:40

In contrast, the Concorde turbo jets, they only needed the afterburner at takeoff, to take off. That Russian supersonic plane, it didn’t last and so they don’t run that anymore. But I thought that was fascinating that they had they had a supersonic plane themselves.

Now, is there a future of supersonic aircraft? I was surprised. This really surprised me. I read that, so the United Airlines, the US airline company, it’s announced that it will buy up to 50 of these Boom Overture Supersonic jets. And the idea is to get them operating by 2029. Now, this is a company in Denver, Colorado, that’s developing supersonic aircraft. It claims it’s going to be using sustainable aviation fuel, and so that minimises concerns you might have about impacts on the environment, climate change, because airline travel is a significant contributor to greenhouse gases.

Arturo Espinoza Bocangel  40:57

Yeah, definitely.

Gene Tunny 40:59

They’re claiming it’s sustainable. They’re also claiming that they’re looking at the aerodynamics, they’re working on the aerodynamics of the plane to reduce the sonic booms. It’ll only have a thud of 75 decibels compared with Concorde’s 105-decibel sonic boom. We’ll see how that all goes, how that works out. That’s interesting that potentially, there is a company that’s been looking at reviving supersonic flight. Now, let’s see how that all goes. I guess you want to try and look through the fact that the oil price now is spiked because of what’s happening in Ukraine. Hopefully, that’s all resolved by then. Look, I think, a supersonic aircraft, it’s still going to face that issue of the regulation. There’s always a risk that maybe it can’t fly the routes it wants to, even if it does get that sonic boom down. I don’t know. I think we’ll have to wait and see there. But I found that fascinating that that there could be supersonic flight in the next decade or so, again. Have you seen anything along those lines, Arturo?

Arturo Espinoza Bocangel  42:20

No, I haven’t checked that. But I think from my perspective, it’s going to be difficult for those ventures in order to develop these kind of supersonic aeroplanes. And of course, these aeroplanes are going to compete with these two big companies, which are Airbus and Boeing. Of course, they will face that limitation in terms of competition as well. I think that is going to be complex for them. Even if we talk about, for example, the many tries of Chinese government to develop their own airlines, or to compete with those big multinational companies, but we have seen that the results were unsuccessful.

Gene Tunny  43:15

It’ll have to have tickets priced a lot higher than standard travel. Let me have a look at this. There’s an article in the conversation in June 2021. “Supersonic flights are set to return. Here’s how they can succeed where Concorde failed.” This is by Peter Thomas, who’s an aerospace engineering lecturer at a university in the UK. I’ll put a link to that. He’s written, “Boom will be optimistic that it can overcome fuel efficiency challenges by the time its aircraft begins carrying fare-paying passengers in 2029. Those fares look set to be high, with Boom anticipating a 3,500 pound price tag per seat. In 1996, British Airways charged around 5,350 to 8,800 pounds in today’s prices for roundtrip tickets from New York to London.”

It’ll be cheaper than Concorde, but it’s still going to be much dearer than a normal fare that you’d pay, probably about, I don’t know, three times or so. I’m not sure what the exact fares from transatlantic fares are in pounds. But I’ll see if I can put something in the show notes. It’s certainly going to be more expensive than the standard fare.

“This means that like Concorde before it, the Boom Overture looks aimed at the luxury market, beyond the reach of even business class passengers.” I think that’s the problem. If you’re aiming the luxury market, then maybe it’s too narrow a segment to try and run an airline on I don’t know. That would be one of the concerns that I would have about that as a proposition, but let’s see how it develops. I’d certainly like to fly supersonic one day, I think it’d be one of those so-called bucket list things to do, if  you know what I mean.

Arturo Espinoza Bocangel  45:26

Yes, the same for me. I would like to do that.

Gene Tunny  45:30

Flying at 60,000 feet at Mach Two or whatever it is, just be spectacular. Some of the facts, or factoids you could say they are, that they have about, because who knows if they’re right or not. You just read these things on the internet. But I think one of them was saying by the time that the hostess or the stewardess pours your champagne, you’ve already travelled 26 miles or something ridiculous, in the Concorde. It’s flying that fast.

Arturo Espinoza Bocangel  46:02

Wow.

Gene Tunny 46:07

I don’t know whether that makes sense or not. You just think about how fast you’re travelling, and it’s just extraordinary. I wanted to end with my takeaways from this whole Concorde episode, or experience with the Concorde, because I think there are a lot of important economic lessons associated with Concorde. It’s more than that you should ignore sunk costs. This is the point that if the British and French governments were smart, or they were paying attention, or this thing wasn’t so caught up with their – it wasn’t such an exercise in national pride or national prestige – if they thought rationally about it, they would have cut their losses in the ‘60s sometime and just given up on it, but they didn’t do that. They ignored the key lesson, very important lesson from economics to ignore sunk costs. Bygones are bygones. Don’t throw good money after bad.

The other lesson, I think, is ultimately economics prevails. If something doesn’t stack up, it won’t survive. Even though Concorde was profitable for a while, over the long run it just wasn’t a commercial proposition. There the regulatory issues. There was the fact that it had higher operating costs than the standard aircraft because of the amount of fuel relative to passengers it needed. This meant it had to be a luxury proposition. That meant that the market was smaller, and more volatile, you could argue. I think that’s what happened. You had the Air France crash, and the downturn in travel associated with 9/11, and people being more budget conscious after the stock market fell, this perfect storm of things that happened that ultimately defeated Concorde.

Okay, my third takeaway is governments should be careful about going into business, i.e. picking winners. I think that’s something governments really need to be careful about. I used to work in the Industry Policy Division in Treasury and we would always cast a critical eye over any idea for government to get involved in business. I think you have to be really careful about that.

Number four, you need to think about those externalities. This is the point you made. There’s this externality associated with Concorde, the sonic booms. And if there is an externality, you need to think about what does that mean, what could governments do in response? And we saw that there was that regulatory response that the Concordes, they couldn’t go supersonic over land. And that really affected the economics of the operations.

Another externality, of course, is greenhouse gas emissions. And so you have to think about if you’re going to run a supersonic aircraft in the future, then what does that mean if there’s some sort of carbon tax or if there’s some crackdown on air travel because of people who are concerned about climate change? Of course, that’s why with this Boom technology company, which is looking at a new supersonic plane, that’s why it’s trying to get into sustainable aviation fuel. It’s looking at “Biofuels and synthetic kerosene that are manufactured using renewable and sustainable materials. It looks like it will mean an impressive 80%… ”  This is what the author of the article is writing. This is Peter Thomas. He writes, “An impressive 80% reduction in lifecycle CO2 emissions is often quoted.” Then he goes, “The key word here though is lifecycle. It doesn’t necessarily mean less harmful emissions from the engine.” Who knows what it’ll ultimately mean for the emissions and what potential carbon tax or carbon price they’d have to pay? Anything else we need to chat about with Concorde, Arturo?

Arturo Espinoza Bocangel  50:46

I think today, all that you have mentioned are enough to have a better idea of what happened about the case of this white elephant case.

Gene Tunny  51:04

I hope if you’re in the audience, you’ve got something out of this. I’ll put links to these articles that I’ve mentioned or have quoted from in the show notes. Check them out. There’s a lot that’s been written about Concorde, I think because people find it fascinating just because it’s such a beautiful aeroplane, and I guess the celebrities that have been on the plane and there are such interesting stories when you got Phil Collins and going to Live Aid, doing two Live Aid concerts in one day. I think even the Queen, Queen Mother, they’ve all travelled on Concorde. The Queen Mother, she’s no longer with us, but they travelled on Concorde at different times.

One other story I forgot to mention, there’s this idea that you can get a pricing lesson from the Concorde. Part of the reason that the profitability of Concorde, it became profitable in the mid ‘80s, was because British Airways figured out that they could put their prices up, because the people who were flying on Concorde, they were busy executives, or they were senior executives, and their secretaries were booking the flights. The actual people flying didn’t realise how much Concorde was costing. They thought it was actually more expensive than it was. British Airways did a survey. British Airways raised their prices and they didn’t have a fall in demand. They ended up making more money, because they increased their prices. How would economists describe that? At that point of the demand curve for those consumers, the demand is in elastic with respect to price. Is that the right way to explain it?

Arturo Espinoza Bocangel  53:00

Yes.

Gene Tunny  53:03

That’s what British Airways figured out. And so therefore, they could increase prices and therefore increase –

Arturo Espinoza Bocangel  53:12

The demand for or travelling, it wasn’t going to change.

Gene Tunny  53:20

Yeah, or very little for that group of consumers, the people who really weren’t budget conscious. I think that’s fascinating. There’s a great article, A Pricing Lesson From the Concorde from The Adaptive Marketer, Gerardo Dada, and I’ll put a link to that in the show notes.

Wow, I think we had a pretty comprehensive discussion of the Concorde, Arturo. Thanks for joining me on this conversation. I think that’s been really good.

Arturo Espinoza Bocangel  53:55

Thank you again for inviting me.

Gene Tunny  53:57

Yeah, of course. And if you’re listening in the audience, and you have any thoughts, any comments, any questions, please get in touch. You can email me, contact@economicsexplored.com. I also have a speak note service set up so you can send me a voice message. There’s a link to that in the show notes. Thanks for listening, and hope to speak with you again soon. 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.

Links relevant to the conversation

EP129 which mentions the Concorde:

Economist article on the Concorde with good summary of what went wrong:

https://www.economist.com/business/2003/10/16/after-concorde

Conversation article on future of supersonic air travel:

https://theconversation.com/supersonic-flights-are-set-to-return-heres-how-they-can-succeed-where-concorde-failed-162268

AP article on Concorde being “unexpected success” in 1986:

https://apnews.com/article/fa1e281d544267a8afe77afceaf3f03f

Early seventies cost-benefit analysis of the Concorde mentioned in the episode:

http://www.bath.ac.uk/e-journals/jtep/pdf/Volume_V1_No_3_225-239.pdf

Other websites consulted:

https://www.businessinsider.com/concorde-supersonic-jet-history-2018-10?r=AU&IR=T

https://www.heritageconcorde.com/who-built-concorde

https://science.howstuffworks.com/transport/flight/modern/concorde2.htm

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

https://ultimateclassicrock.com/phil-collins-live-aid/

https://www.cntraveler.com/story/celebrity-passengers-and-caviar-at-55000-feet-what-it-was-like-to-fly-concorde-in-the-70s

https://www.economist.com/1843/2018/09/03/when-concorde-was-the-future

Credits

Big thanks to my guest Arturo Espinoza Bocangel 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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Podcast episode

Top 10 Insights from Economics – EP129 show notes & transcript

In Economics Explored EP129, show host Gene Tunny reviews his top ten insights from economics with Tim Hughes. These include insights regarding specialization and trade, opportunity cost, and the price mechanism, among others. Applications to traffic congestion and climate change, among other issues, are explored.

You can listen to the episode using the podcast player below or on Apple PodcastsGoogle PodcastsSpotify, and Stitcher, among other podcasting apps. A transcript of the conversation is included below.

The e-book which is the basis of this episode is available to subscribers of the economicsexplored.com website.

Links relevant to the conversation

On comparative advantage:

https://www.economicsonline.co.uk/global_economics/comparative_advantage.html

https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/scarcity-and-growth/v/comparative-advantage-specialization-and-gains-from-trade

On California’s emissions reduction scheme:

https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program

Transcript: Top 10 insights from economics – EP129

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. But can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.

Tim Hughes  00:11

It was. I remember the few times I was there, and it was like every European city. It was just chockers. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward.

Gene Tunny  00:25

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 129, which is about my top 10 insights from economics. And joining me today is my occasional co-host, Tim Hughes.

Tim Hughes 00:49

Hey, Gene. How are you?

Gene Tunny 00:50

Good, mate. Very good. Thanks for joining me for this mini episode in a way. I just want to go over my top 10 insights from economics. So I’ve prepared an e-book. And if you’re listening and you’re interested in getting it, you can subscribe to the website, the economicsexplored.com website, and you’ll get a copy of that e-book. So Tim, I just wanted to go through what I think those top 10 insights from economics are. And one thing I should note is we’re recording this on the 2nd of March, 2022. Currently, there’s a huge crisis in Ukraine with the Russian invasion. We’ve got no idea how that will play out.

Tim Hughes  01:36

Hopefully swiftly and peacefully.

Gene Tunny  01:38

Yeah. But look, I mean, huge, huge risk to the world. And yeah, just feel for the people of Ukraine who are suffering from that invasion.

Tim Hughes 01:48

Absolutely.

Gene Tunny 01:48

Just terrible. Okay, so should we get into it, Tim?

Tim Hughes  01:53

Yeah, let’s do it. Can I ask if this is one to 10 in any sort of preference or order? Is it just top 10 all round?

Gene Tunny  02:00

This is one to 10 in the order that they occurred to me as I was jotting them down.

Tim Hughes 02:05

Cool.

Gene Tunny 02:06

So I think I’ve tried to order them in what I think are the most important insights. But having said that, I recognise that there’s possibly insights that other economists would put ahead of the ones I’ve chosen, or maybe they don’t agree with what I think are insights. And so if you’re listening in the audience, and you have a different view, or if you think I haven’t explained something exactly correct, then sure, please get in touch. So you can send me a message via SpeakPipe, there’s a link in the show notes, or email contact@economicsexplored.com. We’d love to hear from you, as always.

So Tim, just to begin with, I mean, this is one that I often point out when we’re just chatting is that insight about how $50 bills or $50 notes aren’t just lying on the sidewalk, waiting to get picked up. There’s a famous joke about the two economics professors walking along the street and one of them sees a $50 note and says, “Oh, there’s a $50 note there.” He’s about to bend down to pick it up, and the other one says, “Don’t be silly. If it was a real $50 note, then somebody would have already picked it up.” So it’s the idea of opportunities for profit or gains from trade are rapidly exploited in a market economy. So it’s that sort of insight, this idea of arbitrage, so the fact that you don’t have exchange rates being out of alignment. If you think about what we trade, say Australian dollars for US dollars, and then US dollars for British pounds, they all sort of make sense collectively. You’re not going to get an opportunity to, say, take your British pounds, buy Australian dollars, then sell them for American dollars, and do better than if you just sold your British pounds for American dollars. So those gains will actually be arbitraged away.

Tim Hughes  03:58

So if there is a $50 note on the footpath, it’ll get picked up so quickly that it’ll be unnoticeable on the macro.

Gene Tunny  04:04

Well, yeah, exactly. And I guess it’s a philosophy for life too. It’s something that Seth Godin, world’s number one marketing guru, will often say, that look, someone’s going to be number one, or someone’s going to win in this game. Someone’s going to be the top YouTuber. Somebody’s going to be Joe Rogan.

Tim Hughes  04:24

It’s probably not going to be you. Still hope yet, Gene, there’s still hope.

Gene Tunny  04:32

So I’ve always thought that was an important lesson from economics. That’s a key insight. It’s important in economics, because we’ve got all of these models in which there’s optimising behaviour. So we’ve got businesses trying to maximise profits and consumers trying to maximise their utility or their satisfaction. And generally if you assume competitive markets, then businesses can try to maximise profits all they like, but the force of competition means that they’re just earning a reasonable return on their capital. I mean, they’re being compensated for their investment, for their assumption of risk. But they shouldn’t generally be earning monopoly profits. Of course, then there’s that issue about, well, what about if you’re Amazon or what about if you’re Facebook, and so clearly, there are some monopoly profits or supernormal profits being earned. But the way that some economists rationalise that is that they’re being rewarded for the innovation. And you really need those supernormal profits to stimulate innovation in a way.

Tim Hughes  05:40

Yeah, it’s an interesting one, because, I mean, there are so many of those big companies. Certainly Amazon is profitable, but a lot of the big ones who aren’t profitable, just to get scale Uber, and I don’t know if Airbnb are profitable, but you know, it’s those ones that are massive to market. Spotify, for instance so they’re actually making money. But they’re getting market share. So it’s interesting to see how that’s possible without turning a profit. And it’s obviously on the future promise of reward.

Gene Tunny  06:15

It’s all based on future earnings. And so this is what’s interesting in this world of low interest rates, because interest rates are so low, and you can borrow money so cheap and invest for the long term. If you look at what these companies such as Uber could be earning in the future, and you make assumptions about, oh, well, we could all be using Uber, no one will own a car anymore, and look at what the potential revenues could be. If you’ve got very low interest rates, then if you discount those future earnings back to the present, they’re worth a lot more. And that pushes up the value of those companies, because in a way, it could make sense to borrow a lot of money now and invest in those companies, because interest rates are so low, and these companies have such huge potential earnings into the future. So that’s why you’re seeing a lot of these tech companies having such high valuations. And as soon as interest rates start increasing, that could reduce the value of these tech companies, because well, people would rather get the money in the short term, because the opportunity cost of money is higher if the interest rate is higher. Does that make sense?

Tim Hughes  07:32

It does. Yeah. Yeah. I mean, is this still along the lines of the $50 note on the on the street?

Gene Tunny  07:38

We somehow got onto that issue of … You’d talked about the tech companies.

Tim Hughes  07:42

It was my fault. I guess what it is is that they all lead from one to the other, but without getting off that first one, because it is a thing, for instance, of like, yeah, if there is innovation, and if people can copy it, then it will be copied. And generally more people will be doing it, so that general movement away, so that opportunities get taken advantage of by more than one person, obviously. If it works, then other people will copy it and follow and it becomes more dispersed. That would naturally be how it works. So I guess we’re talking about exceptions to that rule with these big, massive companies that are all on the promise of future reward, whereas most companies can’t operate that way. They have to be more instantly profitable if they’re going to survive.

Gene Tunny  08:29

Yeah, look, I may have gone on a bit of a tangent there. But that’s insight one. We might go into insight two. And that is this concept of, there ain’t no such thing as a free lunch. Now a guest I’m having on in hopefully next episode or the episode after is David Bahnsen. He’s a fund manager over in the States. And he’s written a great book, There’s No Free Lunch. And this is the idea that, look, there’s always an opportunity cost with any action. And so my insight two is it’s opportunity costs rather than cash outlays that matter in economic decision making.

Now, I think the original idea or the original, is it a proverb or a saying about there ain’t no such thing as a free lunch, came from bars in the, might have been late 19th century or early 20th century USA, where they advertised as having a free lunch to get the patrons in the door. And they’d know that they could cover the cost of the free lunch by selling them drinks, or maybe they inflated the prices of those drinks a bit while having the free lunch. So there’s that idea.

But also, if you think about it, you’ve got an opportunity cost. Someone could offer to take you to lunch, but that’s an hour of your time and that hour is worth something Time is money. I mean, that’s one of the things we often do in economics in cost-benefit studies. We value people’s time and we work out well how much benefit could erode or a new bridge provide through the time savings. There’s an Australian government estimate. I think it’s $32 an hour or something, on average, you can value people’s time at.

Tim Hughes  10:11

I think it’s a good rule of thumb. You know, there’s usually some reason for something being given freely. Sometimes if it’s charitable, then that is what it is. But in many cases, I think it’s tied in the process of reciprocation, in the form of something else, the other party reciprocating in some form or other, or an opportunity to sell a product or service at some stage. So I think everyone’s aware of … I think that’s a fair one to have in there, Gene. That’s a good home truth, I think.

Gene Tunny  10:49

Yeah. And it’s important because you’ve got to recognise the opportunity cost of your own assets. If you’ve got assets, and they’re not being used, then you’re losing the income from that. So you’ve got to recognise that. It might make sense for you to offload something that’s just sitting around, like an old car or something, that’s costing you. You’re losing money on it through depreciation every year. So yeah, why not get rid of it? So I think that’s an important concept, this idea of opportunity cost, what are you giving up through your current course of action, your current actions.

Okay, insight three, comparative advantage and gains from trade. So this is the classic principle from David Ricardo, the British stockbroker, member of Parliament I think he was, economist from the 19th century, which is essentially arguing that there’s generally going to be gains from trade. Even if a country can produce most things, or in his model, it’s even if a country can produce everything better than another country, more efficiently, it still makes sense for one country to specialise in particular goods and services, relative to another country. Then that maximises the total amount that can be produced, and then you trade amongst each other. So it’s an argument in favour of specialisation and then trading.

Often the examples are given … I think they have the example of England trading with Portugal, and they use the commodities of cloth and wine. And there’s a numerical example that shows why it makes sense for, I guess it was England specialising in cloth and then Portugal specialising in wine. What’s neat about it is it doesn’t actually matter. If one country is superior in productivity to another country, it still makes sense to have specialisation.

One of the ways it’s often explained in economics classes is if, say, you’ve got a professor, and the professor has a secretary. And the professor could be as good as the secretary in administrative tasks, or even better. They could be an even better typist, or better at the admin stuff. But they’re also a great researcher. If the professor gives up an hour to do the admin stuff, that’s going to cost them a lot in terms of the great research output they could produce, whereas the admin person, they’re not going to be able to produce in an hour. If they gave up an hour, they’re not going to be able to produce anywhere near what the professor could in terms of research output. And it makes sense collectively. If you look at it collectively, it makes sense for specialisation to occur. So I’ve got some examples in the insight in the e-book. It’s essentially the benefits of specialisation.

Tim Hughes  13:56

And then maximising the available time within that sphere of specialisation as well, I guess. So for instance, like if you’re educated to a point of being a specialist in a certain area, like in your example there, so you want to be operating in that area of specialisation for the most amount of your available time.

Gene Tunny 14:16

Exactly.

Tim Hughes  14:17

This would speak to scale though, I guess, as well, wouldn’t it? For instance, certainly around my part of the world, originally Manchester, and cotton or linen production around there was huge. And so if you do that to such a scale, then per unit cost or square metre or however you measure the product, that would be ultimately cheaper to produce than if everyone tried to do it somewhat on a smaller scale.

Gene Tunny  14:47

Yeah. I think it’s related. I mean, definitely the gains from scale, the economies of scale, that will come from specialisation. And this is I think what Adam Smith was getting at. He was talking about how just the productivity and efficiency gains from specialisation, the division of labour. Ricardo’s model, his theory of comparative advantage doesn’t depend on that though. It is related. That’s a good point. I mean, maybe I needed insight about increasing returns in economies of scale in this in this e-book. I haven’t got one at the moment. I think that is an insight. That’s an important insight.

Tim Hughes  15:33

For instance, I don’t know what Portugal’s opportunity or capability was to manufacture cotton or linen, but I know the vineyards of Manchester wouldn’t have cut it as far as supplying the local areas with wine. I don’t know if anyone’s tried, but I’m certain that we would have heard about it if it was any cop.

Gene Tunny  15:51

I’ll have to put some examples in the show notes, a link to them on comparative advantage, because there are neat little numerical examples. And, I mean, yeah, it’s just not going to work in the podcast, but I’ll link to it in the show notes if you want to check it out.

Tim Hughes  16:06

I’ve just googled Manchester vineyards and it’s just tumbleweed blowing across my screen.

Gene Tunny  16:13

What about with climate change? See what happens.

Tim Hughes  16:15

Maybe, maybe.

Gene Tunny 16:16

See what happens. I shouldn’t be joking about that sort of thing, because there was a new IPCC report that came out. Was it yesterday? Just saying, yeah, still urgent. Something has to be done. We’re not really doing anything.

Tim Hughes  16:37

As far as climate change and crops.

Gene Tunny  16:39

We’re not doing enough. I think that’s what the message is.

Tim Hughes  16:41

Yeah, absolutely. There’s a different podcast on that one. And I know we’ve talked about it. But absolutely, I think, just very quickly, urgency would be a good thing. No matter whether people believe in climate change or not, urgency in the right direction, of all the changes that would make this planet cleaner, would be a good thing. Anyway, I’ll stop it there.

Gene Tunny  17:05

We’ll have to come back to that. I mean, there is one insight where we could talk about climate change. Insight nine, we can use market mechanisms, taxes or subsidies to correct market failures. So climate change can be thought of as a market failure, because businesses aren’t … At the moment, unless they’re paying a carbon tax, or there’s an emissions trading scheme of some kind … There aren’t many of those around the world. There’s one in Europe. I think there might be one in California. I’ll have to put that in the show notes. If they don’t have that, then they’re not paying the cost of the pollution. They’re not facing that cost. So the idea of the emissions trading scheme or the carbon tax, they’re two different ways of doing the same thing. It’s a way of putting a price on the carbon dioxide that’s emitted. So forcing people to pay for it. So the polluter would essentially pay for it. They’d have to buy the emissions permits. So they would pay the tax based on their emissions. And then they’d pass it on to consumers,  to an extent. That’s one of the insights.

So now, the challenge is, of course …  That sort of makes sense.  It’s a global problem. That’s the problem. So we really need a scheme that operates globally, or there’s some sort of compatibility or trading between different countries, the schemes of different countries. Otherwise, I’ve made this point many times about Australia. It doesn’t make sense for Australia to do much to reduce emissions if the rest of the world isn’t. If China and the USA aren’t doing it, what’s the point of us imposing these costs on our economy?

Tim Hughes  18:55

It’s a fair point, because it is that thing of like, why hobble yourself if other people … Then you’re just giving an advantage elsewhere, and making it harder. But here’s one of those things, it’s like one in all in, which of course, is different around the world, like people from different circumstances or Third World countries who are going to struggle to try and meet a matching scheme. But I’m certain that whatever the future holds in the way of making things better, I think technology and breakthroughs in cleaner energy and all these different things, they’re probably the areas which will get taken up, because if you can make it cheaper for someone to have clean energy, compared to digging fossil fuels out of the ground, or having something that’s not clean energy, as soon as it becomes cheaper, then you’ll have uptake naturally. You won’t have to have schemes or anything in place. That will be widely accepted and welcomed, because you’re going to be better off doing it.

And so those kind of breakthroughs, I think, I can only hope that that would be the sort of game changers. Of course we’re talking about future technology in most cases, but given the right intent behind doing that, and the right minds, the right backing, I’ve got no doubt that that would be a reality. And so that’s where the support globally could come from, if that’s supported, to go down that road and follow that opportunity, because there are opportunities there. Then that would be the global uptake, rather than … I think it would be too hard to try and expect everyone to join a global scheme. I think that is hard. And maybe that’s just an intermediate sort of measure. Maybe that’s an intermediate measure between those who can and that still would make a difference. But anyway, again, I don’t want to get off your top 10 here, Gene.

Gene Tunny  20:47

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

Female speaker  20:52

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Gene Tunny  21:21

Now back to the show. Okay, we better rip through these pretty quickly, because you’ve got to get going in about five to 10 minutes. So far we’ve got through … I think we’ve done four insights now. I’m up to insight four, the magic of the price mechanism, or you can ration by price or by queuing. So this is another point I often make about how a lot of the problems we’ve got is because we don’t have appropriate prices, or we’re not charging for scarce resources.

And a classic example is car parking, the high cost of free parking, as Donald Shoup I think it was, who was a professor at UCLA, that’s what he calls it. And part of the reason you can never find a park is because the councils, at different times they’ll allow people to park for very little cost or for free on the streets. And so they’re not appropriately charging for the scarcity of that resource, the fact that yeah, street park is valuable, and it’s not necessarily going to the person who would be most willing to pay for it.

Tim Hughes  22:40

So going against the supply and demand model, you’re suggesting? Is that right?

Gene Tunny  22:43

Yes.

Tim Hughes  22:44

Because normally supply and demand would go to-

Gene Tunny 22:46

Economists, we’re great believers in supply and demand.

Tim Hughes 22:48

That makes sense.

Gene Tunny 22:49

Another example is congestion. And so economists for years have argued that there’s a lot of benefit to congestion charges. There’s a congestion charge in central London, and I think in Singapore. It’s terrible, isn’t it?

Tim Hughes  23:04

I got stung. I got stung. Don’t get me started, Gene. I haven’t got time to go through.

Gene Tunny  23:11

You get confused at Marble Arch and you end up in the centre of London.

Tim Hughes  23:17

Just very briefly, we were there for two days, like five years ago. And we left central London and paid. We knew there was a fee. We weren’t sure if we were in the central area or not. We were told we were just outside it, had a higher car, etc. But you’re supposed to pay by midnight the following day. And we did it the day after that, and it was 80 quid. It stung massively. It’s like, come on. It was not straightforward or easy to make those payments. And that’s my issue with any of this stuff. Happy to pay for … It was 12 quid a day, I think whatever. That sounds about right. But to then be fined 80 pounds in such a short period of non-payment, which by anybody’s standards, by midnight the following day was like, hang on.

Gene Tunny  24:07

Can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.

Tim Hughes  24:13

It was. I remember like the few times I was there. It was like every European city, it was just chockers, you know. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward. When you went across the Sydney Harbour Bridge 40, 30 years ago, whatever, you threw coins into the tollbooth, and off you went. It was very clear if you paid or hadn’t, etc. There was a little bay to pull over into if you couldn’t find the loose change or whatever it may be. Whereas now those costs are far less visible, I find. You just ticker over on these costs, which come out. I think there’s an element of rot in a lot of this, which I’m not so keen on.

Gene Tunny  24:54

Tim, I agree. That’s an implementation issue there. We’re dealing with the high level ideas here.

Tim Hughes  24:58

Sorry, Gene. I got sidetracked there. It’s a personal thing, and I said I wouldn’t talk about it, but I did.

Gene Tunny  25:02

It’s fair enough. Insight number five, ignore sunk costs. Bygones are bygones. Economics is forward looking.

Tim Hughes 25:11

That’s timely.

Gene Tunny 25:13

Well, it’s true.

Tim Hughes 25:15

That’s right, just forget about it, write it off.

Gene Tunny 25:18

But we often fall into the sunk cost fallacy and we just throw good money after bad. I mean, we spend a few billion developing a Concorde jet that we figure out pretty early on is not gonna be very commercial, or it’s just a money pit. The British and the French government just keep investing in it. And it turns out it just wasn’t commercially viable. Beautiful aeroplane.

Tim Hughes 25:41

Yeah, definitely.

Gene Tunny 25:43

Amazing technological feat, but the economics just didn’t make sense. You just couldn’t pack enough people on the Concorde.

Tim Hughes  25:50

I never knew the economics behind it. It was a tragic end to the Concorde era when it caught fire, which was awful, however many years ago that was. But I wasn’t aware of the economic cost of it at all.

Gene Tunny  26:07

I think the economics of it were bad, so never going to recommission them or to build new ones because I think the problem was you need so much jet fuel to get hypersonic. I mean, it was hypersonic, wasn’t it?

Tim Hughes 26:19

Supersonic.

Gene Tunny 26:20

Supersonic, that’s it. Supersonic, that’s right. And so you need a huge amount of jet fuel to get supersonic. Beautiful design, but it was very sleek.

Tim Hughes 26:32

It was stunning.

Gene Tunny 26:33

You couldn’t pack as many people into a Concorde as you could a 747, could you?

Tim Hughes  26:39

No. I mean, I guess looking back at the time, that was very soon after the lunar landings, and around that sort of time, so it was very much a modern forethinking sort of thing to get involved in. So there’s probably a bit of ego involved in the whole thing.

Gene Tunny  27:01

Yeah. It was British and French prestige. I mean, they wanted to play with the big boys. I mean, they wanted to play with the Russians and the Americans. There was a space race, and the Brits and the French wanted to, I don’t know, I guess they wanted to show that they were technologically advanced as well.

Tim Hughes  27:24

I was just a kid at the time. But I remember there was pride in the Concorde. Pictures of it were plastered everywhere. And it did, it looked amazing. You did take some pride in that in some way. And I guess that, yeah, maybe if they felt that there was other benefits from having that kind of visibility of something that modern looking. I don’t know.

Gene Tunny  27:50

Yeah. Well, it’s a shame. But anyway, it’s the example I give about sunk cost, because they just kept throwing money at this thing, even though it was a really bad investment. So you’ve got to ignore what you’ve spent already, and just think about, is the additional money you’re spending on this endeavour, is that going to be worthwhile?

Tim Hughes 28:09

So cutting the losses?

Gene Tunny 28:10

Exactly, exactly. We better rip through the rest of them pretty quickly. Insight 10, that’s an easy one. We’ve chatted about this one before. Inflation is always and everywhere a monetary phenomenon. So that’s something from Milton Friedman. I’ve chatted about that enough on this programme. So far, we probably don’t need to elaborate.

Insight six, redistributing via the tax transfer system can be superior to redistributing via fixing prices. What I’m talking about there is, a lot of times governments try to fix prices, try to set wage rates or try to fix prices of different goods and services. Rent control is one example, generally a bad idea, because that can discourage investment in new apartments. And that can make the situation worse for people. It’s good for the people who’ve got a rent-controlled apartment, but it’s not good for the majority. So economists tend to think that rather than trying to fix prices, you’re better off letting prices adjust, because there’s the magic of the price mechanism that economists talk about. And then if people, they’re doing it tough,  because there are people who need help, then provide that through the welfare system. That’s an idea. That’s one of the insights there.

Tim Hughes  29:30

So now we’ve got something to talk about more in more depth in that area as well, coming up. It would be good to expand on that because it’s certainly an area where it’s getting very, very difficult for new homeowners to get a foot on the market ladder. And I know there are different schemes in place around the world. I know Singapore has got a scheme whereby the government buys the buildings and allows people to get homeownership through a scheme that they basically provide the building or the land.

Gene Tunny  30:08

It seems very interventionist to me. But yeah, we should chat about that in a future episode.

Tim Hughes  30:13

There were a few things. I know we never talked about having that. But it’s along the lines of this, because that still basically isn’t a fixed thing, but it’s more of an assisted service or assisted package.

Gene Tunny  30:26

Insight seven, collusion and monopoly power can be a concern and may require regulatory action. That’s probably pretty self explanatory. I mean, economists celebrate the market generally.  We think the market system’s great. But of course, there can be situations where companies become extremely dominant, they can abuse their market power, and hence, you might want to have some antitrust action against them. I mean, we’ve got an Australian Competition and Consumer Commission here in Australia to do that sort of thing. The United States has got a Federal Trade Commission, I think, or they’ve got the Department of Justice. So there’s a lot of talk now about should we break up big tech companies like Facebook, like split Facebook proper from Instagram and WhatsApp,  is there something that they should do with Google, should we break Google away from YouTube, etc. There’s  all that debate going on at the moment. I’ve covered that on the show before

Tim Hughes  31:23

 It’s a thorny issue, isn’t it?

Gene Tunny  31:28

It is. And I think what my takeaway from economics would be that, yeah, it can be a problem in some circumstances. And there’s some guidance in the literature. I’ve offered that as an insight. And I guess it’s a topic we should come back to in a future episode, because there are a lot of issues to consider pros and cons, because you don’t want to eliminate that process of creative destruction as Joseph Schumpeter, the Austrian economist, who is at Harvard, called it, because that’s important. We like that creative destruction. New companies are rising and innovating and offering services that everyone enjoys. I mean, Amazon. I’m not a great Facebook fan. Maybe Google’s a better example. I think Amazon and Google have certainly provided a lot of value to consumers and to people in the community,

Tim Hughes  32:25

it seems to come down to ethics, I think, and that’s maybe the direction to take. That would be my feeling on it, because it’s hard to put limitations on a free market. The less governance I think is always a good thing. But then there comes responsibility with these massive companies then to do the right thing and to employ people under good conditions, etc, all those kind of areas, you know. That money should be going back into society at some level. If the profits are so huge, then yeah, it would be, I think, a fair thing to tax those companies more, to give back to society.

Gene Tunny  33:07

Yeah. So there’s a big issue there on multinational tax avoidance. So that’s covered on the show with Pascalis Raimondos.

Tim Hughes 33:13

Outrageous, yeah.

Gene Tunny 33:14

Important issue. Final insight for now, inside eight, because we’ve already covered nine and 10.

Fallacy of composition and the paradox of thrift. So what’s good for the household is not necessarily good for the economy, so just the idea that in economics, you’ve got to think about how everything fits together, just how does everything connect together. And this comes from Keynes in the ‘30s. There are a lot of people who are negative about Keynes and think it’s a very … It’s the economics of depression, you could argue, but the idea is that it might make sense for a household to cut back on its spending if the breadwinner loses their job or one of the household members loses a job. But if everyone in the economy does that, it’s bad for the economy collectively. It’s less spending, less income, less production. So that’s the paradox of thrift, that what could be good for the household may not be good for the economy.

Now I’m not necessarily advocating a Keynesian viewpoint or Keynesian fiscal policies. But I think that is a key insight, that you’ve got to think about how everything collectively fits together. And if you think about governments, back in the ‘30s, when the revenues fell due to the Depression, a lot of the governments thought, we’ve got to tighten our belts, we’ve got to cut spending, to make sure we balance the budget. Sound public finance was what was going to help us in the Depression. But it turns out that wasn’t the case, because when they cut spending, that meant they weren’t spending as much on their public servants or on infrastructure projects. And that meant less activity in the economy. So it was a perverse fiscal policy.

Tim Hughes  35:13

That’s interesting, because now that’s happened more recently, when there have been cases of the government handing out money to people just to get the stimulus packages, for instance, just to keep money moving around and keeping businesses going in it. The first time it happened, it seemed like the craziest thing. I’d never seen that happen before. I’m trying to remember when it was.

Gene Tunny  35:37

2009, Kevin Rudd, the Rudd money.

Tim Hughes  35:39

That’s right. Yeah, it was the GFC, wasn’t it?

Gene Tunny  35:40

$900 checks.

Tim Hughes  35:42

Yeah. And it was just like, it seems insane. But it appeared to work, which is remarkable. But it’s exactly what you’re talking about, I guess, isn’t it?

Gene Tunny  35:51

I’d say it’s got a mixed record historically. But that’s the idea that comes from John Maynard Keynes in the 30s. That’s why Keynes is seen as revolutionising economics, because up until the ‘30s, in 1936, when he published the General Theory of Employment, Interest and Money, everyone thought that idea was crazy.

Tim Hughes  36:12

It seemed counterintuitive. We’re in tough times, and you start spending. But there was sense to it.

Gene Tunny 36:18

What’s counter?

Tim Hughes 36:19

Well, for instance, the stimulus package, like at the time, a GFC.

Gene Tunny 36:24

Oh, I see.

Tim Hughes 36:25

It would appear. And at a household level, you’d think, yeah, tighten your belts and sort of, like, hold on to everything, whereas like, it was completely the opposite. Here you go, put this into the economy, like keep everything moving. The value of that on the greater scale, on the national scale, was really effective. It was impressive to see.

Gene Tunny  36:52

Exactly. So I’m not in any way endorsing Keynesian fiscal stimulus, because there are all sorts of issues with it in terms of timing, are we gonna get the timing of it right. There’s a possibility you could actually add instability to the economy, that sort of thing. Crowding out impacts, all that sort of thing we can cover in another, or I’ve covered with Tony Makin in a previous episode. Tim, that’s been great. Thanks so much for sitting in, as I’ve sort of done this quick tour of my top 10 insights of economics. You’ve given me some things to think about. I want to add something in about economies of scale or increasing returns to a future addition to this. But at the moment, if you’re listening, you’re interested in this, please get on the website and subscribe so you can download it. Tim, thanks so much. Really enjoyed that conversation.

Tim Hughes  37:37

Thank you, Gene. That was great. It was really interesting.

Gene Tunny  37:39 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.

Credits

Big thanks to my guest Tim Hughes 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 Podcasts, Google Podcast, and other podcasting platforms.