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Podcast episode

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

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

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

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

What’s covered in EP184

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

Links relevant to the conversation

Larry Marsh’s Optimal Money Flow website:

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

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

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

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

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

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

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

Nicholas’s 1999 paper outlining the policy proposal:

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

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

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

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

America Just KILLED China’s Tech Industry 

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

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

Gene Tunny  00:06

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

Larry Marsh  01:27

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

Gene Tunny  01:31

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

Larry Marsh  02:28

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

Gene Tunny  08:06

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

Larry Marsh  08:11

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

Gene Tunny  13:58

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

Larry Marsh  14:10

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

Gene Tunny  14:38

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

Larry Marsh  15:39

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

Gene Tunny  16:37

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

Larry Marsh  17:09

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

Gene Tunny  18:56

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

Larry Marsh  19:27

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

Gene Tunny  20:45

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

Larry Marsh  21:36

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

Gene Tunny  24:55

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

Larry Marsh  25:02

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

Gene Tunny  26:17

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

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Gene Tunny  26:52

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

Larry Marsh  27:08

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

Gene Tunny  28:41

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

Larry Marsh  29:20

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

Gene Tunny  33:22

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

Larry Marsh  34:05

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

Gene Tunny  37:43

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

Larry Marsh  38:09

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

Gene Tunny  38:17

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

Larry Marsh  40:14

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

Gene Tunny  40:17

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

Larry Marsh  40:25

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

Gene Tunny  40:28

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

Larry Marsh  41:16

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

Gene Tunny  43:41

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

Larry Marsh  44:52

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

Gene Tunny  45:35

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

Larry Marsh  46:06

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

Gene Tunny  46:26

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

Larry Marsh  46:35

We’re okay, great, thanks to.

Gene Tunny  46:41

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

50:34

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Credits

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Categories
Podcast episode

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

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

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

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

What’s covered in EP181

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

Links relevant to the conversation

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

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

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

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

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

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

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

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

Gene Tunny  00:06

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

Tim Hughes  03:29

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

Gene Tunny  04:04

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

Tim Hughes  04:42

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

Gene Tunny  06:15

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

Tim Hughes  06:49

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

Gene Tunny  07:37

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

Tim Hughes  08:39

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

Gene Tunny  08:44

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

Tim Hughes  09:57

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

Gene Tunny  10:21

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

Tim Hughes  12:48

hang out a shingle.

Gene Tunny  12:50

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

Tim Hughes  12:55

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

Gene Tunny  13:08

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

Tim Hughes  14:42

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

Gene Tunny  15:50

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

Tim Hughes  16:36

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

Gene Tunny  16:52

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

Tim Hughes  17:11

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

Gene Tunny  17:50

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

Tim Hughes  18:30

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

Gene Tunny  19:01

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

Tim Hughes  19:15

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

Gene Tunny  19:39

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

Tim Hughes  21:38

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

Gene Tunny  22:33

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

Tim Hughes  23:07

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

Gene Tunny  23:14

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

Tim Hughes  25:05

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

Gene Tunny  25:23

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

Tim Hughes  25:26

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

Gene Tunny  25:48

Exactly, yeah,

Tim Hughes 25:49

I get it. Yeah.

Gene Tunny  25:52

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

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Gene Tunny  26:27

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

Tim Hughes  26:59

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

Gene Tunny  27:23

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

Tim Hughes  27:27

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

Gene Tunny  27:50

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

Tim Hughes  28:23

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

Gene Tunny  28:34

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

Tim Hughes  29:08

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

Gene Tunny  29:26

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

Tim Hughes  29:32

plan would be proud, very good.

Gene Tunny  29:35

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

Tim Hughes  29:46

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

Gene Tunny  29:51

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

Tim Hughes  30:12

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

Gene Tunny  30:17

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

Tim Hughes  30:27

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

Gene Tunny  30:32

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

Tim Hughes  33:02

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

Gene Tunny  33:28

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

Tim Hughes  34:20

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

Gene Tunny  35:32

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

Tim Hughes  35:59

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

Gene Tunny  37:13

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

Tim Hughes  37:24

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

Gene Tunny  38:04

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

Tim Hughes  39:05

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

Gene Tunny  39:12

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

Tim Hughes  40:56

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

Gene Tunny  41:53

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

Tim Hughes  42:08

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

Gene Tunny  42:27

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

Tim Hughes  42:37

And yeah, if you get a chance, hello.

Gene Tunny  42:41

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

Tim Hughes  43:29

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

Gene Tunny  44:26

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

Tim Hughes  45:28

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

Gene Tunny  45:45

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

Tim Hughes  47:17

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

Gene Tunny  48:10

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

Tim Hughes  48:20

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

Gene Tunny  48:34

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

Tim Hughes  48:38

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

Gene Tunny  48:50

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

50:42

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Credits

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

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

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

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

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

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

About Dr Cameron Murray

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

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

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

Twitter: @drcameronmurray 

What’s covered in this bonus episode

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

Links relevant to the conversation

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

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

Direct link to Senate Committee inquiry report:

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

HAFF inquiry home page:

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

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

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

Gene Tunny  00:06

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

Cameron Murray  02:39

Thanks for having me again, Gene.

Gene Tunny  02:40

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

Cameron Murray  03:07

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

Gene Tunny  04:35

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

Cameron Murray  05:00

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

Gene Tunny  08:16

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

Cameron Murray  08:45

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

Gene Tunny  10:02

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

Cameron Murray  10:13

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

Gene Tunny  12:06

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

Female speaker  12:12

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

Gene Tunny  12:41

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

Cameron Murray  13:34

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

Gene Tunny  16:13

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

Cameron Murray  16:39

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

Gene Tunny  18:08

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

Cameron Murray  18:21

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

Gene Tunny  19:23

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

Cameron Murray  20:43

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

Gene Tunny  21:45

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

Cameron Murray  22:20

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

Gene Tunny  23:34

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

Cameron Murray  23:46

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

Gene Tunny  24:40

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

Cameron Murray  25:05

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

Gene Tunny  26:36

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

Cameron Murray  26:50

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

Gene Tunny  27:57

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

Cameron Murray  28:13

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

Gene Tunny  28:40

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

Cameron Murray  28:51

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

Gene Tunny  29:38

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

Cameron Murray  29:49

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

Gene Tunny  29:55

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

Cameron Murray  29:59

Thanks for having me, Gene.

Gene Tunny  30:02

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

Cameron Murray 30:49

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Credits

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

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

Superforecasting w/ Warren Hatch, CEO of Good Judgment  – EP176

What are the characteristics of superforecasters? How can a superforecasting team be developed? Hear from Warren Hatch, CEO of Good Judgment, a leading global forecasting business based in NYC. Accurate forecasts from Good Judgment superforecasters have included the scale of the pandemic. In early 2020, Good Judgment superforecasters estimated the United States would have over 200,000 deaths from COVID-19 with 99 percent certainty, an estimate that was considered by many as excessive at the time. Warren gives show host Gene Tunny and his colleague Tim Hughes some valuable tips on how to become a superforecaster. 

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 EP176

  • The Good Judgment forecasting business [2:41]
  • What are the characteristics of superforecasters? [6:47]
  • How to identify someone who is good at pattern recognition? Raven’s matrices [9:24]
  • Link between subject matter expertise and forecasting ability [10:40]
  • What are some of the techniques that are used to help super forecasters rid themselves of prejudice and bias? [12:57]
  • How large does a super forecasting group need to be to be successful? [20:35]
  • Tips for being a super forecaster [25:59]
  • Using the percentages to retrospectively see how you’ve gone [27:56]
  • Bayes’ Theorem [31:41]
  • The importance of being open to a range of different views [42:47]

About this episode’s guest: Warren Hatch, CEO of Good Judgment

Warren Hatch is Good Judgment’s second CEO, succeeding co-founder Terry Murray. 

Before joining Good Judgment, Hatch was a partner at McAlinden Research, where he identified thematic investment opportunities in global markets for institutional investor clients. Previously, he co-managed a hedge fund seeded by Tiger Management and was a portfolio manager at Morgan Stanley.

Hatch holds a doctorate in politics from Oxford, a masters in Russian and international policy studies from Middlebury Institute of International Studies at Monterey, and a bachelors in history from the University of Utah. He is also a CFA® charterholder.

Links relevant to the conversation

Good Judgment’s website and Twitter:

https://goodjudgment.com/ and https://twitter.com/superforecaster?lang=en 

BBC Reel featuring Warren Hatch:

https://www.bbc.com/reel/video/p0dwntct/can-you-learn-to-predict-the-future-

Warren’s talk on YouTube which Gene quotes from in the episode:

What is Superforecasting? – Warren Hatch, Good Judgement

Article by Nicholas Gruen:

Making better economic forecasts 

Links regarding foxes versus hedgehogs:

https://longnow.org/seminars/02007/jan/26/why-foxes-are-better-forecasters-than-hedgehogs/

https://goodjudgment.com/the-cost-of-overconfidence/

Transcript: Superforecasting w/ Warren Hatch, CEO of Good Judgment  – EP176

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.

EE_176_Superforcasting_FINAL

Fri, Feb 17, 2023 7:01AM • 47:45

SUMMARY KEYWORDS

forecasting, forecasters, warren, question, people, economists, judgement, probability, super, good, recession, models, world, economics, bias, episode, views, bayes, thinking, big

SPEAKERS

Tim Hughes, Gene Tunny, Warren Hatch, Female speaker

Gene Tunny  00:07

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, Tim Hughes and I chat about Super forecasting with the CEO of good judgement, Warren Hatch. good judgement is a very successful forecasting business based in New York City. Warren has a background in funds management, and he holds a doctorate in politics from Oxford. I’m very grateful to Warren for providing some actionable insights into how we can make better forecasts. And I suspect you will get a lot out of this episode too. So please listen to the whole thing. And stick around to the end because I have some additional thoughts after our conversation with Warren. Okay, let’s get into the episode. Warren Hatch from Good Judgement. Thanks for appearing on the programme. Thanks for having me. Excellent. Warren. Yes, we’re keen to chat about all things forecasting. Forecasting is a big issue. Well, I mean, everywhere in the world, but in Australia, we’ve had a bit of controversy around interest rates. And we’ve got a reserve bank governor who’s in the spotlight or under under a lot of criticism because he was predicting that interest rates wouldn’t rise until 2024. And we’ve had a succession of interest rate rises, which are causing financial distress for families. And it just brings into the spotlight the problems of forecast even by people who are, you know, you think they’re well informed? And Tim saw, I think, Tim, you saw Warren on a BBC show, didn’t you?

Tim Hughes  02:03

It was a BBC real little eight minute video, which is really good. And we’ve discussed these kinds of issues before ourselves. Gene mentioned all that sounds like the super forecasting book by Philip Tetlock and Dan Gardner. And of course, as it was, it was exactly that, you know, your association with those. And so we came full circle. And I reached out and thank you for making the time to talk in an area that we’re really interested in.

Gene Tunny  02:29

Yeah. And so to kick off, Warren would be keen to understand what’s your work, good judgement involved? What are you doing there? And, broadly speaking, can you give us some insight into how you work, please.

Warren Hatch  02:41

By all means, and by the way, it’s not just Australia with central bankers that don’t have a very good track record recently, when it comes to forecasting by any means. Our own Federal Reserve here, had some pretty spectacular misses, as well. And they’ve had to do some pretty severe course corrections. There’s, as you know, and the good judgement project itself came out of some pretty spectacular forecasting failures on the part of the US intelligence community where they had forecast weapons of mass destruction that weren’t. And then they missed 911, of course. So after that experience, they did some very deep soul searching to genuinely try and find ways to improve the forecasting skills of the intelligence community. And they ran a big competition. And as you know, that good judgement team did very well defeated all of the other university based research teams. And then four years after it started, it came to a conclusion, and they wanted to commercialise those findings. And the government, US government supports that kind of initiative as a way of showing the taxpayer dollars are being well spent. And so what we set out to do was to break down this big research initiative into smaller pieces that could be useful out in the real world. And we do a few things we do consulting for some more deeper engagements. But then we also provide a lot of workshop training. So organisations that want to improve the forecasting skills of their analysts and their teams can do so. And then we also have the super forecasters themselves, who are available to forecast on client questions. And we also have a public dashboard where we contribute to the public discourse in our way. And the questions are basically posed by organisations in the private and public sectors to improve their own decisions. Having probability estimates about uncertain events, that’s what we’re all about, is to come up with a number in our forecast rather than a vague word that lacks accountability. But then we also provide the context for those numbers. So it’s not just a dataset that we’re generating, we’re generating the stories that go along with it.

Gene Tunny  04:58

Okay, so buy in Number rather than a vague word, are you talking about a probability? So you’re saying that we are forecast is that within the next 12 months, there’s a 60% probability of recession or something like that? Is that what you suggest?

Warren Hatch  05:16

That’s it? That’s, that’s exactly the way we can frame it is, what is the probability of a recession in the next 12 months, or by a particular date? Or in different time spans? Will there be a recession this half of the year or the next half of the year, and so on?

Gene Tunny  05:32

And that’s about keeping forecasters accountable, is it and if you’re a forecaster, and you give a forecast like that, you can assess your track record, so to speak and adjust your forecasts in the future? Is that correct?

Warren Hatch  05:44

That is correct. And I am using a number it does, it does a lot of really good things. That’s one of them as you get feedback, right? So if you say maybe there’s going to be a recession next year, you’re not gonna get feedback from that. The other thing is that allows us to communicate in a shared language, right? If I say, Well, there’s a possibility of a recession, and you say, maybe there’s a recession? How do we kind of compare our thinking, how do we come up with something that reflects our joint wisdom. And that’s what this is about as having a wisdom of the crowd approach with a shared language with accountability with feedback, and a way to compare forecasts on different topics.

Gene Tunny  06:21

Okay. It’s amazing the type of work that you’re doing. So I had a look at your website a few days ago, and I saw that some of the things you’re forecasting, you’re providing advice to clients on this, you’re providing advice on, what’s the probability that Putin doesn’t survive, or like, what’s happening in Ukraine and all of that? So it’s a wide range of things that clients are interested in? Is that right?

Warren Hatch  06:46

That is correct. And what we’re looking for is the topics that affect decisions. And where there’s a lot of information and conflicting views out there, where our panel of super forecasters can take all of that publicly available information, and filter out a lot of the noise because there’s a lot of noise out there these days, and try and find the signal through their process, and then turn that in into a number on things like Putin’s future on things like Will there be a ceasefire between Russia and Ukraine? These are all quite consequential? Yeah.

Gene Tunny  07:19

And what, how do you get on this super forecasting panel? Who’s a super forecaster? What are their characteristics?

Warren Hatch  07:26

That’s a great question. And that’s something. And something to keep in mind, too, is that in the research project, that wasn’t part of the research plan at all. They just observed that in the first year, there were some people who are consistently better than everybody else. And being researchers that caused a new research question, what would happen to ask themselves? If we put them on small teams? Would they get better? Or would they revert to the mean, and they did not know at all, a lot of people thought there’d be a mean reversion, turns out, no, they continued to get even better. And so we still do the same process now with our public side, where we’ll just take within the top 1% of the forecasting population there, and other platforms to invite him to come and join the professionals and they have certain things in common, for sure, they gave us a lot of psychometric tests, hours of them before we got to do the fun stuff, you know, and forecast on elections in Nigeria in the light, and then to see what kinds of characteristics correlated with subsequent accuracy. And there are certain things that really pop out. One is being really good at pattern recognition, right? So you can think of, you know, you got a mosaic about the future that we’re trying to fill in, and see what’s coming faster than anybody else and fill in those tiles. And being good at that is a fundamental characteristic of a good forecaster. Another is being what they call cognitively reflective. And basically, that means that if you’re confronted with a new situation, you don’t automatically go to what first pops into your head, because what first pops into your head might not be right, you might be overfilling the mosaic too quickly, and getting the wrong picture. So you want to slow down in economy in terms let system to be your friend, you know, it’s hard work. But that’s the way you get a better a better result. So those are two very fundamental characteristics that good forecasters have.

Gene Tunny  09:24

Right? And how do I tell someone with good pattern recognition is that someone who maybe they excel at Pictionary or at certain games or certain board games and trying to understand how would you actually judge that

Warren Hatch  09:37

being good at Pictionary is a good quick and dirty way to do the more formal way is it’s called ravens matrices. And this comes from the UK originally, during World War Two. They used it as a way to identify people who would be good pilots during the war, because when the war first started, they went to you universities grabbed everybody put them in a in a cockpit or in a submarine. And of course, that means their life expectancy wasn’t very high. And they needed to be able to replenish pilots and submariners. And this was a way to go out to the countryside and identify people who perhaps didn’t have a formal education to an extent, but we’re very sharp, very good. And it turns out, that was a great way to spot good forecasting talent, and you can look them up to Ravens. You can see them out on the internet. And it basically what it does is it tests your ability to see different patterns and what rules there are to anticipate what those patterns will become.

Gene Tunny  10:40

Okay, I’ve got one more question. I’m gonna hand over to Tim, because I’ve just got one bill burning question. This is fascinating. What’s the link between subject matter expertise and forecasts inability? Is there any correlation? Because the best economic forecasters actually economists, for example, are? I mean, I’m guessing the best weather forecasters are meteorologists? Is it different across disciplines? Do you have any insights into the relationship between subject matter expertise and forecasting ability? Warren? That’d be great. If you could respond to that plays?

Warren Hatch  11:12

That’s a wonderful question. And what we have found, and the research shows is that there isn’t necessarily a connection between being a subject matter expert and a good forecaster on that topic. Subject Matter Experts are very good at telling us how we got to where we are, they’re also very good at asking the questions, we should be asking ourselves about the future. But they’re not always so good at saying what the probability of one outcome might be relative to another. And one reason for that is that experts, by definition, have models of the world. They have, you know, heuristics, they have shorthand, ways of interpreting what’s going on in the world. And in moments of a lot of flux, there might be small, subtle things, that their models and their expertise will just filter out as a matter of course. And by having a skilled generalist as part of that activity, then they don’t have those blinkers. They don’t have those fixed models. And they might detect something subtle that they go, Wow, this is actually something potentially quite significant. And so what we found is that rather than have experts versus skilled generalists, you have them both and and let them interact with one another on a forecasting platform, one way or another, and then you get really positive strong results we want but our favourite Boolean a good judgement is

Gene Tunny  12:48

and yeah, it’s not either, or, is that what you’re saying? It’s a no. Yeah, exactly. More crisply. Gotcha. Okay, good. Excellent. That makes sense. So just just wanted to make sure I understood it. Tim, do you have any questions?

Tim Hughes  13:00

Yeah, I do, actually. Because I remember in a little bit of research, seeing what you said about experts and skill generalists, and also the diversity in a group of super forecasters, which helps bring different perspectives to a decision, or a forecast. And I was gonna ask about the we’re all influenced by prejudice and bias, whether we’re aware of it or not. Some of it is hardwired survival biases, and, and others, we have more control over. I was interested to ask Warren, what your thoughts were on prejudice and bias and with super forecasters, what kind of techniques or if there are any sort of habits that are encouraged with those guys, to be able to rid themselves of those prejudice and bias to be able to make better decisions or forecasts?

Warren Hatch  13:53

Yeah, good question. And is goes to the foundations of what we’re trying to do. And we might usefully think of two categories of bias. There’s the kind of the bias that we all have the cognitive biases, the things that interfere with our judgments that are just built in to our wiring, right? Most people are overconfident, it just is built right in. Most people will get anchored on a high status individual, for instance, who was the first to speak at a meeting and everybody gets anchored on that it just happens. And for those kinds of cognitive biases, well, the psychologists debate a lot, whether you can eliminate those sorts of things. Some say it’s impossible. Some say there are things you can do. What we do know is that for that category, being aware of them, at least can let you counteract their effects, like being overconfident. You can measure and getting that feedback can get your over confidence in check. So if somebody asks you what your confidence about a particular forecast you might be making, you might say, oh, yeah, I’m 90% sure about that, or 90% sure about some particular fact, in the you can measure that. And it turns out, well, maybe more like 50%, right? Not 90%, right in those situations, so you can recalibrate yourself. Those sorts of cognitive biases, we can identify spot, and do at least some mitigation techniques to rein in their effects on our judgments. The other category is the kinds of biases or prejudices that we might acquire, as we live life, and we have different life experiences. And that will shape the way we interact with others think about issues in all kinds of different ways. And that can be a lot tougher to be sure to deal with, what are the two things that we can do is one, we can level the playing field so that we know as little about each other, when we’re forecasting as a team as possible, right. So if we were on a platform, we would all adopt made up names, we’d have no idea where we came from, we’d have no idea, ethnicity, or gender, or religion, or political beliefs or anything, as much as possible. And all that’s going to matter is, is the quality of our comments that we can contribute. And by doing that, we can at least hold those things at bay, we don’t eliminate them. But we kind of, you know, we put on our white lab coats when we go to the forecasting platform. The other kind is some issues are just really difficult. Because they are, they’re emotional, or they deal with very troubling topics. And that’s a difficult thing for forecaster to deal with. For instance, a lot of the work we did when COVID was was running rampant, is really tough. And a lot of forecasters just said, Look, I have a really hard time with these questions. I’m going to step aside or election questions, I’m gonna just step aside because my personal beliefs are interfering with my judgement. Yeah, the one little tool that you might do. And this comes from the head of our question team, and a super forecaster that I thought was just great to try and create at least a mental distance on these kinds of issues, is imagine you’re an Anthropologist on Mars, observing everything through a telescope, right? By doing that, at least for him. And for some others, too, it makes it easier to engage with these more emotional issues, not all the time. But it can be a helpful tool.

Tim Hughes  17:41

So a level of detachment as much as possible, and that self awareness to to not be involved from what your previous experiences may have been in those areas,

Warren Hatch  17:50

as much as possible. When you’re making your forecast. Then once you’re done, you take off your lab coat, you can go down to the pub, have a beer and just, you know, let it rip.

Tim Hughes  18:01

It’s really good. Like, because it’s come up in conversations we’ve had before. Along the same lines were softening the language around. Like we’ve had conversations around the truth. For instance, like politically and everywhere, like since the beginning of recorded history, there’s always been questions about what’s true and what’s not true. It’s certainly no different nowadays, like, we know, there’s still the same issues of like, is that true? Or is it not? And softening the language around what we consider to be true or not seems to be a good approach, which seems to be something that is adopted with using probabilities and percentages to say, the probability of something being true or not or happening or not. So that seems to fit in with being receptive to new information that may come in that allows you to change your position more freely. Is that sound familiar with what happens at Super forecasting?

Warren Hatch  18:53

Yeah, yeah. And a lot of our process is trying to think about how well do we know what we know? Right? So epistemic uncertainty, is the phrase that they that they use so and being humble about how much we really know. And being aware that there are pockets where we may not be able to quantify uncertainty on certain issues, we run up into a wall of irreducible uncertainty and we should respect that that is something that’s there and not get carried away and go beyond it. And because on that other side, there may be a different kind of uncertainty with a call Alia Tory uncertainty, right? And that’s the kind of randomness that’s just there. And we’re not going to be able to rationalise it away. It’s just, it’s sets a limit on what we can and what we can know. Now, what’s really fascinating, of course, is part of what all of this research project and a lot of what we do do is, is that for some topics, that wall is farther out than we had thought before, right? That irreducible uncertainty, that zone is maybe not as big as we might have thought. So we can quantify more than we had previously recognised. And we can also quantify it with more precision than we had been able to do so before. And putting those two things together means that we can come up with forecasts where we can have a much better informed judgement than we could before.

Tim Hughes  20:35

When you put the left code on the ego, it can’t be there as well, I guess,

Warren Hatch  20:39

as much as possible, right? Yeah, then you can only go so far, of course. But having that kind of an approach, at least gives you a shot at coming up with something that’s that’s good. And you’ll find out of course, because if over a lot of questions, your ego was actually creeping in, after all, it’ll show up in the feedback, you’re receiving the scores that you get on your forecast.

Gene Tunny  21:02

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

Female speaker  21:08

If you need to crunch the numbers, then get in touch with Adept Economics. We’ll see 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  21:37

Now back to the show. Warren, I’m just wondering, from what I’m hearing, it sounds like yeah, you need to it’d be good to have a diversity of views. You need people who question who act as a counter to other people’s biases? How large does a super forecasting group need to be? I mean, do you have a sort of, is there a rule of thumb you need I need at least half a dozen people, you need a dozen or you need dozens? I mean, is there a is there a rule of thumb about that,

Warren Hatch  22:06

you pretty much got a good rule of thumb is six to 12 is a good number to have, especially when you put your thumb right on it, you’ve got a diversity of perspectives and play definitely want to have people with different approaches, different philosophical views, different different life experiences, too. And they’re all bringing, you know, different pieces, right? So we’ve got that mosaic that we’re trying to fill out. And if we all went to the same schools all have the same backgrounds, we’re basically all going to be bringing the same tiles to our mosaic. What’s the point? What we want is people who have different experiences different perspectives, who can fill it out as quickly as possible to get the best possible result. And that’s one thing we see time and time again, is that working on teams is going to deliver a superior result over time. Even the best single super forecaster will not do better than a team of forecasters over time,

Gene Tunny  23:08

Ron, another question, and this will probably be my the final one I want to ask are prepared for? are you competing with mathematical or numerical modelling? Or is what you’re doing? Is that a compliment to it? Because, like I see in meteorology, for example, I think they’ve made some impressive improvements over the last 20 to 30 years, I see the huge range of data that they’re ingesting into their models, and they’ve gotten better economics. I mean, our models have actually not got any better. And if you rely upon a computerised, like a computer model for an economic forecast, you’re going to end up with something silly. So there’s always judgement involved in any economic forecasts that come out from treasuries or central banks. Just wondering how do you see the role of, of modelling? Is it compatible with what you’re doing?

Warren Hatch  23:59

Absolutely, yep, it is very much complementary. And a lot of individuals super forecasters have models that they build, and they craft and they put together. So on that side of the forecasting, process models are very integral. Also, when we put our forecast together and aggregate them, we have a model to help us do that with a machine learning element that will monitor for the accuracy of the forecast so that we can deliver the best possible signal. And then on the user side, what we create that number will go into into different models like quant funds, or regular users of our of our forecast because we’re quantifying things that they couldn’t otherwise get in the form of a number. And looking ahead, I certainly see that’s something that’s going to continue, where there’s a lot that the machines can do that models can do, and they can do it fast and they can do it better in increasingly doing the heavy lifting, that we would other why’s have to do and I love that the word computer itself used to be a person, right? When somebody would be added adding machine typing away furiously? Isn’t that a fine thing that a machine can now do that which lets the human go off and do things that the machines still can’t. And there’s a lot that the machines still can’t do when it comes to judgement when it comes to forecasting, especially how people will interact in an uncertain world. The machines are not there yet, maybe they’ll get there. But what we’ve seen in the research and the results is that right now, there’s a nice division of labour to be had, where the machines can really tell us a lot about a history of a particular forecast area, the base rates, right? So the comparison classes that we should have in mind when we’re thinking about a new situation, but then synthesising them, and converting that into something about the future is something that we do. So it’s a nice division of labour.

Gene Tunny  25:59

Yeah. When you mentioned base rate I just remembered in your, you gave a great talk. It’s on YouTube, I’ll put a link in the show notes for you mentioned, a few tips for how to be a super forecaster and one of them was starting with the base rate. So looking at, well just look at what in the population, what’s the probability that that this would occur? I think it was with Harry and Megan, I’m trying to remember if that was the example, if you’re thinking about what’s the probability that their marriage will, will last, then you know, just look at the start with a base rate for the population itself, and then go from there. I thought that was a good tip. If I remember that example correctly, and then record your forecast, compare with others, update it with new information and keep score. So look at how you’ve gone over time. So I thought they were really good tips. And I’ll put those in the show notes. So yeah, I really enjoyed that. That presentation. Yeah, no, no, that wasn’t a question. Just that observation is, that was really good. But if there were any thoughts you had on that, Warren, feel free to throw them in?

Warren Hatch  27:00

Yeah, that was a great distillation. So it’s all about process, right? And you want to have a checklist, and you’ll have your own checklist. But the five things that you just went through are really important things to have on anyone’s checklist to to come up with a better forecast, there’ll be other things that might be useful from time to time. But even just going through that in your head for a minute, right, can give you a better result, especially when things are you’re confronted with something you don’t know anything at all about. Oftentimes people will say, Well, I don’t know. It’s 5050. And they’ll say, Yeah, I’m 50%. But you know, pause, how often really, is 50% being neutral on something? Not very often. And by just going through a few steps like those, you can maybe come up with something that gets you in a better position than you otherwise would? Yeah, yeah, for sure.

Gene Tunny  27:55

Tim,

Tim Hughes  27:56

one of the things with using the percentages, I remember, hearing you say as well with, it allows you to retrospectively see how you’ve gone. So you can, if there’s something for instance, that is a regular prediction, you can then start to see how you went as a super forecaster, not necessarily yourself, but like anyone who’s trying to forecast to see how they went. And yeah, have a sort of checks and balances, so that you can see how accurate you’ve been. So an interesting thing that came up along those lines was, for instance, if your football team is 80% chance of winning a game. Our inbuilt prejudice and bias, I guess we refer to before would say, well, we’re pretty much home in house. But the reality is, there’s a 20% chance that they won’t win, which of course, is still possible. And so we we sort of edge towards what we want. And also we take something over 50% as being a bigger likelihood, then maybe it is. So it’s really interesting to sort of think in these terms. And it’s a very honest way of assessing situations. And there seem to be a lot of other benefits from approaching decisions and forecasts this way. It was along the lines of what I was asking about before, I guess. But is there a big influence of philosophy in what you do? Because I can see parallels with stoics. And I think you mentioned pragmatism as an influence in what happens that good judgement.

Warren Hatch  29:22

Yeah, and epistemic theology. Yeah, we were talking about earlier is how do we think about uncertainty, all very essential. And one other really important element is, of course, Bayesian ism, where recognising that you can better understand the world with probabilities of this sort, is something that’s very critical if you’re going to be using this kind of a process. And there are those who really genuinely believe that that approach is not useful in it for people like that, that are not going to be very good forecasters, and in this sense, but as you go around and you’re looking for tools to To help think about the world, those are very important touchstones for most people, whether they have studied formally or not, they certainly acquired a lot of those principles through experience and the feedback that they have, that they have received. So epistemology

Tim Hughes  30:17

is how we know what we know. So the other one was, did you say Bayesian theory? Yeah, so

Warren Hatch  30:23

b Yeah, Bayes Thomas Bayes?

Tim Hughes  30:25

Could you explain that one, please? Yeah, I think Gene knows everything. So. But I’m not familiar with that one. So could you would you mind explaining that one, please?

Warren Hatch  30:33

Well, gene can probably do a better job than I can. But at its foundation, it’s just that when you’re thinking about the future, that you can think about probabilistically. And you will identify different variables along the way, that would affect that probability that you have shaped that you’ve started with. So if we are thinking about if there’s going to be a recession in Australia in the next 12 months, there are things that we might be looking for along the way that would get us to update our forecasts of that probability. And identifying what those might be in advance. For really important things like that means that we can attach different probabilities to those different factors today. And then as we move forward into the future, and we find out more about how those variables are actually playing out, we can update those pieces. And that will inform our update of the bigger question as we go. How would you say a gene?

Gene Tunny  31:39

Yeah, that sounds fair enough for me. It’s an A. Yeah, it’s yeah, the Bayes is there. And there’s a good book on the theory that wouldn’t die. I might have to cover it in another podcast episode. So we can go deep on it that Yeah, I think that’s, that’s great, Lauren. Oh, yeah, really, really appreciate that. I was I was thinking of Bayes theorem, but whether I should ask you about that. But that was good that you brought it up independently. So that’s excellent.

Tim Hughes  32:05

That was gonna say it’s good. Common sense, though, isn’t it like it means that you’re less entrenched in your views, and that you’re open to change your mind, because anybody’s opinion is only as good as the information it’s based on. So as you receive more information, your opinion should be more well informed and be a better opinion. Ultimately, I guess that’s based in theory work.

Warren Hatch  32:26

Yeah. But here’s the thing is that not everyone subscribes to that view, for sure. There’s some people who genuinely believe it’s better to stick to their guns, you know, the people who are very fixed models of the world, that tell them how things will unfold. I mean, Karl Marx, not so much of a Bayesian, really. And people like Nouriel Roubini, not so much of a of a Bayesian either when it because he has a view of the world. And we and we kind of hear the same thing over and over. And this new incremental information is something that they will tend to dismiss rather than bring in and update their own views.

Gene Tunny  33:03

Yeah. And I’d target you’re familiar with the John Maynard Keynes, quote, aren’t you, Warren? Yeah, it’s a wonderful one. Yeah. When the facts change, I changed my mind. What do you do, sir? I think that was it. It’s very good.

Tim Hughes  33:17

I mean, the the tragedy with this is this is how we vote in governments around the world. And they often come from entrenched beliefs, with a lack of willingness on all sides to listen to new information. So it has a massive impact at a very individual level in how we vote. I think, you know, if we could all adopts Bayesian theory and in how we vote, then it might make give us better politicians and better outcomes.

Gene Tunny  33:44

To we might have to do a deep dive in a future episode on Bayes theorem and look into it for the intricacies of it. So we might go into that in a future episode. Yes. All right. You’ve been generous with your time has been fantastic. Do you have any final thoughts before we wrap up,

Warren Hatch  34:01

maybe a couple that might be useful, just based on what we were just talking about? One is, and this can be useful for, as we, as we think about politics, and debating issues of the day, right is that most of the time, these really important issues involve people yelling and screaming at each other. Right? It’s very adversarial. And one of the things that can be done with the sort of framework we’re talking about here is if we can get adversaries on opposing sides or multiple sides to come together and identify what are the really important things that they think would support their view, but be very difficult for the other side? What does that look like? Right? And once we’ve identified what those issues might be, we can then collaborate the ideas adversarial collaboration, and say, Okay, well, here are the things that matter for these different worldviews and And then we can, you know, let time unfold to see whose position is supported by the data by events as they unfold. But then we can take the extra step and pose those in the form of questions to a population of forecasters. And by applying that process, we can bring that future into the present and get a better sense of how those issues are going to be unfolding. From here with the input of the adversaries in a much more collaborative framework. I think that’s a wonderful approach. We’ve done a little bit of that others have to, we look forward to doing even more. And I think it can also very much apply in the world of economics, where there are very strident competing schools about what causes recessions. And so let’s get the Keynesians and the monetarists together to have some collaboration in that way, engage on a real world issue, like what’s the probability that there’ll be a recession in Australia in the next 12 to 24 months is a wonderful thing to do. The other thing that I think are useful to maybe think about is economists themselves, why they don’t do better. And I think one reason is that many of them continue to practice their craft, using state of the art techniques from the 19th century, in the way they model things and think about things and exchange things. And the sort of process that we’ve been talking about here, much more dynamic, much more nimble, and much more team based might be really interesting. So for instance, it’d be really, I think, potent, to do a survey of economists about the probability of a recession in the next 12 months, where we just take their snapshot like all these surveys already do. But then put them together and have them compare notes and probe one another’s reasoning. Yeah, and have an opportunity to update as a result of those different views, even anonymously. So their official forecasts could still be the same. But they could have kind of a informal forecast that they make through this process with kind of a shadow version of themselves. And I’ll wager that the number that comes out of that informed crowd is going to be better than any one single economist, Rod.

Gene Tunny  37:31

Yeah, that’s a good idea. I mean, we do have the economic society runs a poll of economists, but I’m not sure it forces them to give answers in a consistent numerical format on these questions where they are asking a question like that. So yeah, I’ll have to have to think about how that could work. Have you seen that work in economics or any other discipline anywhere in the world? Warren, that type of approach?

Warren Hatch  37:54

It’s happening at organisational levels. Okay, that’s, so we definitely see that, where were the things that are important to the organisation, they’ll use that kind of a framework to think about things, we also do it on our public site. And that’s one way to do this is that they could all just go and invent names, Mickey Mouse, whatever, and make a forecast on that very question on that platform, completely anonymously, and see how they do. The other thing, too, that I think is really interesting, is that often it’s rare, where even the word recession gets defined with some precision. Yeah, so one problem is that we all interpret it in different ways. We think of different thresholds, different, you know, different ways of defining what it is. So right from the starting gates, we are forecasting different things, and just having a shared understanding of what that means itself would do a world of good.

Gene Tunny  38:55

Yeah, exactly. I mean, there’s the is it two negative quarters of GDP? And I mean, you can get some odd results if you use that or is it is that the NBR declaring a recession? Yeah, you have to be very specific. I think that’s a good point. I just want to ask about the organisations that are doing this is is one of those organisations is it Bridgewater Ray? Dalio is Bridgewater, I’m trying to remember I read that in his principles book that he, he really tries to get people to be very specific and about what they’re forecasting or predicting.

Warren Hatch  39:26

They definitely do. They don’t work with us. But they’re doing it on their own. And obviously very successful at it by applying a lot of the same things that we’ve been talking yeah, here with with a lot of rigour

Gene Tunny  39:39

I might have revisit that book and just check whether that’s what exactly what they’re doing, but it just, yeah, it rang a bell in my mind that Oh, is that what Ray Dalio is doing? Because he’s very rigorous about in his thinking and questioning his judgement because he got something spectacularly wrong in the 80s and it almost destroyed I think it just destroyed his business at the time and so he learned a big lesson from that. Yes, yes. Okay,

Tim Hughes  40:03

wasn’t it 11 economists predict 11 out of seven recessions is that right?

Warren Hatch  40:13

Yeah, that was a great quote from an economist. Samuelson was his name. And he was writing in Time magazine in the 1960s. And and he that’s when he made that statement, that economist, I think it’s have predicted nine of the last five recessions and the ratio holds.

Tim Hughes  40:33

That’s, um, I love the idea of adversarial collaboration. I think that’s such a smart way to go around things and get better outcomes. And I think there’s so much to take from this. For everybody, like, way outside, the area of forecasting just seems to be a way to be a better human and to a good way to approach life. But so yeah, I’d really like to hear more about that. As you guys do more of that. We’d love to speak again, on the on that regard.

Gene Tunny  41:02

Yeah. Yeah, it’s been terrific. Warren, we really appreciate your time. So I’m really happy with that. And yeah, just incredibly grateful and excited. That was a really learned a lot. And I think it looks like you’re doing some great work there in the methodology or makes all makes sense to me. And it’s, from what I’ve seen over the years, I’ve understand why I’m thinking, why I’m forecasting or predicting certain things or what could be wrong with that question and trying to get other opinions. So yeah, and partly those because I read Philip Tetlock book, partly because I’ve seen the problems we’ve had with forecasting financial crises and recessions in the past. Yeah. So all great stuff and keep up the good work and really appreciate your time.

Tim Hughes  41:47

Just to finish off, I just want to say So one good judgement does work for people, if they want to work on a project, they can approach you guys how to how does that work? Warren? Is there a particular areas you guys work in? And how do people contact you.

Warren Hatch  42:01

So the way to contact us is we can just go to our website, good judgement.com And reach out there. And we do we do consulting work on projects, where organisations may want to bring in some of these things and customise and adapt their own processes. They may also just want to have training workshops. And we do an awful lot of that, especially in finance and economics. That’s a big part of what we do globally. And the third thing is the super forecasters themselves, where we’ve got a subscription service on a lot of topics that are nominated by the user. So it’s a crowdsourcing of the questions as well as the crowdsourcing of the forecasts, as well as doing custom question work for organisations, as well. And I very much look forward to that.

Tim Hughes  42:50

Once I get going. It’s hard to get me to stop. You’re in good company at all,

Warren Hatch  42:54

I’ll look forward to to picking it up again, in due course, and perhaps even meet up. I’m working on a way to do a project over in your neighbourhood.

Gene Tunny  43:03

Oh, very good. Yes, definitely. Yeah, we’re in Brisbane. Yeah. If you get up here, that’d be great. So if you have an event in Sydney or Melbourne, just let us know. So yeah, we’ll have to talk more about that. Yeah. Good one. Yeah. Well,

Warren Hatch  43:16

we have super forecasters in Australia, including a couple in Brisbane.

Gene Tunny  43:20

Oh, very good. Okay. I wonder if I know them. It’s a it’s a little secret. Is it so hush, hush.

Warren Hatch  43:28

Ah, no, no, I’ll put you in touch with a male.

Gene Tunny  43:31

Very good. Yeah. Be very interested. Orrin Hatch from good judgement. Thanks so much for your time. We really appreciate it.

Tim Hughes  43:37

I predict that we’ll have another talk in the not too distant future. Okay,

Warren Hatch  43:42

I look forward to it. Thank you, Tim. Thanks. Good. Thanks, Ron.

Gene Tunny  43:51

Okay, I hope you enjoyed our conversation with Warren hatch from good judgement. To me the big takeaway from the episode is the importance of being open to a range of different views. Think critically about your own forecasts and be open to changing them if you hear someone making a compelling argument for a different forecast. I really want to put some of Warren’s ideas into practice, including the idea of a super Forecasting team. It wasn’t explicitly mentioned in the episode. But one important concept is the wisdom of crowds. good judgement is relying on groups making better forecasts collectively than any one individual. But as Warren mentioned, you need to set up a process or a forum for doing so which is meritocratic, so the group’s forecast is only influenced by the quality of arguments presented rather than by any biases. I must say I was glad that Warren said there is still room for numerical modelling as an input into super forecasting. I really liked his advice about the importance of getting subject matter experts and non experts together to come up with better forecasts. One thing I wished I’d asked Warren about is the distinction between hedgehogs and foxes. This distinction comes from the philosopher Isaiah Berlin. According to Berlin, the fox knows many things. But the hedgehog knows one big thing. Philip Tetlock who popularised super forecasting, he’s observed that foxes make better forecasts than hedgehogs. Someone who’s more widely read and thinks more creatively can be a better forecast. And then someone who has deep expertise in a field but who doesn’t take in a lot of inputs and views from outside of the field. This reinforces the needs to be open minded to think critically about your own thinking and to actively seek out other views. If you’re a subject matter expert, you need to make sure you’re open to other perspectives, and that your thinking isn’t constrained by the conventional wisdom of the discipline. Arguably, this was a problem for many economists in the lead up to the 2008 financial crisis. In my view, economists need to go out of their way to become more like foxes and hedgehogs. I’ll put some links in the show notes about the foxes versus hedgehogs distinction, along with links related to concepts covered in our conversation with Warren. One of the links is to a great article making better economic forecasts by my friend and colleague, Nicholas Gruen, who’s appeared on the show previously, next, a big fan of the super forecasting approach, and he wants central banks and treasuries to adopt it. In his article, he also writes about the potential benefits of running economic forecasting competitions. So please check out that article of next for some great insights. Okay, please let me know what you think about this episode. What were your takeaways? Would you like to learn more about Super forecasting? Would you like a closer look at some of the things covered in the episode such as Bayes theorem, feel free to email me at contact at economics explored.com. I’d love to hear from you. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

47:32

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

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 Podcasts, Google Podcast, and other podcasting platforms.

Categories
Podcast episode

Do environmental and business sustainability go hand in hand? w/ John Engelander  – EP172

Planet Earth Cleaning Co. and Ecobin founder John Engelander proposes that environmental and business sustainability can go hand-in-hand. Show host Gene Tunny asks John about the benefits and costs of businesses adopting more environmentally-friendly practices. 

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 we discuss with John Engelander, founder of Planet Earth Cleaning Co. and Ecobin

  • John’s epiphany that led to the birth of the Planet Earth Cleaning Company [4:15]
  • What are the costs and benefits of adopting environmentally friendly business practices? [8:00]
  • “It’s not an investment if it is destroying the planet” discussion, in which Gene mentions how economics has been trying to account for environmental impacts [20:38]
  • Do we have enough time to avoid a climate/environmental crisis? [25:50]
  • John asks Gene if we need to own cars? [33:54]
  • John’s final thoughts on the importance of being a conscious consumer [44:29]

About this episode’s guest: John Engelander

A true force of nature, CEO & Founder John was green way before it was cool. It was his belief in profit with a purpose that led him to start The Planet Earth Cleaning Company circa 1994, and he has been inspiring people and companies to be greener and better for the planet ever since.

In 2007, John completed his certificate in Sustainability Advocacy at Swinburne University.  He believes, “when you look after the planet, you look after yourself”. When we influence others to take responsible actions, there is a ripple effect. And that’s part of doing good by being good.

Today, John works with people that are looking for a healthier alternative & genuinely cares about making a difference to the planet, whether that’s through The Planet Earth Cleaning Company, the EcoBin business, or his personal advocacy & public speaking. John believes “conscious consumption is a great way to start. After all, less is more, and your planet will be healthier for it.” Now that’s good for business.

Out of the office, John burns off some of his high energy levels with water sports, snow skiing, mountain bike riding, cardio pilates and enjoying time in nature. And when not running after his kids and dogs, he likes to tinker on the piano, watch movies and have dinner with friends.

Links relevant to the conversation

John’s business EcoBin:

https://www.ecobin.com.au/

Quote by Vandana Shiva:

https://quotefancy.com/quote/925201/Vandana-Shiva-It-s-not-an-investment-if-its-destroying-the-planet

Mastercard study quoted by Gene:

https://www.mastercard.com/news/insights/2021/consumer-attitudes-environment/

CSIRO article on natural capital accounting:

https://ecos.csiro.au/knowing-the-price-of-nature-the-rise-of-natural-capital-accounting/

UN article on The Rise, Fall and Rethinking of Green GDP:

https://seea.un.org/news/rise-fall-and-rethinking-green-gdp

Australian Government guidance note on cost-benefit analysis, which makes it clear CBAs should consider environmental impacts, quantitatively if possible but otherwise qualitatively:

https://www.pmc.gov.au/sites/default/files/publications/cosst-benefit-analysis.docx

Transcript: Do environmental and business sustainability go hand in hand? w/ John Engelander  – EP172

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.

Ep 172 31 December 22

Sat, Dec 31, 2022 6:16AM • 49:58

SUMMARY KEYWORDS

people, business, economists, cleaning, planet earth, john, economics, planet, sustainability, clients, cleaners, green, company, eco, thought, buy, organisation, price, good, world

SPEAKERS

Gene Tunny, John Engelander, Female speaker

Gene Tunny  00:00

Coming up on Economics Explored,

John Engelander  00:03

And I do believe that businesses that are purpose driven, people are attracted to that. And that attraction makes people happier and more productive.

Gene Tunny  00:15

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 172 on environmental and business sustainability. My guest is John Engelander, founder of the planet Earth cleaning company, and also the founder and CEO of Ecobin. In this episode, John and I discussed his proposition, but environmental and business sustainability go hand in hand. After my chat with John, I provide some reflections on the conversation, so please stick around for those. Also, please check out the show notes for 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 John or I have to say in this episode, whether you have any thoughts on environmental and business sustainability? To what extent are they aligned or in conflict? I’d love to hear from you. Before we get into it, I would like to let you know that I’m going to take a short break from the podcast over January and come back in early February. Righto, and now for my conversation with John Englander of Ecobin. Thanks to Obsidian Productions for their assistance in producing this episode. I hope you enjoy it. John Engelander, welcome to the programme.

John Engelander  01:26

Well, it’s an absolute pleasure to be here today, Gene. So, thanks for having me.

Gene Tunny  01:30

It’s it’s fantastic to chat with you, John. So you’re very keen to chat about issues around business and environmental sustainability. So you’ve had a very successful career as a business owner, with the planet Earth cleaning company. And also with you’ve been involved in Eco Bins. I’m keen to understand those businesses, what you’ve done there. To start off with, I’d like to ask you about this. This philosophy of yours, I think it is that environmental and business sustainability go hand in hand. I mean, what do you mean by that? What does that mean to you, John?

John Engelander  02:14

Okay, it’s a good one because often I feel incredibly fortunate that I’ve been able to combine sustainability, and commerciality almost as a cocktail. And ther is some perfection in that because you give a lot of thought, I give a lot of thought and consciousness to how we think about the products that we consume, or what we offer our clients. Because I feel that the impact matters. And I think the price we pay for something, let’s call it whatever it might be, dollars, whatever. And then the price we have on our planet require some kind of balance, because, frankly, we don’t have an economy without getting it right with the ecology. Wouldn’t you say?

Gene Tunny  02:58

No, I absolutely agree with you there. I mean, we certainly need the environment to sustain us. So yeah, absolutely, absolutely, agree there. And would you be able to tell us about the planet Earth cleaning company? How you got involved in that? How did you figure out that this was a way that you could have a business that that met these, you know, that was both financially sustainable, and also environmentally friendly?

John Engelander  03:28

I think the like most things that can work out well, is there’ll be a problem. And if you can solve a genuine problem, then there’s likelihood there’s an opportunity, I don’t think you can make up. Often an idea, I’ve done it many times, it’s a good idea should do it. But in fact, there’s no problem to really fix or it’s not going to give people a great deal of joy. And I think there’s a problem when people buy a mountain bike, they buy that for joy, that’s not a problem. So it’s two ways, you either look at it as joy or you’re solving a problem. From my perspective. So how did it come about? I think, purely, it was by accident. I wasn’t planning on going into the cleaning industry at all. In fact, I still don’t plan on getting into the cleaning industry. I plan on trying to resolve something that made sense, and that was that. For those who have heard my story before, it was that one of the cleaners were sick, like they didn’t show up, and I ended up rolling my sleeves and ended up in a toilet cubicle of all things. Cleaning a toilet bowl, which never imagined that would happen. And as I opened up, the cleaning chemicals, the fumes were intoxicating. I also thought I was gonna suffocate and then if I thought that was bad, my hands were starting to crack split from the stingingness, I felt stinging you know, it was like burning, and that was it. Honestly, there’s got to be a better way. How can you subject people to this who were cleaning every day when that happened, and I guess that was one would call an epiphany moment, you know, if there has, if I can look after a way of fixing it for people cleaners, then there’s a there’s possibly a business opportunity, hang on a minute, if it’s good for them, it’s good for the planet. And that was essentially the birth of the Planet Earth cleaning company. Totally. Now, that didn’t mean that three decades ago, people talked about sustainability, then you can talk about green, greens is a fairly new word, back then it was just a colour. So I guess, feeling and believing and having purpose in my day-to-day life all the time drove me. And I could actually lead my people. So they understood that I was actually looking for a way to make their lives healthier. And that was a huge thing, until people started to wake up. Probably more recently, and I say recently went out when Al Gore brought out the documentary Inconvenient Truth, there was a bit of aha moment. And then that slowed down. And that now it just seems, there’s a real inertia in terms of the word impact. And it seems like that the whole idea of impact has become a big topic around what I do and probably attract investors, you know, get the calls, you know, I’ve been doing it for so long that I must know. I do. So that’s it sort of come together. So yeah, it was by accident to see a problem, the problem made sense to fix. And then I figured this is a good business to get into.

Gene Tunny  06:40

Yeah, for sure. John, would you be able to tell us a bit about I mean, how, what your scope of operations mean, where you operate the types of clients or customers that you have

John Engelander  06:52

Sure, so our clients are boutique large, or not so large, when I say not so large, that can fall under the type of clients that that would work with us. we have clients like Katmandu, we have clients like realestate.com, seek.com built a whole lot of building companies, McConnell Dow, which ones largest structural engineering firms in the world, and so forth, just to name a few and Cricket Australia, and other ones. So just a little, few little companies that probably they have good branding, good identity, recognise the need to not just take on cleaning, but see that by having planet Earth, it’s a huge upside for them in terms of letting their people know, when think about what that does to culture when you know, you’re a values based organisation. And we do this in Melbourne and Sydney, we’re looking at Brisbane, but at the moment, it’s really, really the two main cities in this country.

Gene Tunny  08:00

Okay, could you tell me a bit about what you do your operations? I’m interested in this because you mentioned the, the fumes, you mentioned the chemicals that cleaners traditionally use? And I imagine there are companies out there that are still using these chemicals? I mean, what what precisely are they are there some examples you could talk about? And then what what are substitutes? And are they as good? I mean, the thing that I’m wondering is, okay, do you do get the same quality of cleaning is at higher costs. So is this something that is a bit is a bit of a luxury? Or is this something that businesses across the economy can afford? Could you just talk about that, please?

John Engelander  08:44

Great question. First of all, chemicals. What price do you pay for your people getting sick? When those fumes go through your air conditioning wafting through something must happen, can’t measure it. But something must be going on, if it’s happening to my cleaners, because they’re right there and then it’s going to be happening somehow, indirectly to the clients. Better cleaning. Okay, let’s look at acid. It’s really good, isn’t it? I mean, you think about it, you’ve seen urinals we all have as men go into toilets and urinals and the only way to clean a urinal properly apparently is with acid, really. And an interesting story was some years ago, one of my prospective clients who became a client loved the whole story about Planet Earth, but he thought he would prepare cleaning his urinal without telling us so he went out and bought acid and did it. And a very sad story. He suffered for years. Now he called on us I would have gone no way. I’d never give that to my own people. He’s a client. I really adored this person. He took us on board for the very right reasons. And yet, sometimes consciously, it’s possible not to think so his health got a price when he paid for that. Do we have enough money for it? Well, I’m sorry, if you can’t look after yourself and pay for that. There’s an issue, how much more you pay is interesting, right? So think about this, we use chem free, we have a system, which is chem free by planet Earth, we actually installed it in the building’s plumbing system, it converts water through an electrolysis process and turns it into a sanitizer cleaner. The Cleaners just turn up with their little spray bottle, push it in, plug it in, it does that good noise rush, and then it fills the bottle up. And they can use that to clean and yes, it’s effective. And it’s not toxic. It was water, water through electrolysis process. Now, not every body wants to invest in that. So could you say it just cost us not, can do. But are we interested in getting it right for our people? And let’s face it, when you throw away chemicals into your waterways, after you clean toliets or mop floors, do you think that’s really good, can’t be good for the planet. And so all of that, and the beauty of about chem free is that we don’t have the containers. Because when you have containers delivered, that’s transport emission, then you have great big plastic containers filled with chemicals. That’s transport not only transported, but the plastic it took to make it one use. Maybe not, maybe you can send it back to the factory and they fill it up. Well, it’s got to be sent back again, transport. But imagine all you do is plug a little spray bottle in and it fills that up. Now, sometimes you just got to use a little bit more elbow grease. But if you care enough, you’ll do that. Is the price higher? I doubt it. I think what, if anything, it’s really good value. And it all comes down to the effort you put into the job. So the beauty also of that is, if I may, is that, think about this? Is everyone complaining about not being able to get labour at the moment, in this time? It’s 2022. And it’s really hard to find labour. Why is it that a purpose driven company like us doesn’t have a problem, that has to have a great outcome for our clients, because you’ve got people that actually are doing something because it matters for them beyond a dollar, because you’d never pay cleaners enough money to come do their job. But purpose will drive. And purpose if the message is properly conveyed to our clients, people, it all becomes it starts to build culture in terms of value based. And I do believe that businesses that are purpose driven, people are attracted to that. And that attraction makes people happier and more productive. Can you put a price to that? You betcha. You spent $100,000 on cleaning, you’ll get an outcome of three, four times then in your culture development, if you make sure you promote that you’ve taken on Planet Earth Cleaning Company, because it’s a big deal to make the right choices.

Gene Tunny  13:07

Yeah, I think the point you make about health and safety is a good one. I’m not familiar with the data for cleaning, I’ll have to check it out after this. I mean, I’m not sure what the studies show whether there is a significant improvement in health and safety outcomes with using these environmentally friendly products. 

John Engelander  13:35

Yeah, no, I’m saying the same thing I can’t measure. All I can say is it’s a good chance. But it’s good to know, if you’ve taken on a cleaning company they care enough about their people to you know, I mean, we go as far as even caring about their mental health, we have a service where they can call up if they’ve got issues. None of my management are allowed to know about it. So yeah, we’ve gone from product to people’s minds to actually having them, you know, on board with, with, with this whole idea of we’re getting it right, because let’s face it, we all have the planet in common.

Gene Tunny  14:13

John can ask you betting impact investing? I think you were talking about that earlier, you were talking about impact everyone people are interested or investors are interested in impact now. So does that. Have you been dealing with that in investment impact or what does it impact investing community? How substantial Do you think that is? Is? Is that going to help support or help grow a lot of businesses such as yours or other businesses and that are environmentally friendly?

John Engelander  14:43

I think that look I don’t know a lot about impact investing. I prefer to invest in myself. But the truth of the matter is that I do believe that there’s a there’s a whole movement towards looking at being ethical, and ethical and impact seems to have they complement each other, don’t they? So let’s, let’s look at it this way. My couple years ago, I think my brother in law showed me a return on investment with an organisation called Australian ethical. Did that year, he made close to 50%? I’ve never heard of that in my life. I fact, I was blown away. I don’t know if they continue to do that. Was that just a fluke that year? Either way, was it settled? It spoke volumes? Didn’t you look at businesses like? Well, if you bought Tesla a few years ago, just 2000. And I don’t know, let’s call it 2020 20, February to 2020. And that share price is $480. I know because I actually invested in that. And it got it went up and up and up and up, went to 2400 got split by five, what was that worth? Then it went up and up. And now I’ve got slipped by three, not doing so well at the moment, which is really interesting, because they’ve been more profitable than they ever have been. But they’ve actually led the field where they go to in the next 10 years. Who knows. Some have faith in it, and some don’t. But it brings a whole lot of other industries together about looking at what’s viable, both commercially and sustainably. Have To be frank, I’m not a big fan of the word sustainable. So which often shocks people, but I think we should consider the idea of being enabled enable the planet, the planets in trouble, we say it’s overheating the the blanket in the sky of greenhouse emissions that are just get thicker and thicker, holding the heat under. So our temperatures change on the planet. Is is that an interesting? An interesting idea. So I think, you know, when we consider the future we’re talking about so that the health of the planet, you know, with all these things, that people plan it all together pretty, pretty combined. I think there’s a good investment even to look after our children’s future that is enabling the planet, I think it’s an essential part of it all. So, you know, often I can call our teams and enablers, they’re proud of it. We recently had our tree growing programme, we do this, you know, half day tree grow, growing programme. And we’re actually looking to do that for our clients next year, too. So because the half day programme really enables a whole, I guess, one’s team to really come together and, and be connected, which is another part of it, too. We all feel connected, we feel better about ourselves and have something in common. So that whole thing has to be viable, I believe for the organisation. To give you an idea when we when we did the most recent one 30% of our staff actually weren’t working that morning. But they showed up to be part of it. What does that say? Yeah,

Gene Tunny  17:59

yeah, that’s a good culture. Yeah, not bad. That’s really good.

John Engelander  18:04

So that has to make, you know, if you have happy culture, and they’re more productive, which I mentioned earlier, that’s going to be a viable proposition for anybody.

Gene Tunny  18:11

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

Female speaker  18:20

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Gene Tunny  18:49

Now back to the show. I think I may have asked you this. So I think you may have answered it before. But one thing, one thing I’m interested in is whether it does cost you money to do the right thing as a as a business owner. So does it make you less profitable than than otherwise? You may have answered that earlier. But if you can just reflect on that, please, John, that’d be great. Good.

John Engelander  19:13

Okay. So yes, it can and, and like anything, what you choose quality always cost more. But let’s look at it this way. If it’s not, if you don’t see it as quality, but you see it as doing the right thing. Can it cost more? Possibly? I don’t believe if you buy quality, like if we offer a quality service, you pay for it. If we provide green, I don’t believe we’d need to charge you more because we’re agreeing. I don’t think that’s necessary if we manage it fine, right. But when you can talk about what would you pay to drive your workforce? Because you’re purpose driven? What would you would you bring a you know the term people and culture that and companies bring people in and spend Lots of money, right? We don’t have to do that with us. And I think that’s a huge, huge tip, as is bringing in Sustainability Consultants, you don’t need that we, we can give it all eco been planning to go in and give advice on what to do next next year will be big plans to helping organisations transition to a green future. Because I really believe that’s the direction we need to take otherwise, why would you do business with companies that are destroying the planet, and then look at that. It’s not investment, it’s destroying the planet.

Gene Tunny  20:38

So this is a quote behind you. That whose it

John Engelander  20:42

by John, Dr. Vandana Shiva writes it. 

Gene Tunny  20:47

not an investment if it’s destroying the planet? So look, I don’t think that that makes sense. What it’s suggesting, as an economist, the way I think about that, is that if you do have something that is degrading the environment, then if we were properly account doing if we were properly doing the economic accounts, then what we would do is we would, we would recognise the subtraction of value in the environment. And, look, I know that economists, you probably object to the way that economists look at this sort of thing, economists would put a value, they would try to put a value on the environmental capital stock, or the natural resources. And then to the extent that there’s degradation of that you could subtract from that. And we should be recognising that in our national accounts as a, as a negative investment as a disinvestment in that in that natural resource asset. So there is a, there are economists that are looking at how we can measure that environmental damage that’s occurring. And it’s a field called natural capital economics, if I remember correctly, or there’s an environmental economics field, and there’s ecological economics, which takes a different perspective. Yep. So it’s not as I mean, economists are thinking about these issues. So yeah, I think that’s that is an interesting quote, to reflect on. I’ll put a link in the show notes to while reproduce it in the show notes and link to put some links regarding it, because I think it is a it is a very good quote.

John Engelander  22:33

Look, I don’t blame economic, economical economists. I often believe that where I sit in this world is to be highly relatable. And you can’t do that without understanding others. It’s not enough for me to be persuaded and say, hey, you know, staunch Greenie and you guys are bad. I think that’s not the way to go. And nor is that the other way. Extreme. No one listens to extremist. Really, really interesting. I mean, look, I know both sides of the story. I don’t know if you’ve ever read the book, how the world really works. And it believes that we’re in such a heavy hitter, but

Gene Tunny  23:12

I’m trying to remember if maybe, maybe I haven’t read that one. I’ve read a I’ll have to look it up. I’ve read a book about maybe a thinking of a book about the deals that made the world I think I got confused momentarily. I don’t think I have read it. Sorry, John, can you tell me a bit about it’s okay,

John Engelander  23:29

so, look, all of us we don’t think about what we buy, we just buy it that way. And so don’t consider if we buy a plastic tub, how much oil has gone into it? Or we don’t think about whatever it might be. Oh, when was it the Climate March and I was wearing my planet Earth t shirt. And some young 21 year old came up to me and says, Hey, dude, I love your planet Earth T shirts. And hey, dude, I love your one use water bottle. And it went red. And I actually looked back at him. I said, Look, I’m really not looking at you. And judging, I just think we do forget not thinking. But when when you think about the different layers. For example, ATP is a good good case in point, we brought out a waste system for being able to separate your waste using different colours, red landfill blue for paper, green for food, yellow for recycling, and so forth for plastic recycling aluminium. And, and I’ll go back to the book in a second because it’ll all come together. And when I chose to do that, it’s really good that we’re able to help people sort waste because let’s face it when you change people’s ways, habits through colours, it’s much easier Yeah. Now it’s made in Melbourne, Australia. Not only is it Australia and I thought about what’s called an LCA, a lifecycle analysis, went through the whole thing and understood how much carbon we were able to find a plastic fabric, plastic, believe it or not, but a certain type of plastic that used to 80% less energy and its manufacturing of an equivalent sized plastic bin. How’s that? So the consideration was good, by the way, cost less to make. So I can charge less for other people use the no excuse. It’s quite affordable. So talk about is it costly? Do grain not in that case, but the separation of it means imagine, you throw a plastic whatever in there. And it turns eventually into plastic garden furniture. I mean, it’s it’s pretty phenomenal, isn’t it? I mean, you didn’t have to steal the resources out of Mother Earth. You actually did it, because it was available there and then and didn’t have to go back into it didn’t have to end up in landfill. It ended up converted, right. Good point, right. Here’s the thing. Look at this book. And it’s bizarre how the world really works. And it says, we’re addicted to plastic. We’re addicted to oil. We’re addicted to steel, we’re addicted to ammonia. How are we ever going to change? Then I’ve got another book on the other side of it called the carbon carbon Almanack. It’s not too late. So which one do you believe?

Gene Tunny  26:08

Which one do you believe the carbon Albert ACK or the how the world really works?

John Engelander  26:13

Yeah. Because the Almanack says it’s not too late. And the other one says are we’re in? We’ve got all these habits. Yeah. Plastic oil, you know, ammonia, concrete, you know?

Gene Tunny  26:25

Yeah. Well, I mean, I’d like to think it isn’t too late. I recognise that there is a need to decarbonize our economies? Our look, I think it’s, I mean, I’m, I’m of the view that we need to, I’d be probably advocating a more gradual transition, then then many others, including many other of my fellow economists, I think most economists would support a carbon tax or an emissions trading scheme, which imposes a carbon price, I think there’s a recognition that we need the right signal air to, so that businesses and consumers are considering the what you call the marginal social cost of, of greenhouse gas emissions. So that’s included in the in their economic calculation. So I think there’s there is a recognition that something needs to be done. I’ve just been concerned about the pace of it. And I think, with the issues over energy here in Australia at the moment, cost of energy rising. That’s, that’s something I’ve been concerned about. But I would like, yeah, so I guess I’m saying I’m probably more of a carbon Almanack view. Because I’m just trying to, I think we just need to understand that the world the way that economists think about this, and it is that with these resources, I mean, you mentioned these resources that have been depleted or being used. And you could say, you know, maybe they been used unsustainably. But the standard way that economists look at this is that to the extent that they are, then that’s going to be reflected in the price. And that will encourage conservation of those resources. So that’s the way the the economists tend to look at it. And the argument would be that we really haven’t run out of any essential resource globally. So that’s the that would be the economic argument there. So I guess what I’m saying is that if he asked me to choose between those two, those two books, what was the one that how the world really works?

John Engelander  28:44

It really works and the carbon Almanack Carbonell Almanack. It’s not too late. It says underneath it. Yeah.

Gene Tunny  28:49

Yeah. I mean, my, my view, or rather, my hope is that it isn’t too late. I think it’s something perfect. We can, we can sort out in time. I mean, a lot of these predictions of Apocalypse are coming from numerical models of the climate. Yeah. So Well, yeah. Okay. I know that there are there have been there. Definitely. There’s definitely change occurring. I’m not denying that. But my hope. And I guess my expectation, if I had to put if I had to make a best guess, my best guess would be that we have time. But look, I may be wrong. I’m not. I’m not 100% confident in that, that.

John Engelander  29:34

You don’t have to be Gene. I think the the point here is why wouldn’t we just do the very best we can? Yeah, there’s no harm in that sort of harm. And the other way, there’s no harm in that. And so you think we all live pretty well. Let’s look at look at Australia. How many TVs do we have in our house? How many cars do we drive? And what kind of is that quality of life or is there something else that’s actually hot at a higher value? I have to tell you I much prefer getting on my mountain bike in the country and writing that than then jumping into someone’s petrol car, you know? So it’s it’s those considerations, what is life? What is it? What is really the essence of the quality? That one would really require the kind of 140 square home carpark underneath? Or do we really need that much? Do we? I’m not saying it’s not a judgement call, by the way. Choices are there? But I don’t know, it’s like, I think it brings it down in my fundamental philosophy. And that is, if someone was to ask be you’re really passionate about the planet? And I’d say no. And so that shocks, but there’s a reason behind that. It’s not important for me to be passionate about that. I mean, I love my you know, I could have someone you ask someone, do you love your mother? Yeah, very much. Are you passionate about it? No. Love it. And so it’s those things that you kind of look at, it’s logical, I look after myself, do you look at yourself? Do you eat good food? Do you do all the right things for yourself? So you do it for the planet, wouldn’t you? You don’t have to be passionate, just passionate. From my perspective, live life fully is my passion. I do stuff, you know, I get out there enjoy the fresh air. I don’t want it to go naturally I want to look after and preserve what’s happening. And what price do you put to that? Now? $1 financial, you know, it’s not important. Entirely. Put it in perspective. But if you have very little it is important. But when you have more, how much more do you need? What is at what point do you say it’s enough? At what point do you tell your shareholders that, you know, we’re going to deliberately make this? It’s okay. But maybe it’s not? Because I didn’t come into business just on that basis, I need to be interested in what I do. And when I’m interested, that fuels me, and somehow Money takes care of itself. Not always. But most of the time, yes, I’ve made, we’ve all made mistakes, I brought out a product called Eco to life. Would it be 14 years ago, that in 14 years ago, while I was trying to and as we were building the product together, it was actually concentrate to sugar cane and corn made into a cleaning product. And there’ll be little little packets, he buys spray bottles. So once you once once you buy spray bottles, you’d have to buy them again, you have to go to the supermarket and get more, but you just add this little bit at the waters, you’re not carrying heavy loads of water home either. And I thought that would be a good idea. And I threw a lot of money into this idea. And it didn’t, didn’t happen. So the timing, you know, today I know what’s happening because I you can buy this, you can buy this. So in a sentence pioneering is it’s very painful. But I’m interested in the topic and it becomes part of my story. And I’m good with that. Instead of being sort of being a victim, you look at it and go, What have I learned? Where can i What, how can I use that moving going forward? And I do believe we’ve got a chance. And it’s a great story for all of us to come together and get it right. And there’s so much new technology coming out. It’s unbelievable. In terms of what we’ll see we’ll see people with solar on their roofs, sharing their power with other people. That’s a great example. Yeah. What about geothermal, and housing your home with heat and air conditioning from the natural substance of Earth, underneath us, and by the way, that could be economical to once we get the price down in terms of that technology.

Gene Tunny  33:54

I think the point you make about the local energy grids or whatever you call them, with the sharing of solar and if we can use EVs as batteries, and if we have smart metres in the household, I mean, there has to be a lot of investment that occurs before this all happens and you know more batteries around the place that Yep, EVS mean, everyone will need to get an EV they’re currently twice as expensive as they probably need to be to have widespread adoption by consumers.

John Engelander  34:27

Jane, question though, do we need to own cars? Ah, we currently use if you’re lucky one and a half hours worth of driving a day.

Gene Tunny  34:37

Yeah. Look, I agree with you there, John. And I mean, I’ve I myself have spent several years of my life without a car. But I recognise that the only reason I was able to do that was because I lived in the inner city. So I didn’t have to commute. I didn’t have a family to to ferry around. into. So I think I think it’s a fair point. And you know, we could look at mobility as a service, I think they call it. So yeah, yeah.

John Engelander  35:12

Call on it when you need it. And now that way, because battery technology, if it’s function properly, it can go a long way. Otherwise, we’re wasting a terrible resource. And we can have less cars on the road. And instead of people going, our batteries are bad. Well, maybe we can turn that whole notion to something that’s productive, as opposed to focusing on what’s wrong, rather than what’s right. You think?

Gene Tunny  35:42

Yeah, well, yes. I mean, I’m all for having fewer cars on the road. I try and walk wherever I can. I just, but that’s partly for self interested reasons. It’s not necessarily for the environment. I think it’s good that it is positive environmentally. But I, I look at it as incidental exercise. I mean, I think that I find that if I don’t, if I don’t walk, to go down to the shops then that I lose an opportunity to do a bit of exercise, and then I’ll go to the gym. But I find that if I can not take the car, I get a benefit that way. And yes, it is good that it is good for the planet. That wasn’t that probably wasn’t my first consideration, though.

John Engelander  36:25

But you know, you said something really profound is that you looked after yourself. Look at the planet, you look up.

Gene Tunny  36:34

Yeah, there’s a nice correlation. There are a nice coincidence of, of interest there. Yeah, yeah.

John Engelander  36:40

Yeah. I just, I just hope that the economists see the logic and the fact that, from what I understand is a sustainability scorecard that I that I believe will will come to come to businesses, whereby it’ll be just as important as your financial accounting, as it will be to show that you’re actually showing your impact.

Gene Tunny  37:04

Yeah, yeah. I mean, one thing I’m interested in it is, to what extent can this be led by this transition? To what extent can be led by business and consumers directing? Well, by their purchasing power, directing, production, directing the commercial activities of businesses and how they treat the environment? In particular, we have the scorecards, if there’s greater transparency, to what extent can change be led, in a bottom up way, rather than top down with government policy to have any thoughts on that? I mean, to what extent is a lot of this stuff already happening? Or does it? Or do we? Or do you need government policies such as carbon pricing as well?

John Engelander  37:53

Yeah, it’s, it’s, it can be, it feels a bit disappointing if you thought that’s what it would have to happen. Look, look at our young generation, they want to work for companies that are values based, they care that have this notion about the planet. So it could happen from the bottom up, down, right? Because you do attract. I’ve heard this so often attract and retain staff. I know, it happens, we do it. So if you, you can do it from the bottom up. And I don’t really want to see people forced to engage being engaged. It’s like leading a horse to water, isn’t it? So imagine if you just got people from a feeling of what would we call it excitement, or at least be happy and joyful about the fact that work for a company that actually cares put together green teams develop ideas together. It’s, that’s one of my missions next year, actually, is to help business transition to a green future. And there’ll be in this regard our membership base solopreneurs, coming together, and having evening discussions about what’s possible, and then see what of the possibilities we can actually put into action or influence others to put into action. But to I can’t have all the answers, but I can certainly bring the right people together in order to support the needs of of local organisations. And certainly one of the things I do find really of high value. And I mean, when you talk about bottom up, if I get invited as a speaker into an organisation, I’m talking with a level of enthusiasm that will that I’m believable, inspire everyone to actually feel like we can do this. We can all be planted enables. Because by that way, we enable the planet and they’re viable because they’ve got a sense of purpose when they come to work every day.

Gene Tunny  39:47

I think that does make sense. The challenge is, and this is this is probably obvious. It’s probably rather a trivial point. But the challenge is that you as a Business, you could be doing the right thing. But if your competitors aren’t doing the right thing, then they can get a competitive advantage by having a cheaper product. But then you’ve got the advantage that you’ve got, you can label well, you can promote yours as the clean green, the environmentally friendly alternative. So that could give you an edge in the marketplace.

John Engelander  40:20

I think it would accept that when you say that, and you have a cheap, cheap and nasty cleaning company, putting it together a quote, one needs to ask, what are you really getting for the money? Let’s put aside the green aspect. The Greens there to you know, from my perspective, you have that as a product, it better be good. Once it’s good, everything else should come together. I hope you know. And so I don’t, yes, it does give it does allow people to have their eyes pop out and go up, I’m going to listen to you because you’ve got a green way of doing things, but also gives you an opportunity to say how you’ll do it. And how you’ll do it better for them. If you get that chance that really shouldn’t have that boring conversation that most companies are, oh, you should use our business because we’re we give good service to our customers. And we do this and we do that. And you know, I’ve heard that everyone, everywhere. So what makes you really stand out? And it’s what you stand for. That makes you stand out?

Gene Tunny  41:27

Right? Yeah. And I mean, have you had? How do you prove that to to your customers? John, how do you are the fact that you’re the sustainability? You’ve got testimonials? And you’ve got? I mean, you got a track record now, haven’t you? I guess one thing that would be it seems like you’re talking about the service people trying to promote themselves based on superior service. And I mean, a lot of businesses will say that. How? Yeah, yeah, exactly. So I guess you do need to demonstrate that if you have this environmental commitment, you need you need some is that there’s a certification, I’m just trying to think how

John Engelander  42:13

it’s a great term certification, I think that does belong to some people who need it. And so when you’re born green, the birth of a planet back in 94. So essentially, that’s us were born green, we know it, we should be the ones giving the certification to others. And that’s why when companies take us on, they suddenly become greener, they, they have an opportunity to tell their people. And let me tell you that that’s a good news story for their for them. That’s, they want that message. And so when you offer eco bins, colour coded bins, systems, and you roll it out for no charge whatsoever, and then you give a morning tea talk on why we do what we do, and how they can also become plant enablers. The who does that, and then with, with all those other aspects about talking about chemical free cleaning, and then everything just comes together, you can’t find that just anywhere. You can’t. Even in the name planet Earth, we imagine this, you have the person who made the decision they send on their intranet, to their 500 cluster. We’d like to welcome to planet earth, their new caretakers around our building, starting on Monday, you can’t do that if you’re gonna make up a name Zen topless and Sons cleaning service, it just doesn’t feel it just it doesn’t register, right. And that’s more than ever, this whole idea, it has never been more relevant for what’s going on in business. And what’s and it’s relevant for what they tell the people, it’s relevant to attract people to your company. By golly, you know, all you have to do is ring up, see, all you have to do is ring up any of our clients. You know, it’s it’s a given. And in my decision, because I’ve done it for three decades, and know what I know and want to help and support organisations. How do you beat that? Warren Buffett has a great line. And he talks about enduring, competitive advantage. You can’t beat three decades. He can’t beat being born green. Can you?

Gene Tunny  44:29

Exactly John, that’s, that’s terrific. Any final thoughts before we wrap up?

John Engelander  44:35

Yeah, whatever you do, start to think about the choices. Because our choices do have impact. And being a conscious consumer makes a huge difference. And people notice you. They do they do when I when I bought my first TV seven years ago, boy, did they have a message. I didn’t just buy a car. So I think being conscious and other people watching you do what you do. You don’t even have to tell people, if they watch how you do it. Let them ask you the questions, but really, that don’t. I don’t think it’s a good idea to be an extremist. If you want to be listened to, and and hold an open mind, and we’d live with what’s possible, that’s what I do.

Gene Tunny  45:22

Okay, so a steady, can we take a steady approach? I mean, I’d like to be more conscious, more environmentally conscious. I’d find a difficult making radical changes at the moment. But I know that because I know there’s a movement for people to live off the grid. I don’t think I mean, I could never imagine myself doing that. But I mean, is that something you’d be considering? John?

John Engelander  45:43

Not? Yeah, I have solar and I have batteries. And very convenient. But depends. I like this term shades of green. Okay, where you sit, let’s just get, we don’t have to be perfect. Let’s you don’t have to be you just be better, not perfect. And if you just do one thing at a time and think about the one thing you can do today, I think that makes it simple. Otherwise, it becomes complex. And honestly, it’s not as hard as you think.

Gene Tunny  46:15

Yeah, I think that’s a great message to end on John, John Engelander. And that’s been great. I’ve really appreciated your, your thoughts and your insights into business and sustainability. So thanks much for your time.

John Engelander  46:29

It’s a pleasure, and I’m really glad that you’re able to catch up with me. So thanks, Gene.

Gene Tunny  46:36

Okay, so what are my big takeaways from my conversation with John? My first takeaway is that it’s clear that many business owners can have sustainable businesses and look after the environment to John’s businesses are great examples of how that can be done. As an economist, however, I wonder just how widespread this phenomenon can be. In the absence of regulation or policy measures covering all businesses, many businesses will probably choose lower cost and less environmentally sustainable practices. And many consumers will choose lower price options over more expensive, environmentally friendly ones. That said, public attitudes are changing and it’s possible consumer behaviour will drive more environmentally sustainable practices by businesses in the future. Following my chat with John, I found a really interesting study done for MasterCard and 2021. And I’ll put a link in the show notes to it. This study reported that more than half 54% of those surveyed across the world believe it’s more important to reduce their own carbon footprint since COVID-19. And more than three and 560 2% said it’s now more important than before that companies behave in a more sustainable, and eco friendly way. changing attitudes could have big implications for business in the future, and I’ll aim to have a closer look at consumer attitudes and behaviour in a future episode. My second big takeaway from my conversation with John is a reminder that we need to consider any degradation of our natural environment if we’re properly measuring the benefits of economic activities. The discussion I had with John in this point was inspired by a quote that John had on the wall behind him in our conversation over zoom. It’s not an investment if it’s destroying the planet. That quote is from Dr. Vandana Shiva, an Indian scholar and environmental activist. I would know that for several decades now, economists have thought a lot about how to account for any environmental degradation and cost benefit studies of projects. This is not something we’re ignoring or don’t care about. Economists have also thought a lot about how to augment the traditional national accounts to reflect environmental considerations. I’ll aim to cover how economists analyse environmental impacts in some depth in a future episode. For now, I’ll include some links in the show notes relating to the field of what’s called natural capital accounting. And I’ll also add some links regarding how economists have been trying to account for environmental impacts and cost benefit analysis. Okay, those are my big takeaways from my discussion with John Englander. The EcoBin, do you think I picked the most important ones? If you’re willing to share your own takeaways from the episode, please send them to me via contact at economics explore.com or send me a voice message via SpeakPipe. You can find the link in the show notes. Thanks for listening and Happy New Year. 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

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

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Podcast episode

Aussie energy crisis & Net Zero transition w/ Josh Stabler, Energy Edge – EP170

Energy market expert Joshua Stabler shares his views on the current Aussie energy crisis and how well placed Australia and other countries are to transition to net zero greenhouse gas emissions. Learn why Joshua thinks that transition could be disorderly, and learn about the role self-driving EVs could play and whether Josh thinks nuclear energy and hydrogen are realistic options for Australia. 

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: Joshua Stabler

Joshua Stabler is Managing Director of Energy Edge. He has extensive experience in supply-side market operations for the electricity and gas sectors, and as an advisor and system developer in the Australian energy industry.

Joshua is the architect of the Gas Market Analysis Tool (GMAT), which is utilised by gas producers, LNG participants, gas generators, end users, financial intermediaries and banks. Joshua is also the author of The Edge – Gas Market Update report.

Joshua has a BE (Computer Systems).

You can follow Josh on LinkedIn:

https://au.linkedin.com/in/josh-stabler-6683895b

Links relevant to the conversation

Energy Edge, the advisory business Josh is Managing Director of:

https://www.energyedge.com.au/

What are Renewable Energy Zones? 

https://www.climatecouncil.org.au/resources/what-is-renewable-energy-zone/

Abbreviations

EV Electric vehicle

NEM National Electricity Market

REZ Renewable Energy Zone 

Transcript: Aussie energy crisis & Net Zero transition w/ Josh Stabler, Energy Edge – EP170

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.

Josh Stabler  00:03

So we have a known urgency that we need to get rid of carbon out of the atmosphere because it is causing issues with regards to climate change, our ability to shift that rapidly, may be outside of our economic grasp. That’s the danger.

Gene Tunny  00:19

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 170 on the Aussie energy crisis and the transition to net-zero, not just in Australia but around the world. I’m joined by Josh Stabler Managing Director of Energy edge. Energy Edge is a Brisbane based advisory firm specialising in energy markets. Also joining the conversation is Tim Hughes, who helps me out of my business adapt economics from time to time. It’s great to have Josh on the show because energy has been very topical lately. High coal and gas prices, largely as a result of the war in Ukraine that pushed up the costs of power generation worldwide. Also, a cutback in maintenance during the pandemic has compromised generation capacity. Also increasing prices as Josh explains in this episode, just how bad are things energy markets, Josh helps us understand what’s been happening and what’s to come. 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 this episode. I’d love to hear from you. In the show notes, you’ll also find a list of abbreviations. There’s a lot of them when it comes to Australia’s energy sector, including any M for national electricity market and our Zed for renewable energy zone. Righto. Now for our conversation with Josh Stabler on energy markets. Stick around for the end of the conversation for what I think are the big takeaways. Thanks to my audio engineer Josh Crotts is the assistance in producing this episode. I hope you enjoy it. Josh Stabler Managing Director of Energy Edge welcome to the programme. Thank you for having me. Oh, it’s great. Josh. Tim, who’s joining me as well. Tim, my occasional co host, recommended you as an expert on the gas market and energy in general. So I thought it’d be good to have you on the show. So Tim, thanks for that. And good to have you on the programme again.

Tim Hughes  02:18

You’re welcome, Gene. Good to be here. Hi, Josh.

Gene Tunny  02:20

Excellent. Okay, Josh would be keen to know about your role at Energy Edge. What is Energy Edge? What, what do you do at Energy Edge, please?

Josh Stabler  02:30

Sure, so we’re a small boutique advisory firm in the energy market, we have sort of two different arms of our business, one sides, our advisory sites. So that’s helping businesses in the wholesale energy market, understand their exposures, that’s with both traditional assets and renewable assets. And on the second side, we have our software arm of our business. So we have our own deal capture system, we have our own risk and analytical system. We have a gas market analysis tool, and we have our own edge report, which we talk about things that are going on in the industry.

Gene Tunny  03:02

What do you mean by exposures? What are they exposures toward?

Josh Stabler  03:05

Oh, yes, so the commodity exposure. So we we we delve deeply into understanding what the business are, how it makes money, how it pays for its energy, and then using that commodity exposure, where then we’ll say simulate out the exposures that they have on making a sort of at risk assessments of the money that they could make. And then from that you can go into deep sort of risk metrics. So you can work out a business’s probability of exceeding certain levels, and that’s known as at risk modelling.

Gene Tunny  03:39

This is Monte Carlo, Monte Carlo simulation modelling. Yeah, good one, using At risk. That’s one of the tools you can use. Right. And what sort of clients

Josh Stabler  03:50

Ahh yes, we’ve we’ve actually supported about 80 to 100 energy businesses on the East Coast, which surprised me sometimes I never wouldn’t think there’d be that many. But, you know, we help all sorts we help, you know, most of the Queensland Gox, we’ve really supported. So we’re actually heavily involved with the setup of Cliniko, which is the latest Queensland Government generator that took over all the renewable projects in 2019. So we came in, help them set up their risk systems and help them get started ready for day one, and then they flip went on and did their own things themselves.

Gene Tunny  04:25

Right. So this is one of the Gox the government owned corporations here in Queensland, that’s looking at renewable energy options for the Queensland Government. Okay. Right. That’s great. Sounds like quite a nice portfolio of clients. And that’s great. Yeah. Okay. Yeah. Tim, did you want to kick off with the first policy or economics question?

Tim Hughes  04:54

Yeah, absolutely. So it’s funny we’ve we’ve all talked about this at different times. So cobbling it together. We’re gonna start with Josh, a summary of how we got here, because I know you’ve talked about this before. And I think getting an understanding of this then helps with the conversation we will have about where we go from here.

Josh Stabler  05:14

Yeah, definitely. So how do we get here is such a, you know, an open-ended question, but in terms of, what are we looking at there. So during winter 2022, in Australia, we saw unprecedented levels of pricing. So the electricity prices settled at $300 a megawatt hour for the quarter, the highest ever previously was about 170. And this was across all the regions. So Queensland, New South Wales, South Australia, and Victoria, were all at record high levels. And this was an accumulation of so many different things that have happened over the last few years. And if we go back two years ago, we have to go through the traumatic experience, again, with going through COVID was that during COVID, we had travel restrictions and congregation restrictions, which means that you couldn’t bring expertise from international space, and put them together to do preventative maintenance. And because we didn’t do the preventative maintenance on coal generators on gas generators that lowered their reliability of those assets. Now, the exact causality of each of those is not perfectly known. But what we started seeing was a rising of unavailability of the coal generators. Now, as we move forward through time, we started seeing other international things starting to change. The, the war of Russia and Ukraine was in March this year, but they actually started reducing their supplies into Europe at the end of 2020. So by the time that they’d reached the point of the Nord Stream failure in July this year, they had actually stopped delivering mushroom to Northern Europe, had lowered their deliveries from 17 petajoules, a day to 1.6. Now, that’s 16 petajoules less now that seems like a big number. And it is a big number, it’s actually the equivalent of 95 million tonnes of LNG, which is 25% of the world’s LNG cargoes. So the extraction of one country’s deliveries to Europe was the equivalent of 25% of the world’s LNG. So it’s a it’s a big, big variation in terms of this is probably the largest shock in terms of supply shock, ever, like I know what the equivalent would probably be the 70s sort of oil shock conditions. So it’s an amazing sort of outcome. But it started happening well, before we actually got to the point of war, which meant that we actually started seeing gas prices in the international space rising from September 2021, six months before we actually had the the actual war. And that led to a scarcity of that of energy starting to appear across the planet. And by the time we got to April, in Australia, we’d actually been buffeted away from this, we weren’t seeing any of the higher prices until we started in April. And that’s when it’s first started seeing a rising of the of the energy prices. This is on two fronts, one was on the coal international coal prices which reached $450 a tonne, which is the equivalent of around about $25 a giga Joule in the in the coal pricing. So that means that coal was not cheap. Coal was very expensive.

Tim Hughes  08:24

What was the regular price?

Josh Stabler  08:27

 Yes, for the first decade of the market, it was $1 a giga Joule for coal and $3 or Giga Joule for gas. So that’s in the early 2000s. And progressively gas prices have risen and fallen. But the coal prices have stayed in that sort of $1 to $3 range. So to see it go 10 times the level is really just driving up an underlying input cost. And then by the time we got to May, we had our first event, the event of the roundabout, the 28th of April through to the sixth of May, was when we first saw a sharp increase in the electricity prices. And that was primarily driven by a large reduction in availability of coal generators. And so we saw a spiking of sort of 30% of the fleet was completely offline during May. In New South Wales, we’re talking 40-45% of the fleet was offline. So this is an unprecedented level, like a AMO forecast 12%. So we are three, four times the height in terms of unavailability of the coal generators during that period that caused electricity prices to spike. Two days later, gas prices spiked. So it wasn’t a gas rose and caused electricity to price up. Its electricity went higher and that caused the input costs to follow it up. So we had and once that once the dam had broken once we had the gas prices jumped up to around about $30-40 it connected to the international price which coincidentally was around about $40 a giga Joule, but just pure coincidence. And when once it reached that point, we started having the prices remain in that area. Now, the coincidence wasn’t that the price joined up the coincidence is that in the late 90s, we decided that the market should have a cap, the market cap should be $40. Nobody thought about that $40 cap when thinking about the Ukraine war in 2022, she just happened to be in a note number that worked out very nicely. And once it came that $40, we’ve just had it stay that level. And we’ve had the market go into a price administered state. And then during that, that level, there we had very high electricity prices. But we didn’t have shortfalls, they weren’t customers that were losing the ability to consume. They were just paying a lot in the spot market for those for that generation, that consumption.

Gene Tunny  10:52

Right. So look, there are a couple of things I’d like to follow up on there. Josh, you mentioned that COVID meant that we couldn’t get people over to do maintenance on coal-fired power stations and gas-fired power stations too. Yeah, right.

Josh Stabler  11:10

An outage is literally bringing expertise and putting them really close to each other in a kind of confined space. So we couldn’t get them in because they couldn’t fly from overseas. And when they were here, they also couldn’t do the work. So what we did was a lot of the generators moved their outages just to the next slot. And the slots are normally the April, May or March, April, May. So the shoulder seasons in terms of weather. And the second slot is in the September, October, November period, where you also have a lowering of demand. So you’d normally fit the outages in there, and they didn’t. So they moved them into the next area. And eventually we just squeezed them all together, and then assets just started to fail.

Gene Tunny  11:50

Yeah, that’s interesting. Something that Tim and I are interested in for in terms of, it’s another one of these potential world costs of lockdown or costs of COVID policies that are on the year, the negative side of, of COVID, or the cost side in a cost benefit analysis. So I have to check with Judy Foster’s included this in, in her analysis because we went to an event a couple of weeks ago in Brisbane here on pandemic and managing the pandemic. And there’s a lot of discussion about the costs and benefits of lockdowns. I mean, that’s, that’s not for this conversation. But I just thought that’s interesting as another cost of those policies during COVID.

Josh Stabler  12:42

And it’s not just Australia, the French nuclear facilities are all having an unheard of levels of maintenance right now. Because again, they also had to delay their work. So there was just that there was just a period of and so that that created some of the false security because in 2020, nobody had outages. So everybody had extra supply to the market, which caused prices to fall. So it wasn’t just that we had a lot lower demand, we had a slightly lower demand because of COVID. But we had an incredibly high level of availability of assets. Because no one did any work. No one was doing any work. But the repercussions of that are that there’s an increased unreliability, but be they’ve got it then do that work. You can’t avoid it. There are statutory obligations, you have to actually do it within a certain time period. Otherwise, you’re breaking the law.

Gene Tunny  13:32

Josh, can I ask you what’s the connection between the domestic price paid for gas in Australia and the international price they’re linked?

Josh Stabler  13:41

They are at time. So we’ve we had a very, very strong relationship during 2019, 2020 and early parts of 2021. And then in mid 2021, electric the gas prices domestically jumped up very rapidly, primarily due to domestic issues, domestic supply concerns, and then the gas prices internationally started to rise and they rose steadily from 10-15, 20-25, 30, $40 a Giga Joule, but the Australian Government gas market after about October or September 2001, all the way through to April was only about $10 a giga joule. So we had this rising International and a very low flatlined was still higher than historical numbers, but it was very low in relative terms. And the relativity really matters for a lot of businesses. If you are a fertiliser business and you sell fertiliser, you are a price taker, you take what the international price of fertilisers are worth, and that is priced on international price of gas. So if you have a relatively low price that absolutely high, you are still in a strong position. Whereas if you are a domestic customer who sells domestically then the absolute price is a problem for you because you’re passing that on to a domestic an audience who have to take the higher price. And that will directly increase their, their outcomes, because there they are a price setter themselves. So that, that differential there matters, especially over the medium term in terms of what that does for certain businesses. Now, once we got to make we, that’s when it joined up, and we had lots of periods where the domestic and international were about the same. There are periods where it looks like the domestic is cheaper than the is more expensive than the international but the international price was jumping $10 a giga Joule, every couple of days. So the volatility was more to do with the when you sample the data more than it was to do with the market price it was moving between 40 and $60, depending on the international experience at the time. You know, when Russia first did that change in their availability, the market moved to $20 in a day. So it gets a bit hard when you’re trying to say, well, what is the exact outcome, in general for the year substantially cheaper than almost any other country other than, say, the US and Canada, Australia in terms of gas pricing. Because most other countries are highly linked, you have a Japanese Korea market, okay, yeah. And you have the TTF, which is the Dutch price for gas, both of those have been elevated in the 60s $70 for Giga Joule equivalents for the entire year. And Australia had 40 for about two to three months, and has had 15-10, 15 for the rest of the period. And long term contracts have been in and around about $12.38, I think was the number that the ACCC reported on so substantially below where the international prices are. Now there are some people who have offered very high prices. But that doesn’t mean that anybody traded there. It’s like going and saying, I asked a hotel. Well, I thought price for a night was and I asked a guy on the street, if I could buy his house, they came in at different prices. You’ve got somebody who doesn’t have any guests available to sell, and you ask them to sell you gas, and they’re going to obviously offer a very high price.

Gene Tunny  17:03

Okay, so I just want to make sure I understand what’s going on. So is it the case that the gas suppliers or the big gas companies, they’re they’re entering into these longer term contracts with their customers, and they’re doing that at a rate that’s much lower than the spot price, because they know that will that spot price is just temporary. That’s what’s going on.

Josh Stabler  17:27

And it’s just for short periods of time that those prices are at that very high levels. So you’re not seeing that pass through that long term contracts unnecessarily getting done at $4. There are, if you go to businesses that do not have any gas, yeah, it’s already in you ask them to give you a price, it’s going to be high. But that, but that post, that business doesn’t end up doing the deal. And that’s what we’re seeing. And when you look at the ACCC report they’ve got the price range was between 10 and 60. But the price ended up being 12. So it’s yes, there are some numbers that look, and they are frightening if you are a customer, looking at the deal like that, and trying to make it work. But most of the ones that were especially the ones that made the media were related to the accident of western energy, which went broke in late May. And the basically, businesses were then going out to so that that retailer had to give their contracts back to the retailers last resort. And that didn’t that those prices were back at the tariff rate. And they were very, very high. So there was some bad media around that. But in general, most customers who have gone to long term, producers have had prices in the order of 10 to $14 a giga Joule right, not on a weighted level. Is it anywhere in the 30s or 40s?

Gene Tunny  18:54

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

Female speaker  19:00

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.adapteconomics.com.au. We’d love to hear from you.

Gene Tunny  19:29

Now back to the show. I’ve got some more questions. But Tim, I should ask if you’ve got any questions for josh.

Tim Hughes  19:36

I know between the three of us we could talk for days. For us and for everyone else who might be listening, we should not. However, so if you did have any more questions with that Gene, what I was going to come to and we might want to move on to this after if you have any questions to finish, but basically, because we’re in this fascinating point in our history of our time with emerging energy markets to clean and green options that are coming, the opportunity or the challenge to get to net-zero. So that’s what I’d like to put forward for the next part of it. So if you’ve got anything to add from what we will do that first.

Gene Tunny  20:18

I might just ask you about the risk of what happened earlier this year, happening again, it sounded like that there were some specific circumstances the fact that there wasn’t this maintenance going on, in their catching up with maintenance, does that mean, we won’t see another repeat of what happened earlier this year?

Josh Stabler  20:42

Okay, so, I guess, there’s two parts to that we have the problems that we know that are deterministically at fault. Yeah, which is that we know that there is some coal supplies that are low, some of the local mines at say Mt piper, in near Newcastle, have reaching end of life, and they will need to get coal from train links. And the train links have a limitation in terms of the delivery. So we know there are some facilities that will be energy limited by the fact that their suppliers are constrained. That’s the deterministic issue. On the probabilistic issue, we had outage rates of three times what we anticipated during May and June periods. That of those were random events. So they weren’t failure, reliability failure, they are a probabilistic event, they there is a chance that those numbers could come back, there’s chance those those things, as we are getting closer and closer to the end of life are these assets that are less likely to spend the money to go and fix the power station to be ready. Because they don’t, they won’t recover the profitability. And that’s that there is so if you’re only going to survive five years, and you want to spend $100 million, you need to make an extra $20 million out of that asset every year in order for that to even makes sense. And if your input costs are high, then you won’t go and do that. So that’s why we’re seeing a whole lot of power stations, even in a very high price environment. But it’s also a high cost environment, are worried about what that means for them as they get closer to their end of life. And that leads us to that, I guess, if we can carry on to the next question is what happens in terms of as we get closer to transition. And the complication of transition is that it is by default, disorderly.

Tim Hughes  22:38

So this is transition to new energy sources.

Josh Stabler  22:40

As you transition anything from any old, anything old into anything new, you are going to hit this issue in regard to how you get somebody to give up their space for the next person. Now, if a power station has no goal, no plan for profitability over the next three years, then you would be better off to turn off rather than lose money three years in a row. So that means that you’ve got this, you don’t get an overlap in a transition. Normally, you get old assets who are there will want to exit because they see no path to profitability. But we don’t have a solution yet, because that hasn’t come on yet. So we have a renewable wave and a battery wave, and we have a decline of the coal. And if you don’t act to try and keep them so that they overlap, then there will just be a gap. And if you have a gap, then you’ve got an issue because then the power stations as they become less reliable, will fail. And in fact, when they fail, they will withdraw their capacity from the market, which will cause prices to rise. Making them the reason why the prices are high is because of their failure caused the event. So you actually have to that, and that leads you to part of the policy plan, which is how do you keep something online that doesn’t make money. And that’s where you had starting to talk about capacity markets or anything else to try and social licence. This is why a most said that you’ve got to give three now three and a half years notice before you can exit is because you need to tell them in advance that you’re going to leave. Now the obvious response was origins, which was if I had to tell you three and a half years, I’m just gonna tell you three and a half years and I’m just gonna make a different decision at a later date if I need to. If I get close, and I want to keep it online, well, you didn’t tell me I have to shut and three and a half years. I can just keep it on for another two years with a year’s notice. And I’ll just keep it going. But if I’m forced to make a notice then I’m gonna give it early. And then I’ll update it if I need to.

Gene Tunny  24:48

Yeah, good point. Good point. So amo was the Australian energy market operator. And yeah, it’s interesting. This I mean, I’m, as an economist, I’m rather laissez-faire. I’d prefer to just to rely on market hours, the market as much as possible. But yeah, with energy, you’ve got to take into account the fact that you need to keep the power on you need reliability. So we need, we can’t just rely entirely on the market. And that’s why we’ve got this Australian energy market operator that’s overseeing things and trying to get the right policy setting. So we do have, we don’t end up with unreliable power. And we don’t have to have blackouts in that horror show scenario.

Tim Hughes  25:32

I see. Am I right in? I think it might have been one of your podcasts Josh, or something I read recently, and it was a rant. There, there is gas that is used as a backup currently, for that kind of situation where it is expensive, but it kicks in and that can sort of cover any shortfall. Is that right?

Josh Stabler  25:52

Yeah. And it’s, it’s important to like, when sometimes when you think about what is the what is the idea, you can think globally, you’re like, Okay, well, nuclear is going to work for the world in terms of meaning things because of the problems that some countries have. But Australia has the situation we have, we have a lot of sun, we have a lot of wind, we have a LNG export capability that is delivering gas offshore, all the time. So if we get ourselves into a situation where we are short of wind and short of, of sun, we actually have this enormous amount of gas being delivered, that can be interrupted for a short period of time to deliver that energy back into the grid. And the amount that has been delivered is the equivalent of the entire electricity market. So the four petajoules, that goes off is approximately 100% of the net. So if you actually brought it all down, you could power the whole network if you had enough power stations. But what it does is it provides resilience. Now, not every country has an LNG export option. And it’s not saying that we need to use the gas all the time. In fact, we only want to use it when it’s required, because it’ll probably cost us more to interrupt them. So if we had a commercial arrangement where we could say, give me your gas when we need it, and we’ll pay you some money for it, well, then we almost never have a reliability issue. So long as we can get that gas where it needs to go.

Tim Hughes  27:21

I mean, that would obviously cause some problems with markets. So you’ve got to keep a consistent supply to the current customers overseas, etc. So that might be in a sort of like a short emergency sort of situation.

Josh Stabler  27:33

Yeah, a percent of theirs is a huge amount of gas for the domestic market. So a percent of a day is still 40. It’s like 150 megawatts, 24 hours a day. So it’s 1000 megawatts for six hours, it’s a huge amount of gas that can be moved through into power stations to meet the short term problem.

Tim Hughes  27:55

So with the broader view of where are we going, you know, what’s, what are the options open to us? What are the opportunities for Queensland and Australia in particular, but there was clearly a lot of choices about, you know, renewable energy is obviously growing very quickly. It appears to be green and clean, which I know is a little bit of a side conversation as well. You know, everything has some impact of some sort. But that’s the direction we’re heading. Net-zero is the term that we are all familiar with, that covers it all as in like, whatever we’re going to be doing, it’s not going to be harming the planet. That’s pretty much what the goal is. And so we’re in this transitional period that we’re entering now. So from gas and coal in towards these different areas, and like you say, gas may form a part of the contingency or the emergency supply. So we’ve got renewables, we’ve got wind, we’ve got solar, waves, hydro, all these different things, in your opinion, and your experience. What are your views on these new available sources of energy?

Josh Stabler  29:04

So if we separate it into two parts, one is can we get the electricity grid towards a greener environment? Yeah, we have moved a lot further than most people think. So when we signed the Paris accord in April 2016, so six years ago, six and a half years ago, we had an a carbon emissions for the electricity grid of 171 million tonnes per annum, 171. And this year to a couple of days ago, we were just below 120 million tonnes. So we have reduced our carbon emissions and our electricity grid by 40%. In six years.

Gene Tunny  29:41

Are we talking about Australia or Queensland? Australia?

Josh Stabler  29:45

Australia wide and so in the last couple of days, this is the gold period of the year is the golden period for renewables. It has great sun, no much demand, fair bit of wind. We are sitting in Most days at about 65% renewables during the day, and about 25 to 30% renewables every night.

Tim Hughes  30:06

So that 40%, so 40% reduction in six years. Yep. And that’s purely attributable to these renewable energy sources.

Josh Stabler  30:16

Yeah, it’s basically a one for one reduction increase in renewables, one for one reduction in brown coal fired power stations. So that was it, certainly for the first like four years, and then it’s progressively eaten out some of the black coal, that appears to be really first it’s very, very fast, quite a lot. We’re moving 10 million tonnes per annum reduction. That’s on the electricity side. And we are now we’ve now you know, we’ve got days when we’re more than 50% reduction in terms of our carbon emissions, which is, which is great. That’s really, really wonderful. The problem is, is that it’s not the only thing that our requirements our Paris Accord is not electricity market requirements, it is an economy wide, starts getting a little bit confusing, which is that you cannot use renewable solar panels to meet our agricultural emissions requirements or our industrial requirements. But there are still good news stories in it. As we bring in electric vehicles, we move away from inefficient oil to efficient electricity. And as our carbon emission of our electricity grid becomes cleaner and cleaner, it has a multiplicative effect. Now, five years ago, because the ratios change every year, five years ago, the ratio was 36% was our electricity, and 18% was out was transportation. Now, this is where I’ll jump into some of the numbers for this so EVs, we have 15 million cars on the road. Each EV is at two kilowatt hours, if you had them as a Tesla mum, Tesla Model three, just as far as an example, which makes it 1200 gigawatt hours worth of storage, which is about the equivalent of 250 Wivenhoe, and why Wivenhoe is able to support about 1000 megawatts worth of renewables.

Gene Tunny  32:03

So that’s if everyone in Australia had an EV. If we replaced all the cars, on the road with EVs, we would have how many Wivenhoe dams?

Josh Stabler  32:12

250 Wivenhoe’s in storages which can do 1000 megawatts, which makes it 250,000 megawatts worth of hydro of renewables, which is more than we use switches will far more than we use. So we actually only need about 15% of the equivalent of cars moving down in order for us to have a situation where we have enough storage from cars. But cars don’t plug into the grid every night, we need to have them absorb them the right time, there’s a whole lot of, you know, complications that come around that plan. But it’s just a point of what is an opportunity available to us, we have so much storage there that would need to be replaced. Because at the moment, we have all these cars with their engines, and all they do is drive people. Whereas if we had them being engines that were able to be electricity driven as well, they would have a they would have a role in this market. Now, that is a wonderful vision for 2040. Okay, but as a idea of the same problem they have with any bridge, if you start a bridge at one side and start on this side, you’ve got to make sure they meet in the middle, you can’t just have a dream of where you want to be in 2040 and go off and just hope it’s gonna work out. You have to aim the bridges at each other. And that’s where it gets complicated, is how do you transition across. And right now our danger, is it we’ve seen what happens when things don’t go right, and it’s unpalatable. It is politically unpalatable. Electricity is not run by the governments anymore. But it’s politically considered to be run by the governments. So having it move fast is something that people can not accept, that it’s not politically acceptable. So therefore, if you have these another event like this, then people will start giving up on wanting to transition because I think that that is the reason why it’s happening now. Is that the reason? Well, there’s it’s far too it’s not you can’t point to one thing and say there’s definitely been fault on multiple sides of the fence here because renewables have made coal, not make money which has made them unreliable and made them unreliable before they have to exit and renewables are not ready to take over the role yet because they haven’t got the cost structures in order to do it. So we’ve we’ve got one abdicating the role and the other one, a child who can’t take over it.

Tim Hughes  34:34

So what’s your feeling on that? Josh? Like? Because I mean, is it just the transition is happening too fast? Or is it? Are there other things that we need to consider?

Josh Stabler  34:42

We’ve we’ve, we have a known urgency. So we have a known urgency that we need to get rid of carbon out of the atmosphere because it is causing. It is causing issues in regard to climate change, our ability to shift that rapidly, may be outside of our Economic grasp. That’s the danger.

Gene Tunny  35:02

Okay, that’s a good point. I think I know what you mean. But what do you mean by economic grasp?

Josh Stabler  35:08

Exactly. So it’s the cost of solar falls 36% for the doubling of capacity. So if you wait until you’ve doubled the amount of capacity in the world, you get at 36%, cheaper, wait for your next installation. So that part of the deflationary learning curve that we have, right, so you are highly motivated not to invest now, right and wait for it to be cheaper, and then be beat everybody on the lower cost structure. All other things being equal, not all other things are equal, because initially, you have high income for being in a scarce market. So the initial investments of PV got paid 42 cents a kilowatt. And there was a really good incentive for those first people to invest in solar while it was expensive. Yeah, but eventually, you’ve got to compete in is this worthwhile in the long term. And that same applies to batteries, batteries are falling very rapidly. And if you invest, now, your income stream is high, but your costs are high. And eventually, if you don’t get the right deal in place now, then eventually, someone’s going to come along and eat your lunch. And that gets harder, because you’ve and that’s what does that lead to? It leads to, if you accelerate the process, it will cost money. Is that an unpalatable level of money? I don’t, I haven’t clearly worked out, it’s got better, if we had accelerated faster, five years ago, we would be a very expensive system. But we are accelerating now and batteries are coming on. And they are likely to have a heavy impact because we are having a under normal circumstances a very negative during the day price and a high evening peak, which gives a very large arbitrage, temporal arbitrage, buy low sell high. And therefore people are incentivized to put in batteries to meet that obligation. But as you bring on more batteries, that arbitrage shrinks, lowering your income. So therefore, you need to win on costs at that point, because the revenue numbers will start to decline. So it’s just a it’s a there are you know, there are assets that are getting built now that will make money. But if we built all the assets now at this cost, we will just have a high-cost system,

Gene Tunny  37:18

Right. Okay, yeah, good point.

Josh Stabler  37:21

And eventually that comes back because the customer the godly truths of our market is as the customer pays for everything. Yeah, everything has to be extracted from the end user.

Gene Tunny  37:31

Right. Okay. And what do you think about what the state governments here is proposing with? They’re looking at pumped hydro, aren’t they?

Josh Stabler  37:40

They are. So there’s some very, very large pumped storage hydro that they’re talking about. It’s gonna take a long time to get into the market. Yeah. pumped hydro is so when we’re talking about how solar drops in price, as we instal more pumped storage hydro increases every year, because it’s the civil project. It’s not getting smarter technology, its its its potential energy, gravity and height. That’s that maths still the same from 1950s, as it is, now it’s, we probably gained a couple of percents in efficiency. So we are we are getting more expensive, which is a problem, which is why the state’s doing it. Because the state can afford to do something like that, that has an 80 year life and take on that level of risk. Because the of the there are two outcomes, either it was not needed, and everything’s fine. And they’re happy with that, or it was needed, and they helped make it better. And they’re happy with that, as opposed to a private company, which would be unhappy with a scenario where they were unneeded. So iIt’s not that it’s warped. It’s just that they have greater vision in terms of what what is important to them compared to a private in private industry.

Gene Tunny  38:55

I liked the point you made about EVs and in just how many Wivenhoe dams the EVS could represent if Wivenhoe, Wivenhoe is not Hydro Electric is it?

Josh Stabler  39:06

It’s a pump storage. So it is a small drive to a big lake, okay, and it’s called split Creek. So it has the ability to move water up and down from the so an actual slide on the dam is not good for the power station, unfortunately. But it has about 20,000 mega litres of water. So it’s got a large area that it can fill. Yeah, this gives a you know, having all of those batteries gives a incredible capability to meet the rearrangement of data nine, right, we probably have too much, which means that we will, we’ll probably get to a situation where not everybody has to do it. Because we’ve got we’re going to have all these batteries and all these cars and we’re not expecting everybody to be doing this every night. We don’t expect you to get because the other problem is is that you have to fill during the day and then empty when you get home and your rooftop PV is on your roof and you’re not at home because you drove your car away. So if we’re imagining in 2040, we have an answer to that, which is when the car drops you off, it goes home again, because there’s an automated car, and it returns to the base and fills up. And then it comes and picks you up in the afternoon in the process, it’s filled. And when it arrives, it pumps power into the grid, and keeps everything’s sorted. Because it’s moving energy around, not just passengers.

Tim Hughes  40:24

I see this feeds into an area, which I think is really interesting, because the technology is moving so quickly. Yeah. Is that then a hindrance to adopting new technology because you know, you’re investing in infrastructure that all of a sudden becomes, you know, it gets superseded by the next shiny thing.

Josh Stabler  40:40

Oh yeah, especially big costs, like a great example is distribution networks, you’ve got these power grids, or these power lines, they are long, long, long life assets. But if you’ve got power that’s moving by car, you don’t need the distribution network anymore. You got this. So which leads you to the threat, which is known as a death spiral, which is that you have a large cost, but by structure, and you’re smearing it over customers that are getting smaller, which means that you need to charge them more. So eventually, we’re in a position where my, my mom needs to pay $250 million a year in order to keep everything on track. So because you know, it’s the last people obviously, regressive, the people with the most money exit first, and the people the least money exit last. And that means that you’re smearing more and more customers, people who can’t afford it. But that just leads you and that could be where we’re at, we could have some of these assets that are built that are a little bit stranded. But again, you know, some of these things need to get done. In order for us to get there,

Tim Hughes  41:41

You end up with a drawer full of Betamax videos and CDs.

Gene Tunny  41:46

This is fascinating. I’ve never, I hadn’t thought of that before. But if I’m interpreting what you’re saying correctly, we’ve got a car that drives us to work, it’s all automatic. And then it drops us off, and it goes home. So we have all these empty cars travelling on the roads to go home, so that they home when the solar PV is collecting the energy, and they’re storing it.

Josh Stabler  42:12

Yeah. Do you want to make it’s really crazy? They may not go back to your house.

Tim Hughes  42:15

I was gonna, I was going to say they go to the closest available home. Yes, you know, but the thing is also like so this, I mean, we’re getting into the speculative nature of this.

Gene Tunny  42:27

Imagine the IT or the AI  that you need to organise all of it.

Tim Hughes  42:31

That is an exercise in efficiency. Yeah,

Josh Stabler  42:34

well, that’s, that’s the classic, I’m travelling salesman issue. So you got to got all these ones that you need to move on. Because once they select does, it does the first person who gets to choose it, because I’ll just choose the one next door for the next 17 years right now. So that it doesn’t every time. But you need to make sure that that is an equitable sort of delivery of energy. And when we get to that state, then, you know, if you’ve got this demand that can be moved, and can be selected as selective and discretionary in its consumption, then we can just keep on installing more solar, because it will find a find somebody who wants to buy because the power all the cars will come and fill it up. Which leads us then to a problem, which is what have we just built the world’s most expensive way of doing that. Because most of our energy that we need to have, we need to move from the middle of the day to the evening. If I put power into a car, I can come back 100 days later, and it’s still at 99%. So long as you don’t put on a sentry mode, then it will consume it all. But you got to you’ve got to technology, a wonderful technology that is able to keep this energy for long periods of time. But in fact, we don’t need wonderful technology, we need terrible technology that is highly inefficient. That just does it for nothing between the middle of the day and evening peak. And then we can just keep on plunking down more and more solar, because it’s going to solve the more and more expensive evening peak with gas issues or any other thing else or its competition is expensive other vehicles or other batteries. And you’re just trying to undercut them by buying for nothing and selling for anything.

Tim Hughes  44:11

So becomes a market sort of battleground if you like,

Josh Stabler  44:15

Well, I think we’ve over engineered the solution. We’ve there’s probably a much cheaper, easier, stupid engineering solution.

Gene Tunny  44:22

So what and what is that job?

Josh Stabler  44:23

One example would be let’s freeze ice and your roof and make your house cooled down when it does that. Now that one’s I’ve already been asked somebody I think it’s been debunked, but there are answers, which are to do with most of our most complicated times like today. We’re 37 degrees too hot and what we need to do is just move these copious amounts of sun because it’s hot, and it’s bright into the evening and just make cold and if we make it cold if you make the house cold, like in Germany, you have pipes throughout the house and you just heat up that and that hits that water heating keeps the house warm. Same thing We just need to know, is that economically viable? Do you need to go to every single house and water? You know, there are, these things start getting highly complicated when you start thinking about all the engineering and and there’s just a point of, we kind of don’t know what we are going to have. I can think of 25 ideas today on what could possibly happen. And none of them will be right in comparison to what we’re going to do. 20 years time is a long, long time, in a world where people are incentivized to reduce their costs, where something starts causing, you know, the old adage, high prices as a cure for high prices. Because when it starts getting up, people start finding different answers, they find, oh, I don’t need to use that much electricity, I can lower my consumption, I can make these changes. And once you start having those drives, correct drivers people follow, follow the economic behaviour, we, we underestimate our citizens. And that’s why we make our electricity tariffs so simple, in terms of the way that they’re done, the billings insane. But the actual methodology is very, is too simple. It’s, you have a flat price from 7am till 10pm at night, even though that you don’t consume that way anymore, because most people have solar, which means you don’t consume during the day, and then you consume a lot during evening. So we actually need more definition that will drive behaviour, if you were aware that these things were driving you and changing your behaviour, then you would do things slightly different. Anyway, that was it’s a nice little.

Tim Hughes  46:29

It is interesting, because, again, it’s an it’s a question of efficiency. Yeah. And yeah, and householders are interested in efficiency, especially when it’s gonna save them money, especially when it’s gonna save them money. I did have another thing I wanted to pop in there, because I don’t want to make it too speculative. Because I mean, it is fascinating. But solid state battery technology has been mentioned by a mutual friend of ours who John Atkins, who was on a previous show, previous episode. And he had come across this technology, I think Toyota are one of the leaders with this new battery technology, which ultimately could have the potential to charge your house. So it’s not just running the car, you can then plug it back into your house, and it can run the house in the evening. So one of the main areas of concern if you like, at the moment, obviously, it’s you can’t take a punt on future technology that’s not here, we have to go with what’s here. But this must be also a concern for not a concern. But like, governments aren’t always going to be the first to adopt this new technology. But it must make it harder for them to commit to putting infrastructure in for a technology that they think could be redundant fairly soon.

Josh Stabler  47:42

Yeah, and that’s where, you know, a lot of the res idea is that we’ve we have this expectation that we’re going to need large scale wind and solar, out in the out in the regions, that’s going to bring all the power in and that and therefore that’s where the energy is going to come from. And the biggest error in any of the forecasting for the last 20 years of electricity has been the forecast of rooftop solar, every one of them is like this year, it’s gonna be the same as next year quadruples. This year, it’s gonna be the same instead of quadruples, there’s just been this constant misunderstanding of how quickly people were going to invest in it. And they’ve and the and the forecasts have been just horrendously wrong. And now, rooftop solar as a market share is one of the biggest in the net, it is got a now a major part of the electricity grid is what happens from rooftops. And that is driven by mums and dads.

Tim Hughes  48:40

The market is driving this as we’ve had conversations with quite a few different people. And the common thread is that the market is driving these changes.

Josh Stabler  48:48

It is but do you get to talk? Do you get to go into the room and tell people that you’re going to go and do this? Are you going to tell people that you’re putting batteries in, or the big guys can? It’s easy. There’s only like 100 of them, we just go and ask them are you going to go and install batteries and they say sure, I’ve got this big plan to build this big battery out there. And I’m gonna build this wind fine over there. And this is where my solar farm is going to go. And they can tell the people who are going to make those plans. What it is, they didn’t go and interview 15 million households to find out who’s going to invest in batteries. So there’s a level of a lack of advocation on behalf of those customers on behalf of mums and dads in terms of what they’re going to do. They also don’t really get paid for it. Because when they installed batteries, they lowered the consumption during the middle of the day. For the first 10-15 years of this market. The middle of the day was the most dangerous part. It was the most worrying section was what’s going to happen at the hottest point of the day, two o’clock in the day. It’s the highest demand we have the hottest weather and the electricity grid starts failing power lines can’t move anything. And then we don’t have that problem. Because rooftop solar has completely carved out the amount of demand we have at what used to be the most threatening. Now we’ve built, the whole market has built all sorts of power lines, and extra things that need to handle hot weather to move really long, lots of power at certain points in time, that are completely unused now, because that requirement doesn’t exist. And then when we start thinking about what’s going to happen with people, when they put vehicle to grid, and they can move their own power between themselves, Well, no one’s getting asked. So we don’t know what they’re going to do. So there’s like a just an unknown when that starts happening. And what I suspect is going to happen is that eventually, a, someone like probably Macquarie Bank, because they’re the kind of people who would do it, which is they’ll work out that if they install a battery on your home loan, you are now better, you are now a better creditworthy person, because your costs have just gone down, so they can offer you a better deal. And at that point, it all starts changing when you can just put on your home loan.

Gene Tunny  50:49

Right? So you can buy a Tesla Powerwall.

Josh Stabler  50:52

Put it on your home, you are now you are now considered a bit less of a threat, because you don’t have an electricity bill anymore. So at that point, they’re like, oh, okay, well, yeah, you deserve to be I can, I loan you money if you know, whatever percentage lowest because I think that you’re in a better, better position. And you can put that money on to your on your home loan, and we’re going to accept that. And that’s all fine, because we consider this an investment, not a bad, not a negative decision. Once that starts happening, things start moving quickly. Once debt gets involved, the world moves changes very fast.

Tim Hughes  51:24

Yeah. And that technology is obviously good for a considerable time to come. Solar seems to be working really well, that 40% drop in six years that you mentioned down to renewables. Great news. Yep.

Gene Tunny  51:39

Yeah. Okay, so, Tim, I think we suspected we, we might be picking Josh’s brain a lot, we’d go on quite a while. So we’re at 50 minutes, I’ve got a few questions I want to make sure we get answered before we wrap up. So if I try and wrap up for the next 10 minutes or so. Okay, so first, what about nuclear or hydrogen? How much potential do they have in the future electricity grid?

Josh Stabler  52:07

In the world nukes have a very big role, in Australia. I think that that the moment, most of the discussion that is around nukes is probably not in good faith. It’s more in a let’s stop doing things and wait for this new technology. And then our didn’t work out? Well, you might as well stay with coal. I don’t feel like the discussion is necessarily in a in a with completely good faith. Your issue with nukes, which is the same ones that you have with coal is that you can’t get cheaper than solar in the middle of the day, when it’s delivered to your house on your roof. It is cutting through transmission distribution directly into the source of where the demand is, which means that is impossible to get cheaper. So that means that nukes will never be able to run 100% capacity factor, because they will be carved out by the six hours of sun every day, which means that their capacity factors will be lower, which means that their very, very high capital costs will have to be smeared over a smaller volume making their costs, every estimate of costs will be based on 100% capacity factor. That’s all impossible, which means that everything’s going to be more expensive than you anticipated, unless they plan on turning off solar. So they need to get rid of a better solution to make this other one work. So I just don’t see it really working on hydrogen. I am the biggest issue with hydrogen is economics. And it is an inefficient process to produce energy that can be moved. Now, if we have infinite free energy in the middle of the day, because we have so much solar, then having something that costs nothing to put into this energy. So if it’s inefficient, inefficiency doesn’t matter when it doesn’t cost you anything. Zero times by an efficiency of 30% is still $0. So so long as you can get to a point where there’s basic never ending spilling of the load of the solar that it would do nothing, it would literally be turned down and dig and shorted, then you’ve got something that can make sense there. Because then you can just the inefficiency doesn’t matter. So that’s what I was talking about before we you know, we have what is our engineering solution? I mean, that one there is a horrendously inefficient way of getting energy. I don’t know you might fit the bill. I it just doesn’t fit the bill now. Yeah, because the cost structures are $2 or $2 a kilo. That’s $15. If you could do, we’re not doing anything at $2 a kilogramme. Right now we’re doing things at six and sevens. We’re talking 80s and $90. A Giga Joule, you know, we’re having conniptions right now, because the gas prices are above $12. We, we can’t expect to move from something where the world goes in goes into crisis mode at the best possible price point of the future. Like that’s there’s there’s a there’s an issue there. So we’ve got to work out how we’re going to bring the capital cost down and then the marginal cost down so that the the dollars per kilogramme that was a giga Joule for hydrogen falls. But even with all of that, I don’t see how it beats EVs, like, how does it be just putting the power directly from the roof into your car? Like why introduced another thing between an inefficient thing in between there. So if you lose that market, you don’t have EVs are okay, maybe you’re going to get car trucks, because they might need the energy, well, there’s probably better answers to that one as well, why not just have replaceable batteries in your truck, because then you can just take it out, and then you don’t have the energy problem, you can just put a new one in moving energy to other countries so that they can use it that very much relies on the demand, wanting to pay more for it. We’re not, we’re not in charge of that. Japan’s in charge of that. And Toyota most recently, sort of can’t there or not can but they’ve di D prioritise their hydrogen cars, which is not necessarily a great sign for where that’s going. But there are other things green, green steel, you know, there’s always other things, there’s always other things that use hydrogen and making that green. Sure, that doesn’t seem to that seems like a great direction, because you need to build it anyway. Need to get the hydrogen somehow anyway. And your choices are using natural gas or using clean options. If your carbon has got a price on it, then you will end up with a clean one. Without a price. You need regulation to say you can’t do it that way in order for it to hurt. So that’s, that’s my concern is just it’s just economics. That’s that that’s worries me there. I just needs to get the economics. You know, the numbers are so big that it needs to be like have like, eight times. And things can get hacked. It’s easy, you do a lot of economies of scale, and suddenly you find something that’s half the price. But doing it eight times feels like a lot of steps that you need to make better.

Gene Tunny  56:54

Yeah, here there,

Josh Stabler  56:55

you know, yes, you can get a couple if anything’s out by four to one. And its initial stages. Yeah, that’s, that won’t take any time to fix. But, you know, 100, to one that starts getting to a point where you’d like we, there’s a lot of things that need to go right together.

Gene Tunny  57:10

Okay, so now some policy questions and probably haven’t left enough time to go through these complex issues. I’d be interested in your thoughts on the you mentioned capacity, capacity markets before paying for capacity. So you talked about the problems that nuclear and coal, they can’t compete with solar during the middle of the day? Should we be paying to the generators, the fossil fuel generators, or if it’s nuclear, paying them to make sure that they’re online, that they stay in the market, that they’re available? If we need them? Is there a need for some payment like that? So that’s one policy question. The other big policy question at the moment is regarding the and the one of the challenges we’ve got, as this episode will be released after the national Cabinet meeting that we’re having this week to decide on whether we have a cap on coal prices, whether we have a cat isn’t it is proposing a cap on gas prices and also a domestic domestic gas reservation policy. What are your thoughts on all of those,

Josh Stabler  58:10

please start on the gas cap one and then go back to the GST. So the gas coal caps, your biggest issue with any type of so let me start with gas gas one because and they’re all good, we got analogue across to call it the gas, the problem with the gas market cap is that you need to you are having a broad based market response to try and solve what is not a broad based problem. So your businesses a an example a coal mine does not need cheap electricity, because it is making more money than it knows what to do with. So charging it more for charging it an appropriate price for electricity, based on its cost structures end up its revenue stream is part of the reason why cost structures are so high, which is why electricity is high. So if you give them a discount on their electricity, then they’re just making more money. If you are a services business, I’m sure electricity doesn’t even make it or a percentage number in terms of a normal business or normal professional services business. So increasing the cost of electricity doesn’t make a difference. It doesn’t materially change your market, your value of your business. It doesn’t materially change whether or not you’re viable. However, there are businesses that where there is a clear difference, which is if you are a domestically focused manufacturer, and you have a implication of high absolute prices will cause you to pass on high absolute prices to the domestic market that has an inflationary impact, and therefore it needs to that has a legitimate claim to being fixed and to being resolved. Your other group is that mums and dads have paid two points to Extra 2.9% of the total costs for the last 40 years on electricity might be slightly higher right now, but the number is about the same all the time. It’s also not a lot with it, our cost of living has increased remarkably much this year, because of interest rates, not because of electricity. So we’ve had a massive increase in terms of people’s livelihood costs, because of because of the interest rates. And electricity is like a thing that is annoying because it’s on top of so. So for depending on which sector of the market, if you are a low income earner, then that 2.6 is not 2.6 is probably four or five, because your consumption doesn’t really change that much based on your, you know, your your money, you still have to do all these things to keep the lights on and to consume. And therefore that becomes a regret your recess, regressive sort of threats. So you need to manage low income, and you need to manage domestically focused manufacturers or consumers, energy intensive consumers, if you are the rest, which is a lot of the energy consumption, aluminium spouses, you know, your fertilised and everybody else, they are competing internationally, and they are competing in a high market international price. And therefore, their prices they’re passing on, I’m not even going to Australians, they’re going out into the world. And the most of us not even coming back to Australia anyway. So what that doesn’t, so doing a broad based outcome for that kind of doesn’t really fit the bill. So I think that’s where the problem is. Now when you take a look at coal, coal really only has one market in in Australia, which is thermal electricity, our, our meteorological metrological cold, there was stuff that’s used for coking coal, we don’t, we don’t make steel in Australia anyway. So all that stuff is going off to China where the iron ore, it’s getting turned into steel. So there is the implications on the coal market are purely on the electricity space, so long as you can still get the energy. Our problem in winter was not because coal prices were high is because the coal generators were offline. And the ones that were online had limited coal supplies, and you couldn’t give them more coal, because they’re not next to the coal mine. The ones in New South Wales are off the spur of Newcastle and you need to drive the train through a major city to get it to a power station. And you can’t deliver any more to that power station. So you get physical limitations. And just simply saying, your price of your coal is cheaper, doesn’t make them have better power stations, or find more coal, they are just limited by their energy. And that makes it a that that’s an that could return next year, we could have kept on the market, low coal prices, and no energy. And therefore prices are high, because we’re not actually keeping anything that fundamentally keeps the market under control. So our threats right now are not only input, the problem that I find is that everybody said the market is going up because of Ukraine, which makes it feel like it’s an external thing. And all we have to do is disconnect ourselves from there, and it’s all fine. But we aren’t we aren’t actually we’re not we’re in we’re in our own scarcity issue domestically, at the same time as the scarcity issue internationally. And when it goes bad, it joins the international market, which makes it feel like it’s all related. But it’s actually just joining whether they’re in a bad place, and we’re in a bad place. And unless we see some sharp increase in availability, then we don’t, we may just have the same problems again. So that’s, and that leads us to our other question, which is what do you do about capacity markets? How do you make a power station that is unreliable, more reliable? One way, definitely making sure it goes to be less reliable, is to not spend any money on maintenance, so that it will turn off. So if you are thinking that your power station has two years left to live, you’re not going to spend any money on your maintenance, just like you don’t spend money on that car, a clunker that’s about to break down, you don’t go and send it in for a service. When it breaks down, you leave on the side of the road and get someone to deliver it to their records. That’s the problem we’ve got with the power stations as we’re getting to the record stage. When they break, like realistically This is at the point in their life where they might have four units, one breaks, it becomes parts, it doesn’t get turned back into service, it just left to make sure the other ones survived through to the end. Right. So that’s where your capacity might do is it might give you an incentive to stay around for a longer period. Yeah. Which gives you the money to be able to do that to spend on the maintenance so that you can have an asset that will be able to survive until you’re no longer required.

Gene Tunny  1:04:50

Yeah, so we’ve been talking about this for for years now. Do we know if we’re gonna get one capacity? Okay.

Josh Stabler  1:04:57

I think now that we’ve got So many power stations planning on exiting over the next X number of years. It’s also about with we’ve rapidly changed our expectations. Yeah, even just two years ago, we were in a position where coals wood, coal was cheap. There was coal mines were losing money on what they were delivering in. So they stopped slowly stopped there, the supply, you had power stations that weren’t making money, because they were they weren’t, the electricity prices were so low, you know, we’ve, we have gone from $30 a megawatt hour to $300 a megawatt hour in two years. Like it’s such a variation in terms of the outcomes, it’s so quick that nobody has in a market that that builds its world over 10 years, you can’t respond in two. And, and that’s just where we’re, you know, when we’re, you know, we go into a price cap on gas on coal, it doesn’t fundamentally make doesn’t change the engineering just changes the economics. And then the hope is that the economics works. Because if, if you’re saying that’s the next year, anybody who sells coal only gets a lower price, then you just hold and you own it, and you have a stockpile of coal, well, then you just wait to the year after and some of the higher price economic theory is you just waiting there. Or if you can deliver to a boat and sell into $500 a time overseas, then you definitely do that. So you’re definitely getting this position where if you deflate the domestic one, you also need to motivate them to continue to supply because otherwise, you’ve just given them the exact opposite, which they don’t supply, because no one’s going to pay you anything that’s worth anything.

Gene Tunny  1:06:35

Yeah, well, I mean, is that what we’re going to end up with? If there’s a domestic gas reservation policy, where we say that you’ve got to supply this amount of gas to the domestic market at this price, I mean, is that where we’re heading,

Josh Stabler  1:06:49

it does appear that that’s where the direction they’re going. It it. The problem also applies to where that supply is coming from Australia is a lot the tyranny of distance. We with this usually said in the fact that it takes a long way to deliver things from Australia to other countries. But the tyranny of distance also works for our large country to deliver gas from Dolby to Moomba, to young to Melbourne is 2800 kilometres, yeah, which is the same distance as Edinburgh to Turkey. Yeah. So it’s very long distance in terms of of how far you have to deliver, which means that we don’t necessarily have the infrastructure to be able to deliver all the guests that’s required in the south via the infrastructure that we have we we have limitations on that, which means that we need to build up our, our storage in the south ahead of winter so that we can actually deliver it. Now if there’s a cap on the market. And it costs you $12 To buy gas, and it cost you money to put into storage so that you can take it out and get paid $12 What was the financial incentive there? So your cost $12? And then you get paid 12? So what are the $2? Or you just lost that? Okay, well, once if I deliver it from Queensland, where you buy it at two or $5, you’d paid $3 to deliver it down, and then you can sell it for $12. So you’re taking a financial hit there as well. So you, it’s not just so simple as to say that everything’s the same, because then you’ve got no incentive to do anything. If you’ve got gas in Queensland, and you’ve got no reason to move it to another region, other than regulation, that you must deliver excess capacity. It’s just this is when you start delving into how you want things to work. It’s the the problem with putting a cap in is you lose merit, or you lose who deserves to get the gas, who’s willing to pay more who’s willing, or has a higher need for that. So they can actually meet that meet their requirements. Because you don’t have the merit order, you then don’t have the volumetric assessment. So if I was somebody there, I’m just going to say, Can I have a billion petajoules of gas. And if we prorate or down, I’ll have 99.9% of it all, because I asked for the most amount, because there’s no difference between my $12 and your $12. Let’s just split it, split it down the middle of who bet in a billion versus one. I’ll have my billion and you can have your lunch. So it’s it just your problem. You’ve it’s there’s a lot of unintended consequences that need to be managed there. And it’s it’s difficult. It seems simple, but it’s difficult.

Tim Hughes  1:09:33

Yeah. Does that fall into the category of the infrastructure needed for that particular energy source? So for instance, you know, it’s obviously going to be expensive to deliver that, that amount of gas. One of the things I was going to say it was like clearly, not clearly, but it would appear that a diverse array of energy sources would be a wise thing to do. So we now have all of our eggs in one basket Solar has its limitations. Wind has its limitations, etc. Coal has its limitation has its limitations and gas has its limitations as you were saying there’s so like, a sort of array of all of these solutions that would get us towards Net Zero. Yep. would seem like a good idea. So hydro might be a good part of that.

Josh Stabler  1:10:21

Or we should definitely have every single piece of the puzzle that we can get, then the question I think has been slipping in regarding the Niccolo answer. The problem with the nuclear answer is there’s no way we’re getting a nuclear facility in, in Australia. 15 years. Yeah. So even even, you know, we can even have the conversation just so long as the conversation isn’t, we should spend more time talking about Nikola the, the the reality is, if somebody wants to go and do that, yeah, change the law, and then have somebody go and pay the money and spend the 15 years getting it organised. Talking about it now, and with it never been within, you know, not five election cycles away. That’s, that’s, that’s a long, long time. Now, and I guess that also leads to how quickly things have changed away from what we expected, our expectation of gas was that it was going to do nothing anymore, we were just going to have a little bit in Victoria, it’s expected to continue to decline every year, the gas storage two years ago, almost did nothing. The amount of gas that we should be expecting, you know, we, we ran near record levels during winter, but we ran an absolute record lows during spring. So that’s, you know, that’s like a 10 to one variation in terms of daily consumption between spring and winter. We’ve got this, it’s, it’s not just that we have a, an, a constant need is this we have this massive variations and our experts, the forecasts, then beforehand, were like, we’ll use 22 petajoules. And we ended up using 100. Like, we’re completely, we’re completely misreading how it’s going to occur, because things happen that we didn’t expect. And those unexpected things relied on certain technologies to solve it. Because you can’t ask solar to be brighter. You can’t ask wind to get more wind it, it can do everything it does, which it what it does, it does, it runs as hard as it possibly can. The problem with that part as possibly can is, is you can’t go more and go less solar conquer more can only carry less. Gas is already less, and it can do more. But our complication of that is that ends up costing money. Now that might be the cheapest money we could spent. Like that might have cost us a lot of money. And we managed to have no shortfalls. And we managed to keep society going on. And we had no other issues other than a whole lot of political noise around the outside of it. But in reality, we only had a small, very small marginal change in terms of people’s bills. And everything’s, you know, some people are bad, but you know, in general, we have worked our way through it. That cost us money. Yeah, could have been the cheapest option we had available, probably was the cheapest option we had available.

Gene Tunny  1:12:56

Right? I think we might have to.

Tim Hughes  1:12:59

It’s quite an it’s so good hearing your insights and your your from your experience, Josh. And, you know, we could go on and on.

Gene Tunny  1:13:11

I think we’ll have to have you back on again, Josh, because I need to digest. Yeah, this episode. And what’s what’s been said here, because there’s a lot of, there are many things to think about. And I mean, I’m starting to think oh, yeah, I mean, there could be some things that are really positive and make it easy. But then there are other things that are big challenges. And, and you mentioned how this is all uncoordinated. And yeah, I mean, it sounds to me like there’s a risk of some bad outcomes in the next decade or so potentially the non trivial probabilities of, of blackouts. And it just, I mean, I guess we will muddle through somehow. But could could be messy.

Tim Hughes  1:13:54

We seem to be doing remarkably well, like that. The figures you mentioned about reducing 40% In six years is is fantastic. Yep. And I was going to mention, of course, like, there’s a geographical advantage that we have in Australia, for instance, like with solar, like the other parts of the world. Yeah, they would love it doesn’t have, you know, I said so they might have different nuclear might be more viable for certain places, with all its, you know, issues that come with that too. But certainly as technology and this emerging technology, which is coming through very fast, you know, if they can get solar through to be doubly triply 10 times more effective, then it can make it more viable for different parts of the world. So it’s, it’s fascinating, where we’re going and it’s it’s amazing to move so fast. And I guess this transitional period that we’re in is really important that we not trip ourselves up. Yeah, on the way to net zero like, which, of course, you know, who wouldn’t want to be there? I certainly wanted to be there. But we want to get there with the lights on.

Josh Stabler  1:14:59

Yeah, we need to do it. with the least amount of, you know, this is an essential service. Yeah. And it, you know, society doesn’t function if this if this breaks and and transition will lose its lose its losers backing if it can’t keep the lights on. So it’s these are these are important parts. But it’s also I have one last point which is always very difficult to imagine the world different to the one you’re in. So right now we’re in a high market pricing, we’ve got all these danger, we’ve got all these conditions that are that are creating uncertainty where we are, but we have so much, you know, it can change so quickly in this space, we’ll just two years ago, we’re in 1/10 of the price. Yeah. And it can move very quickly against you in or not against you, but in very quickly into a different environment. And it you know, leaps of faith could leaps of technology change, or, you know, we could have, like, everything that’s basically happened in the last couple of years has been supply side failure, it’s just been everything that happened just happened to be on the supply side, we didn’t have a smelter go down. We didn’t have customers do large scale production, because they got their meeting, you know it the spot price was high. But domestically, they’re probably making pretty good positions that are able to pass on these costs. That’s why we’ve got such high inflation, these things are happening, which is allowing people to survive. But if these if we suddenly got lucky on the supply side, and things started getting better, and some things just started getting lucky, you know, we could really move that back away, and then we could leave the international space where it is solve our domestic scarcity issue. And then it won’t be Ukraine that’s holding us up, we were in, we’re in a we can return back to a a more settled environment, which is a little bit like the US us as far as you could your gas, because they are separated for physically separated and the ability to export more is not there. If we suddenly solve some of these problems, we can really pull back, we don’t use other gas for electricity, and that won’t set the price. And therefore we can see it dropping back down if we see some of these problems get resolved. So it’s just a, you know, it’s easy to be stuck in it and to feel the you know, the shadows, the darkness of the shadows in the times when they’re in there. But it’s also you can move past that and you know, we’re definitely at 40% down in emissions, we are on the right path and once we start bringing EVs that’s 54% of the emissions in two sectors, and if we can bring them down to full 4% That’s a long way in terms of where we want to go.

Tim Hughes  1:17:31

Well, I was gonna say I mean, because the way this is driven by the market is, is giving it is decentralising in its effective, like, yeah, if you’ve got rooftop solar, and ultimately you can be self sufficient. The consumers have more autonomy and, and that collectively around the world will make a massive difference. And so it’s, it’s a good direction, it appears, you know, like, I mean, who wouldn’t be happy with that, because you’re not going to have the bigger issues with those outages, you know, it’s going to be more of a localised

Josh Stabler  1:18:04

issue, and a 5% fault is 5% of a million, which makes it 50,000. It’s, it’s not 5% of 20. When you start becoming actually 5% means it’s probably those two, all which is probably the 1% of the time is four off, it’s like when it’s a million, it’s always the same, it’s you know, it’s distributed, the the law of large numbers kicks in, and it’s just 5% Haircut across all the time, on everything, as opposed to occasionally being a very large number, which is what we’ve had very large numbers of times where we’ve had coal fail at the same time as coal fail, same time with gas fail and the, in the in the misalignment of a couple of bad things at the same time, because they’re large, ends up creating large impacts. Lots of little ones and it all disappears.

Gene Tunny  1:18:54

Okay, Josh table, it’s been fascinating. Thanks so much for your time and for your insights have really appreciated that. And once we digest this and think about some more, I’m gonna have to chat with you again, since it’s been terrific. Thank you. Thanks, Josh. Thank you. Okay, so what are the big takeaways from our conversation with Josh? My first takeaway is that the transition to net zero will probably be a bumpy ride. I love the way that Josh described it. To quote Josh, the complication of transition is that it is by default, disorderly. my conversation with Josh confirmed my fear that we could end up with unreliable electricity in coming years. I’m still very concerned, we will have to start expecting the occasional blackout as we bring more renewable energy into the system. My second takeaway from the conversation is that the energy solutions of the future may not be obvious to us at the moment. We need to allow innovation and we need the right incentives in place. EVS could be a big part of the transition path in the conversation with jasha was blown away by the idea of self driving EVs returning home or going to other people’s homes to fill their batteries during the day after they drop us off at work. That’s just incredible. Okay, before I leave, I should note that the Australian Government legislated a highly interventionist energy market package earlier this week, I recorded this conversation with Josh last week when we only had an outline of what could be included in that package. I’ll aim to have a closer look at the specifics of the package in a future episode. 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 at economics explore.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

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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

Understandable Economics w/ Howard Yaruss, NYU – EP168

In his new book, Understandable Economics, Howard Yaruss from NYU argues “Understanding Our Economy Is Easier Than You Think and More Important Than You Know.” Howard is an Adjunct Instructor in economics and business at NYU. Previously, he was Executive Vice President and General Counsel of Radian Group, a mortgage insurance company. Howard lives in Manhattan and serves on his local community board. 

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

Where you can buy Understandable Economics:

https://amzn.to/3VCsxMV

Howard Yaruss’s website:

https://howardyaruss.com/

EP159 with Romina Boccia from the Cato Institute on the future U.S. fiscal crisis:

https://economicsexplored.com/2022/10/03/the-future-us-fiscal-crisis-and-how-to-avert-it-w-romina-boccia-cato-institute-ep159/

Transcript: Understandable Economics w/ Howard Yaruss, NYU – EP168

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.

Howard Yaruss  00:03

I saw reason survey that the majority of young people don’t trust capitalism. That’s a catastrophe as far as I’m concerned. And I think what we need to do is give them a reason to have more faith in the system that has created more wealth than any system in the history of humankind.

Gene Tunny  00:23

Welcome to the Economics Cxplored podcast a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny broadcasting from Brisbane, Australia. This is episode 168. It’s on a new book I’ve been reading called Understandable Economics, because understanding our economy is easier than you think and more important than you know, the author is Howard Yaruss, and he joins me to talk about his new book this episode. Howard is an adjunct instructor in economics in business at NYU. Previously, he was Executive Vice President and General Counsel of Radian Group, a mortgage insurance company. Howard lives in Manhattan, and he serves on his local community board. I’m grateful he came onto the show to share his thoughts on how a proper understanding of economics can help people argue for better public policies. Please check out the show notes, relevant links and information and the details of how you can get in touch with any questions or comments. Let me know what you think about what either Howard or I have to say in this episode. I’d love to hear from you. Right now from my conversation with Howard Yaruss on understandable economics. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Howard Yaruss, welcome to the programme.

Howard Yaruss  01:38

Thank you, Gene. It’s great to be here.

Gene Tunny  01:40

Excellent. Good to be chatting with you. Howard, I’m keen to chat with you about your new book, Understanding economics, because understanding our economy is easier than you think. And more important than you know. So how would I like to ask you? Why do you think that understanding our economy is easier than you think? Can we begin with that, please?

Howard Yaruss  02:10

Yes, I think a lot of people are intimidated by economics. Virtually anyone who’s taking a course, taking a course in economics, has been confronted with a bewildering array of formulas, graphs, jargon, those of the people who’ve taken a course the people who haven’t taken a course, understandably, don’t know much don’t know much about it at all. So I think there’s a lot of misunderstanding about economics, but what is economics about? It’s about how society allocates scarce resources. And that’s not a science, like physics or biology, you could just plug some numbers into a formula and get an answer. There are value judgments involved in how we allocate our resources. Our resources involves value judgments. And so it’s, it’s a different type of discipline than a bit different from what most people think it is. And I think what it really is how human beings interact, is easier to understand than the typical economics course, leads people to believe.

Gene Tunny  03:18

Right? What do you think is wrong with a typical economics course, Howard.

Howard Yaruss  03:22

That they begin with a whole bunch of formulas and jargon and graphs. And what we’re talking about is human behaviour. It’s like if you went to a psychiatrist, and they said, Let me plug everything into my formula. The world just doesn’t work that way. There’s, as I as I say, in the book, there’s a reason why a downturn in the economy a severe downturn in the economy, is has the same word is called by the same word as a severe downturn, a psychological downturn for human being or depression. These are psychological phenomenon, they quickly have real world consequences. But again, you can test the industrial capacity of a country right before, lets say, something we’re more accustomed to a recession rather than depression. Fortunately, we’ve had very few depressions, you can test the industrial capacity of a country right before a recession starts. And right after it’s the same, you can test the skill level of the workers right before a recession begins. And right after it’s the same, what’s changed? Outlook. It’s an infectious gloom that takes over. So I think understanding economics requires thinking about human behaviour. And it’s somewhat different from what’s often taught in economics courses.

Gene Tunny  04:43

Rod, okay, we might delve into that a bit later. The other part of your the subtitle is it’s it’s more important than you think. Why do you think that is the case are more important than, you know? Understanding economics

Howard Yaruss  05:00

I was going to rewrite that part of the title, I’d say much more important than, you know, simply because people are told all sorts of things by politicians who have self-serving motives for making certain claims. And I think, because most people don’t take a course in economics, and those who do are, again, faced with a bewildering array of graphs and formulas, so they don’t really get a sense of it. I think people can easily be misled by claims of politicians and other people who have motives to support a particular policy that they want to see enacted. I think it’s essential for people to understand how the economy works a bit better, so that they cannot be as easily fooled, and so that they would support better policies that would make our economy better and more productive.

Gene Tunny  05:53

Okay. So what do you think they’re being fooled about Howard?

Howard Yaruss  05:57

Well I can give you a few examples, this one went off the top of my head. There are a lot of politicians in the US who claimed for years that giving tax cuts to wealthy individuals would increase employment and improve the economy. And if you think about it, why does a business expand not because there are more investors with money, it’s because they’re more consumers wanting to buy their product or service. So if you put more money into the pockets of middle and lower income people, they’re going to spend on goods and services, and businesses are going to be forced to expand and hire new workers to produce those goods and services. If you merely give it to wealthy people who tend not to spend as much of their money, they have a lower propensity to consume, the businesses are not going to expand because they don’t have the additional demand for their product. So that’s an example of something that’s that’s said, by politicians that often misleads people. And it’s not something you need complicated formulas, or very, very specific kind of knowledge to figure that out. You just have to not be intimidated and use your good common sense.

Gene Tunny  07:14

Yeah. Okay. Now, you’re saying that you think there are some issues with the way economics is typically presented? Is it just not presented in in an intuitive enough fashion? Because when I read your book, I saw a lot of good economics in there. I don’t, I just want to, I just want to understand where you’re coming from with this book. Is it that you’re you’re not saying that a lot of economics is bad, it’s just not well presented? What’s your actual position here? How could I ask you that, Please?

Howard Yaruss  07:49

I think you said it very well. It’s not taught very well. First of all, let’s start at the beginning. Most people, at least in the United States, don’t learn economics, it’s not required in secondary school here. What is required is trigonometry. Which to me seems to use a technical term crazy. And I have a lot of respect for math, I was a math major. So the fact that we require something like trigonometry, and don’t require economics is shocking, to say the least, when it is taken at the college level, it there are all these assumptions made perfect information, everyone’s rational 100% of the time, and the real world doesn’t work that way. I live on the Upper West Side of Manhattan, which is a fairly affluent neighbourhood, about 40% of the retail spaces are empty. Many retail spaces have been empty for decades, that, according to economist shouldn’t, just shouldn’t be. Why why are people greedy? We always assume landlords are greedy. Why? Why are greedy landlords seeking zero income? There’s a disconnect there. And I think a lot of people are confused by this phenomenon. And the answer is that the real world doesn’t work perfectly. According to these models with all of these assumptions, I know economic the economics profession, is trying to there’s behavioural economics now. But the point is, people people, it’s people should be able to make some of these judgments on their own, they should be able to understand some of this on their own, because if they, if they don’t, they can easily be manipulated or misled by people who have ulterior motives.

Gene Tunny  09:33

Right. Okay. Now, I saw in your conclusion that originally this book was titled, economics for activists it was its focus was the people who were troubled by our economic system, yet optimistic enough to engage in activism in the belief that change was not only possible, but also that they could play a role in making it happen. Okay, what sort of activists are you talking about here? Howard, are we talking About the Occupy Wall Street? Are we talking about, I mean, who exactly is this pitch at, this book?

Howard Yaruss  10:08

oh, all activists and what and what I had in mind is people who are fed up with the current system and those include Occupy Wall Street, the Donald Trump voters, the Tea Party, and I know Australia has has their equivalent of these groups, there are a lot of people frustrated with the way our economy is going I call it the winner take all economy in the book, that the people who are doing well are doing better than ever, and the people who are not doing well are stagnating at best. And these kinds of actions is exactly what I’m talking about. What happened to Occupy Wall Street, Donald Trump, the Tea Party, they haven’t made life better for anyone. And my hope is that by understanding how the economy works, people would support more constructive policies that would make life better. What originally was he title of the book was understandable economics, because you can’t improve a system you don’t understand. If people don’t understand something, they can’t work to improve it, or if they try working to improve it, if they become an activist that their efforts may be for not. So the goal is to arm readers with the tools to understand what in fact, would improve the economy. And what on the other hand is a false medicine, is a false cure for the economic ills we are suffering.

Gene Tunny  11:30

Okay. Can I ask you about the fact that you grouped tea party with Occupy Wall Street? So is it your view that they’re both coming from the same frustration that and but they’re both got different, those two groups have different prescriptions or different recommendations. I mean, they’re both after different things, aren’t they? But are you saying they’re both motivated by the same? The same concerns?

Howard Yaruss  12:02

Why is it said there are some similarities between the two groups and some differences? What are the similarities, they’re frustrated with our current system, they both clearly have that in common. And at the risk of sounding cynical, they both didn’t achieve very much. I think what they were different is Occupy Wall Street had a specific flaw in that they did not recognise that it’s the political system, that effects change. That’s the system we live in. Unless there’s a revolution and there hasn’t been one. That’s the system we live in. So they were particularly ineffective in that they did not have a mechanism for getting people who had views similar to theirs into the legislature to effect change. They basically shot themselves in the foot by not doing that. On the other hand, the Tea Party was extremely successful, getting people into the legislature, the problem is just cutting the government without giving thought to what is the government what the government does is use, what useful things the government does. And what non useful things the government does is not really helpful to the average person either. The point I make in the book is how I use highways as an analogy. Cars are great for getting people from one place to another. But if there were no rules on the highway, people could drive on either whatever side they wanted, if eight year olds could drive, drunk drivers could drive, if there were no speed limits, and people could do whatever they wanted on the road, the road would not work. There have to be clear rules. Obviously, rules that are overly burdensome, shouldn’t be there. But the highway just cannot function without rules. It’s the same thing with a market economy. If there aren’t clear rules, it can function.

Gene Tunny  13:54

Yeah, yeah. Can I ask you about this, this point you made before that, to be able to affect change, and to be able to, to really participate? You need to understand how the economy works. What do you think of the key principles? Do you set this out in your book? Could you What do you think are the big things that we should understand in terms of how the economy works?

Howard Yaruss  14:23

I read a survey and it was an international survey so I’m sure it included Australia, of economic students, and they asked them where new money came from, and the majority couldn’t answer it. How could you talk about resources or equality and not know where money comes from? Again, if you want to improve a system, you have to have some understanding of it. So I think what I tried to do in the book is give some foundational knowledge about how the economy works, how trade works, how the central bank in the United States, the Federal Reserve System, affects the economy and how they create new money. So people have a basic understanding of the foundational components of the economy. And then I talk about different aspects of the economy. And I hope readers reach their own conclusion as to what makes sense, but at least they do it in an informed and intelligent way. As opposed to, we’re talking about the people who supported Donald Trump or Occupy Wall Street, they’re expressing their frustration, but they’re not pointing people in the direction of something that would improve the lives of the average life for the average person.

Gene Tunny  15:40

I think it’d be good how, if you give a just a rundown of how you explain that, or just take us through that, that where money comes from, I think that would be really useful. I’d recommend. If you’re listening in the audience, I would recommend this book, I think there’s a lot of really good stuff in there. And I really loved your chapter on trade. I loved your chapter on industry policy, your, your criticism of the bailouts, and maybe we can chat about that later. But to start with, if you can explain, Well, how do you how do you explain to people where money comes from, I think that would be really useful?

Howard Yaruss  16:20

Yes, well, I have the quote in the book, that all money, all new money is loaned into existence. And again, the average economics student didn’t know that. And in the book, I tried, I tried in the book to make it very user friendly. To write with a sort of basic style, it’s supposed to read like, readable narrative nonfiction, but how money is loaned into existence is, as you know, is not the easiest thing to explain. Basically, when a bank lends money to someone, they’re not grabbing the cash from someone’s account, this is not like, I have to make a very contemporary joke. FTX, they take people’s cryptocurrency and do with it what they want, the bank merely creates new money, it’s totally created brand new money. That’s what a licenced bank does, in virtually every country in the world. So that’s how new money is created, it’s created through bank lending. And the money can go away, when the when the loan is repaid, it disappears. So it’s how critical it is to understand that I’m not sure what people’s particular frustrations are or what their particular interests are. But to understand where money comes from and how it’s created, it’s basically important to anyone who wants to get more involved in these kinds of issues, to understand them better. And ideally, to have an impact on policy, you have to understand the basics before you can go ahead and get involved in, in assessing policy.

Gene Tunny  17:59

Right, okay. And it’s certainly important for macro economic policy we’ve had, because of how our monetary policy has pushed down borrowing costs, and then there’s been a huge explosion in credit for housing here in Australia. And that’s pushed up property prices and and that’s also help keep the boom going. We’ve had this incredible post COVID Boom, that I think will probably end.

Howard Yaruss  18:28

We’ve had this here too. I think the whole developed world is having inflation, eight, nine 10%. It’s an important issue for people understand, I also talked in the book about hyperinflation. Inflation is a problem, clearly a problem that needs to be dealt with. But it’s not a civilization ending kind of problem like hyperinflation, hyperinflation almost always results in nation collapse and death, which is fundamentally different from just eight or 9%. Inflation. It’s, it’s again, it’s not a good thing. But people have to separate the two and, and they make it very, very clear point in the book that I don’t think there’s any advanced nations, certainly not the United States or Australia, that’s risking hyperinflation, which is a whole level, a problem on a whole nother level. We do have inflation, which is a problem, but it’s you need to separate it from the kind of hyperinflation inflation that for instance, brought us nuts, Nazi Germany.

Gene Tunny  19:25

And what do you say about the Fed? How do you say anything about their quantitative easing policies that they’ve had over the last decade and a half?

Howard Yaruss  19:35

Well, we see inflation. So I think that speaks a lot more loudly than anything I can say. If, if their policies were more effective, we wouldn’t be having inflation. So the suggestion is or the inference is that they were hit the accelerator a little too heavily. Yeah, yeah. Yeah, for sure. And now they’re slamming on the brakes. A lot of people claim they may be slamming the brake too heavily, because there’s, as you know, there’s this very significant lag between them hitting the brakes and the car coming to a stop. And it’s very hard to know how hard to tap the brakes as the car slowing down, but it may not be slowing down enough. My own personal opinion is that we’re going to see a assuming, again, there’s so many assumptions here, that the war in Ukraine doesn’t doesn’t escalate, that the supply chains get sorted out that there isn’t another problem that arises on the horizon, we’ll probably see the effects of all the central banks, their attempt to rein in inflation to start having some success.

Gene Tunny  20:44

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

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Gene Tunny  21:22

Now back to the show. Okay, can I ask you about what you see as the false solutions? I think you suggested before that economics helps us understand how the economy works, what sound policy responses would be. And then also, what are some of the dead ends to go down or false solutions? What would some of those be?

Howard Yaruss  21:49

Well, I already mentioned one in the tax cuts for the wealthy to spur the economy. We see in England that in a period of inflation, the government proposed tax cuts for the wealthy, which is just throwing more money out there, creating more inflation. So that’s definitely a false solution. I’m not sure what the problem was. But it’s definitely a bad policy idea. That seems to be in response to I don’t know what. So that’s one example of something in the United States, we’ve had a debate about Social Security, pensions for older people. And there’s always this talk of the government running out of money, Social Security going bankrupt. And as Alan Greenspan, the former chair of the Federal Reserve System, once said, It can’t run out of money. The United States government can always create money. What it is, it’s a question of will and will not, it’s a question of politics and not economics. It’s a decision as to whether we, as a society wants to devote our resources to these things. And that takes us back to what we just discussing at the very beginning. It’s not like physics, where you plug certain variables into a formula and outcomes an answer. It’s a value judgement about how we, as a society want to use our resources. Do we want to help people in their old age and obviously tax workers to do that or not? And again, there’s no formula that will give you an objectively right answer on that. What, what we need to do is have people understand the trade off, and then make an informed decision as to what they want. And I want to give one example, I serve on my local community board here in New York City. And we talk about different projects, like a bathroom in a park, or an elevator in a subway station. And these all sound great, but then I look at the price of these things. And a bathroom in a park is $4 million to put in. To make one subway station handicap accessible, which involves in all fairness, putting in multiple elevators. Yeah, it’s $70 million. That seven, zero million. And so again, people need to be cognizant of these economic issues because it all comes down in that case to a cost benefit analysis. And all of these things are good, Social Security is good. But there is no formula that’s going to give you the right answer to that. Although I think even if there were a formula it would tell you the $4 million bathroom doesn’t make sense. But the point is, this is a value judgement. It’s something that people shouldn’t rely on economic experts because there’s no objectively right answer for that. It’s something that people have to get an understanding of how it works, and then apply their own values to that issue and make the decision for themselves.

Gene Tunny  24:55

Yeah, I think that’s, that’s right. This is one of the points I’ve been trying to make on this. show over the years as I’ve been, as I’ve been doing it is that, you know, we economists need to be honest or need to be. Yeah, we need to realise that there are in decision making value judgments come into play. And often the best thing economists can do is outline what are the trade offs and, and what we expect will happen. And then it’s up to any decision typically involves a value judgement. Yeah, I’m just saying, Yeah, essentially, I agree with you. I agree with you there with Social Security. I’ve had a guest on the show, Romina Boccia, she was at Cato I forget, I’ll put it in the show notes. I think it was Cato or Heritage. But she’s very concerned about Social Security. And look, if you project it out, and you don’t, it is going to add to the deficit. And, like, you can think about that two ways. And I guess that’s what you’re saying, it depends on your values, you could, if you, you could try and limit that spending, you could reduce the entitlement or constrain it. Or you could just raise taxes to address the deficit. And making that choice, to an extent, depends on values. But I think what economists should be saying is that if you do make the choice to fund the higher social security, then you need higher taxes, and there are efficiency costs associated with that. And I mean, that’s the way how I’d be trying to frame it. What what do you think about that, Howard?

Howard Yaruss  26:41

Well, it’s again, it’s a trade off, I think we, in a democracy, should decide how society uses resources. And we shouldn’t make the decision in that context. It’s running out of money, you need to cut it with your personal finances, you have a job, that’s an issue, it’s finite, with a nation, there are all sorts of trade offs that can be made. And people need to understand this is not a crisis situation. There’s in the United States, the $22 trillion of goods and services created every year. And if we are committed to certain programmes we have, we have the ability to support them. It’s it’s not something that there’s a finite amount of money there that can only be used, I will go back to the first President George Bush, when he was talking about education, which I think is the most important investment of society could make it to keep itself wealthy, and not only wealthy but happy and secure. Again, I’d make the point in the book, you could look at places like Congo, and Venezuela and to a large extent Russia, which have enormous resources, natural resources, and yet they’re relatively poor countries. And you could look at Germany or Switzerland or Israel, which really don’t have any or Japan or any resources, and they become quite wealthy. What’s the difference? Human capital. And so the original, the first President Bush said, with regard to education, we have the will to fund it, but not the wallet. Well, I think he had it totally backwards, we’re a very rich country. And it’s there’s the question of just allocation of resources, which is, again, something that I think people who haven’t studied economics don’t understand the concept of opportunity cost that, that you can have, if you if some, if you prioritise something enough, you can have it, but you just have to realise that you’re not going to you’re going to have less of something else.

Gene Tunny  28:38

Yeah, absolutely. I think that’s an important concept. And you talk about how what we’ve got in this in advanced economies, we have a mixed economy, and, and in different countries, they make different judgments about the scale of government versus the private sector. And, and, you know, us is one where it’s, I mean, there’s still obviously, government plays a very substantial, significant role in the economy, but not as much as say, in Scandinavian countries or in France or, or Germany. So I think that’s a good point.

Howard Yaruss  29:14

All along a spectrum. Yeah. Yeah. I think it’s easy to fall into that trap of, are you capitalist or are you socialist? We’re all basically the same. It’s just that some countries are a little further on the spectrum of government spending, and some countries are a little less on the spectrum of government spending. We all basically have free markets that are regulated by the government. It’s not a question of socialism that they throw around the word socialism in the United States all the time. The textbook definition is where the government controls the means of production. I don’t think that’s what anyone’s talking about. And I make the point in the book pretty emphatically that all these isms can sometimes warp understanding of what’s going on in the economy, the way to understand what’s going on in the economy is to actually look at what’s going on. And that get involved in all this esoteric theoretical discussion of different types of economic systems.

Gene Tunny  30:11

Yeah. A lot of people are interested in crypto currencies. What does your book say about cryptocurrencies, Howard?

Howard Yaruss  30:19

Well, I make the analogy that it actually is, in a certain way, very similar to the US dollar or the Australian currency. It’s something that’s created totally out of thin air. The big difference is who creates, I don’t know, who creates Bitcoin, or Dogecoin, for that matter, but I know exactly who creates the US dollar. It’s the Federal Reserve System. I know exactly who the people are. I know exactly what the rules they operate under. I know exactly who to turn to if there’s a problem. When it comes to cryptocurrencies, we don’t know any of that. If you have a problem, we’ve all had problems with our checking account. And we know how frustrating it is to call customer service. But could you imagine if your quote unquote bank didn’t even exist, there doesn’t have any employees and doesn’t even have a customer service number to begin with? And I think we’re going to see more problems with cryptocurrencies because it’s just something created out of thin air by people. We don’t know operating under rules they claim they have but how do we know we have them in Bitcoin suddenly doubled the number of tokens out there? Who would we sue? What recourse would anyone have?

Gene Tunny  31:30

Yeah, exactly. And I mean, you mentioned what’s happening with the news around FTX. Is it and Sam Bankman-friedand here what we’ve seen in the news recently, yeah, yeah. Yeah.

Howard Yaruss  31:45

As I’m concerned, he was supposedly FTX was supposedly a place people could use to store their cryptocurrency. Well, if it’s not there, it was stolen. It was misappropriated. So I think it’s this is something that the prosecutors need take a look at.

Gene Tunny  32:04

Yeah, it’s all very confusing. I mean, I thought the great benefit of crypto was this decentralisation. And then suddenly, people are losing all this money, because they’re involved with this exchange.

Howard Yaruss  32:19

It’s decentralised. But the question is, what we were discussing before, there need to be rules, there are literally no rules with regard to this. So it’s like going to a highway driving on a highway where there are literally no rules. People could drive at any speed on any side, and do anything they want. If eventually there’s going to be a crash. If enough people come to that highway, you guaranteed a crash.

Gene Tunny  32:44

Yeah, yeah, for sure. What I liked about your chapter on money, was that you talked about how a lot of the value or the value of the US dollar is that you can pay bills in it right? Or you can, you can, people will accept it. It’s widely accepted. And it’s a fiction that everyone believes in. So I think that was a little something along those lines, I’m trying to remember the exact words used, but that’s essentially what Milton Friedman, how he described it. I mean, all money is fiction. So I thought that was, that was good. Okay. Now, what about modern monetary theory, which is another popular topic? What are your few things to say about modern monetary theory in your book? Could you take us through that Howard?

Howard Yaruss  33:39

Well, the most amusing thing I say about it is that it’s not particularly modern. It’s not a theory. And yes, it has to do with money. So I’ll give it that. Basically, they’re saying that the government can create as much money as it wants, as long as it doesn’t create inflation. That’s, I don’t understand why that’s anything new. Everyone knows that the government has printing presses and they could create as much money as they want. What I think is interesting about what they say is that the government should not be constrained by a balanced budget, that we all know it can produce as much money as they want. The modern monetary theorists say they should be able to create as much money as they want, as long as they don’t cause inflation. And arguably, that’s right. They if they’re printing money, and it’s not causing inflation, that really is a free lunch, if if you create an extra $10 and magically, an extra sandwich appears. That’s that’s literally a free lunch. The problem is, you need some constraint. And that’s why we have the central banking system we have today. Because if politicians could just rev up the printing presses, and print money for whatever They want tax cuts for their donors, giant spending programmes, you have the catastrophic problem we discussed before hyperinflation. And yes, if politicians could show adequate constraint, restraint rather. Yeah, I guess it makes sense. I think there are lost opportunities when the Fed is a little parsimonious with the money, and the economy could be more robust. But I think the downside risk of the politicians running amok and printing too much money and having the lose, lose control over that risk is too great, because that’s, again, a nation ending kind of risk. So I agree with what they say. I just don’t agree with their conclusion that we should turn trust, trust our politicians to show proper restraint. If we gave them the right to rev up the printing presses and print whatever they needed or wanted.

Gene Tunny  35:59

Yeah. Exactly. Okay. Do you say anything about climate change in the book, Howard, the solutions to climate change, or if that’s really to worry about?

Howard Yaruss  36:13

Not really, included in the book is the fact that if we want change, if people want change, then they have to assert themselves, it doesn’t happen on its own. If, if company if there’s a company that is doing something that people don’t like they need to, to promote policies that would rein in that behaviour. And it’s the same with climate change, that people need to be clear that this is something that is important to them, and that they want, because that’s how our political system works. Again, economics is not like physics, you don’t put things into a formula and outcomes and answer, it’s, it’s, it’s what you can get people to agree to do. And the more people understand, and this is a perfect example, the more people understand the harm we’re doing to our climate, the more they’re likely to support regulations that would rein in climate change. Ignorance is a threat to good policy. And that’s the whole point of the book. It’s to get people to think about it more, to understand it more. And I make it very clear in the epilogue, I passionately believe we would have better public policy if people had a better understanding of what’s going on, not only in the economy, but in with regard to climate change as well.

Gene Tunny  37:34

Okay. In terms of better public policy, one thing I liked in your book was your analysis of bailout. So you were highly critical of the bailouts that occurred, or the all of the assistance that went to was it to airlines in the States and other companies? Airlines as an example? Yeah, yeah. You were highly critical of that during the, during the pandemic. Could you explain your logic there, please, Howard?

Howard Yaruss  38:03

Oh, certainly, we gave billions of dollars to the airlines. But what did we get for it? Were the planes going to disappear? The planes are there, they were grounded, because there was a pandemic going on. But they don’t, they wouldn’t fall into the earth. So by giving money to the airlines, we were just saving the management of the airlines and the shareholders of the airlines. What what a lot of European countries did is they actually funded the wages of workers, which would have made a lot more sense and would have been a lot cheaper. Instead, we threw enormous amounts of cash at the airlines. And I think I don’t remember the exact figure in the book, I think it came out to about $750,000 per employee, we could have saved a lot of money by just paying the wages of the employees saving the employees. And the airplanes would save themselves, they’re not disappearing. So they’d sit there on the tarmac, the shareholders would get hit very hard, which is unfortunate. But given that there are finite resources, I don’t think they’re at the front of the queue in terms of warranting a handout. And when the economy came back there, the airplanes can be put back into service. So the point I’m making in the book is bailouts help management and shareholders as opposed to what Europe did, helping individual employees or or not offering assistance at all, and the assets would stay there and be acquired presumably by another company.

Gene Tunny  39:36

Yeah, yeah. I think that’s, that’s a good point. And remember, during the pandemic, there was a Silicon Valley, one of the billionaires in Silicon Valley who was making that point on or a similar point on CNBC and I thought, you know, that’s a that’s a that’s a good way of looking at it. And yeah, I think, you know, the way you go through it in your book is great. So I’d recommend your book for that. on that issue. It’s a key issue in industry policy. So I think that’s great.

Howard Yaruss  40:09

Okay, I’m just gonna add that that’s, that’s another great example of how people are misled that the hotels are going to go away, the airplanes and the airlines are going to go away if we don’t offer them a bailout, the hotels are there. There’s bricks and mortar, if they don’t get the bail, if they don’t collapse, the planes are there. The executives, if they lose their jobs, don’t get to fly them off and take them wherever they want to take them, then there, it’s just the management and the shareholders that are the risks. Now, not the actual wealth of the country, the actual infrastructure, the hotels, the air, the aeroplanes, they’re, they’re not going to go anywhere, whether or not there’s a bailout.

Gene Tunny  40:49

Yeah, yeah. Good point. Okay. I just want to go back over, go back to this winner takes all economy, you mentioned that early on, is that what you see is one of the big challenges in advanced economies at the moment? And what exactly brought this about? I think, if you could take us through that I think your book does a good job of explaining how we’ve ended up with what you call a winner takes all economy, or at least an economy where, at least in the US in, in Australia, it’s we haven’t had the same increase. And it’s a bit of an argument about whether we’ve had an increase in income inequality, certainly in wealth inequality. But could you explain what you know, what’s led to this winner takes all economy, please. And what in your view, economics suggests is a way we could get out of it. Or your logic suggests there’s a way we could get out of it.

Howard Yaruss  41:48

I teach this subject and I love one word answers. And I can give you a one word answer to that. And they’ll give you a more expensive answer the one word answer the internet, basically, the cost free platform that enables Jeff Bezos, or any of these big companies to do their business, internationally with no costs, has enabled the best providers to have economies of scale that have been able have enabled them to grow much larger than any company was able to grow before, before the internet era. For instance, in 1950, if you were selling clothing in New York, and wanted to sell clothing in somewhere in Australia, that was incredibly difficult. Just the phone calls alone wouldn’t cost a fortune. And now, it’s cost free. It’s frictionless. They’re the ultimate economies of scale. So Jeff Bezos can do his business, internationally, and basically take all so technology actually, it’s not just the internet, it’s technology in general, has facilitated this winner take all in the book, I use the example of musicals before 100 years ago, every city of any size, have a musical where people want to hear live music, and now he’s just flicking it on your computer. There are a few major international stars who provide the music. And I’ll add that not only do they provide the music, but they provide their performance in infinite number of times whenever you’re interested in hearing it, based upon one performance. That wasn’t the case 100 years ago. So yes, the best performers in New York City 100 years ago, probably or definitely earned more than the mediocre performers somewhere in Indiana. But the point is that many people earn livings in connection with that business. And now there are just a much smaller number of people. And the earnings are much more concentrated among the most popular performers.

Gene Tunny  43:52

Raw. Yeah, yeah. And what about the role of there’s obviously the role of monopolies or market power in this?

Howard Yaruss  44:01

Absolutely. Because with this, these economies of scale, we’re natural monopolies what economists would call natural monopolies develop. And you see this in ride sharing with Uber. I mentioned Amazon, information Google, social, social networking with Facebook, there are many more natural monopolies because of these economies of scale. And it’s a problem. Why is it a problem? Your Facebook’s free. Why is that a problem? Because you lose, you lose innovation when there’s a monopoly there’s no incentive to innovate. And as they really consolidate the monopoly, it’s, it’s it reduces opportunity for workers. And this is again fueling the winner take all phenomenon that the average worker has fewer options for potential places to work. Certainly entrepreneurship is foreclosed, you can’t go up against these behemoths. And so there’s a shift of resources from labour to capital, when you have these kinds, when business gains more power in this way.

Gene Tunny  45:16

Yeah, yeah. And so what in your view is the is a way to address this winner takes all economy? If you? I mean, I’m assuming you think it’s, it needs to be addressed. It’s not something that we need to spur innovation. I mean, it’s not actually I think probably most people agree that there’s a problem with big tech so far across the political spectrum. So, or across the economics profession to.

Howard Yaruss  45:45

This is a perfect example of what we were talking before about regulation. Here’s a question. I’m a lawyer that Facebook has had hate speech or a speech that motivated people to commit all sorts of crimes on its site throughout the world. Why isn’t there a potential liability there, and in the United States, they’re exempted from liability. But because they claim to be like a town square, but they’re not a town square, they prioritise certain speech over others. For instance, on Twitter, I tweet something it’s going to get, it’s going to be replicated many fewer times. And if someone else tweets something, so they are curating, they are involved in amplifying certain speech. So I don’t know why they’re exempt from free speech, from the laws governing libel and slander. So that’s one thing we were not we’re sort of asleep at the wheel in a way, we are not regulating these companies the way we need to regulate them. Every monopoly is different, or companies get monopolies for all sorts of reasons. And the government needs to look at them, it has the tools, it just needs to employ them to make sure they’re not abusing their market power. Because ultimately, if they do that, it’s not good for the economy. And it’s not good for workers.

Gene Tunny  47:09

Right? So would you break up any of these big tech companies?

Howard Yaruss  47:15

Well, there are such incredible economies of scale with a social networking site, you don’t want to go to a social networking site that only has a few people. So I think the government is going to have to look at, for instance, I talked before a moment ago about legal liability, to the extent they promote certain speech, and it causes harm, maybe they should be on the hook for that. And maybe they would be more equitable, and more fair, in running their business, if that were the case. So I think that, again, every monopoly is different. I think the government needs to look at them, and make sure we’re getting the best social benefit from them. Because again, they are natural monopolies in my opinion, if I wanted to set up a social networking site, I could set it up. But Facebook has 3 billion users, I’d have one, none’s going to it. I think, I think given that the government needs to, to impose some fair rules so that society gets the maximum benefit out of it.

Gene Tunny  48:15

Right? And what about inequality? How do you propose dealing with that? How would you see that as a substantial problem? Do you and how would you deal with it?

Howard Yaruss  48:26

 Yeah, as we have more of a winner take all economy, there’s more of a gap between the people who are doing well, and the people who are not doing well. And that’s a great failing of a society as as our economy grows, on average, most people should do better. And that’s what was so great about America and Australia for so many years, people bought into the system. And to the extent that people are alienated by the system, I saw a recent survey that the majority of young people don’t trust capitalism. That’s a catastrophe as far as I’m concerned. And I think what we need to do is give them a reason to have more faith in the system that has created more wealth than any system in the history of humankind. I make the point in the book that since roughly 1800, we evolved from a society where the vast majority of people were food insecure to a society where the average person does quite well. And so we have to keep that, that we have to continue that to make sure that people buy into the system and we continue to grow.

Gene Tunny  49:31

Right, and what measures in your view would be required to do that? Are we talking but yeah, exactly what measures would be needed?

Howard Yaruss  49:41

Well, in the United States, there was a lot of talk a few years ago about a universal basic income that we may get so efficient. John Maynard Keynes talked about this. There was a writer I think his name was Edward Bellamy in the in the late 1800s, who talked about this how’s this It got so wealthy, that people, many people just didn’t have to work. And we could just have an income and benefit from automation. And the fact that society would be so efficient, we haven’t reached that point yet, in my opinion, I don’t think we’ve reached that point in anyone’s opinion. So that’s not going to work. But what can work is, is to have a more progressive tax system. And let me be clear what I’m talking about. In the United States, hedge fund managers pay a lower tax rate than teachers and firemen. That’s ridiculous. Again, to use a technical term, that we people need a better understanding of exactly what the 10s of 1000s of pages in the tax code are doing, and try to have a more reasonable, a more equitable approach to the way we allocate society’s resources. So off the top of my head, I would say that better funding for education to give people opportunity, certainly increase the tax rate on hedge fund managers. So it’s at least as great as teachers and fire man. Warren Buffett always says that he pays a lower tax rate than his secretary, that makes no sense. So that’s one easy place I would start to have a to provide more opportunity to the average person, I would I would have higher taxes for the people who who’ve enormously benefited from this winner take all economy and provide more resources to, for instance, for education, so as to maximise the chances that children growing up today can participate in contribute to this kind of economy.

Gene Tunny  51:40

Right. Yeah, I think certainly there’s some issues with the tax code in the States, I did an episode with Steve Rosenthal, from Urban Institute, do must have been toward the end of last year, just on the rules that you’re talking about, so I think is it carried interest?

Howard Yaruss  52:03

There’s a rule of carried interest exactly the provision that allows hedge fund and venture capital executives to basically have their income taxed at capital gains rates, which rates are lower than personal income rates. But I’ll raise a bigger issue, why should investment income be taxed at a lower rate than working income? I think that’s something that should be changed. And not only is it equitable, but by having the two types of taxation, you make the whole tax code so much more complicated, you introduce all sorts of distortions that people go through, so as to re-characterise their earned income, as investment income, it throws friction into the economy. And so that’s something that I think needs to be corrected. Again, to make it more equitable and more efficient. There are companies that have meetings in Bermuda, to leave the United States, because of tax reasons, that literally makes no sense. That’s a lost opportunity for the American hospitality industry, and just a colossal waste of resources. That’s something that needs to be looked at. And, frankly, when the tax code is 10s of 1000s of pages, I think the Internal Revenue Service is going to be out manned, by the whole army of lawyers and accountants that businesses and wealthy individuals have, it has to be simplified.

Gene Tunny  53:30

Yeah, I have a lot of issues with tax. I’ll have to come back to them in a future. Just interested in your thoughts on how to deal with that. Okay. Now, how would we better start wrapping up. I’ve been really grateful for your time. I mean, this has been this has been terrific talking about your new book, which I think yeah, I certainly recommend reading it. There’s a lot of good stuff in there. I’m probably more concerned about debt, you’re suggesting in your book that, you know, the federal debts. It’s not a huge concern, I guess it depends on how you characterise it. And your point is that it’s something that you can manage over time. But I should ask you about that. I mean, what is your view on the US federal debt and the fact that the US is running, you’re running a structural budget deficit, aren’t you, which is quite substantial, you’re not? You’re not raising enough revenue to pay for the spending. Do you see that, do you see that as something that has to be fixed up? I mean, you do have to be ultimately concerned to some extent about the debt and will you want to try and stabilise the percent of GDP, what’s your exact view on the debt, please in the States?

Howard Yaruss  54:51

This is such an important issue. It’s like the allocation of society’s resources that I tried to give people the foundational knowledge so that they in turn can reach an informed conclusion on their own. What I do in the book 20 trillion – 30 trillion. I don’t know about you, I can’t get my head around it. So what I do in the book is divide the national debt by the 330 million Americans and I come up with a national debt of roughly six to $8,000 per person with an annual interest payment of roughly $1,045 a person. And so there’s the question, Is that sustainable? Is that an existential threat to the United States? And I make the point that virtually everyone who went to medical school or started a business has bought a home for that matter has a debt hanging over their heads greater than that. The question is to just step back and offer some insight, try to offer some insight is that if the debt is growing faster than the economy, there could be a problem. Yeah, I mean, yet grow at the rate of the economy. It’s like, you owe a certain amount of money. If your income doubled, and your debt coverage doubled. It’s not a problem. It’s only when the debt is growing faster than the economy are issues raised. And yes, our debt has been growing faster than the economy, not significantly faster. The past fiscal year in the United States, the deficit was half of what it was in the preceding year. And so well, we have to watch it. But the question is, do people feel comfortable with this level of debt, I also make the point that when you say it’s a crisis, this debt is being paid, we have to pay it. But to whom is it being paid, two thirds of the payment goes to other Americans. So this is merely a transfer of money, from taxpayers to bondholders, which quite frankly, overlap enormously. Wealthy people tend to pay higher taxes, and wealthy people tend to own more bonds, poor people tend to pay lower taxes, poor people tend to own fewer bonds. So it’s really just moving most, two thirds of it is literally moving money from one pocket of the left pocket of a American to the right pocket of American, it doesn’t necessarily do any harm. A third of the interest payment, roughly 300, and some odd dollars here does go abroad. And you know, there are questions about that. But the question is, is $300 a year, per American in a $22 trillion economy? An existential nation bankrupting kind of issue? And personally, I don’t think it is, but you might reach the conclusion as that it is, and and vote and promote policies accordingly.

Gene Tunny  57:43

Right oh well, look out I think your book does, yeah, it makes a contribution. I think it’s got a place. It’s in this emerging genre of economics for everybody. I chatted with some people from the UK early this year, they had a book, what is the economy? I think it fits nicely in that, in that genre. To finish with, what do you think is different? Or what’s special about your book? Or what are the main? What do you think should be the major takeaway, or if there’s anything else, any other thoughts you’d like to make? Before we wrap up, please, that’d be great.

Howard Yaruss  58:21

I appreciate your asking that. And I think my book is, is is special, or I’ll go as far as saying it’s unique, in that it does, it tries not to have a political perspective, it tries to be fair, it tries to give the foundational knowledge to people so that they can reach their own conclusions as to what makes sense for the economy. Or there are points at which I do say something, but I make it very clear that it’s my opinion. And I make it clear why I’m saying so I think the book is accessible. It’s one of the only books on economics that has no formulas, their jargon, no graphs, it’s supposed to read like narrative nonfiction. And I hope it can reach an audience that ordinarily would would not learn about economics, but would pick up the book, read it, become more informed, more able to understand what’s going on in the economy, and hopefully, support better policies that would benefit not only their lives, but yours in mind, frankly,

Gene Tunny  59:20

That’s terrific. I just thought when you said about no equations. There’s a joke that John Kenneth Galbraith used to make in some of his books where he said that his publisher told him that every time there’s an equation in the book, it cuts sales in half. That’s what he heard you didn’t want to have any equations because it’s bad for sales. Okay. Howard Yaruss from NYU that’s been terrific. I really enjoyed the conversation. Thanks so much.

Howard Yaruss  59:51

Yeah, I really enjoyed it. Thank you.

Gene Tunny  59:55

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.

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

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Podcast episode

The Progress Illusion w/ Jon Erickson – EP166

Professor Jon Erickson is an ecological economist and advisor to policymakers including Senator Bernie Sanders. In his new book The Progress Illusion, he criticizes what he calls “the fairytale of economics” and argues we are failing “to design an economy that is socially just and ecologically balanced.” Show host Gene Tunny discusses Prof. Erickson’s new book with him in this episode of Economics Explored. 

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: Jon Erickson

Jon D. Erickson is the Blittersdorf Professor of Sustainability Science and Policy at the University of Vermont, faculty member of the Rubenstein School of Environment and Natural Resources, and Fellow of the Gund Institute for Environment. His previous co-authored and edited books include Sustainable Wellbeing Futures, The Great Experiment in Conservation, Ecological Economics of Sustainable Watershed Management, Frontiers in Ecological Economic Theory and Application, and Ecological Economics: a Workbook for Problem-Based Learning. He is also Adjunct Professor at the University of Iceland, and has been a Fulbright Scholar in Tanzania, Assistant Professor of Economics at Rensselaer Polytechnic Institute, and visiting professor in the Dominican Republic, Norway, Germany, and Slovakia. Outside of the university, he is an Emmy-award winning producer and director of documentary films, co-founder and board member of numerous non-profit organizations, past-President of the US Society for Ecological Economics, and advisor to state and national policymakers. Jon lives in Ferrisburgh, Vermont with his wife Pat, their occasionally visiting sons Louis and Jon, and a menagerie of dogs, cats, horses, chickens, and donkeys.

Links relevant to the conversation

You can buy The Progress Illusion and if you listen to the episode Jon will reveal a discount code:

https://islandpress.org/books/progress-illusion

Transcript: The Progress Illusion w/ Jon Erickson – EP166

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.

Jon Erickson  00:03

Since at least the night, late 1970s. For a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown, grown. But these alternative metrics, whether it be GPI, or surveys on quality of life, or the ecological footprint, these things have not improved. They have not kept up with the pace of growth, right.

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 broadcasting from Brisbane, Australia. This is episode 166 on the progress illusion, a new book from Jon Erickson, Professor of sustainability science and policy at the University of Vermont. Professor Erickson is past president of the US society for Ecological Economics. And he’s an adviser to state and national policymakers, including Senator Bernie Sanders. Please check out the shownotes for 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 Jon or I have to say in this episode. I’d love to hear from you. Right oh, now for my conversation with Professor Jon Erickson on his new book The Progress illusion. Thanks to my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Professor Jon Erickson, welcome to the programme. 

Gene Tunny 01:00

Thank you so much. 

Jon Erickson  01:03

It’s a pleasure, Jon to have you on. I’ve read your new book, progress, the progress illusion, reclaiming our future from the fairy tale of economics. So given this as an economics podcast, there’s definitely a lot to talk about with your new book. Yes, yes. So can I ask you first? Why do you think progress is an illusion? What are you trying to communicate in this book, please?

Jon Erickson  01:56

Sure. Sure. Yeah. So the progress illusion is really a reference to a fairy tale of humanity’s place and purpose in the world. Certainly, economics isn’t the only discipline that is subject to the solution, but it’s the one that I’m trained in. It’s a story that economists like myself have been teaching and practising for decades, decades that, you know, every time we see the size of the global economy double, which doubles every 25-30 years at current growth rates, that we erode the very foundations of life and human societies in the process. So, in this book, I questioned that, that reigning logic, that reigning story, I unpacked various dimensions of this grand illusion of economics, you know, which I see as an illusion of history and a lot of economics programmes, mine included, we don’t teach the history of economic thought we don’t discuss the debates of, of economists of the past. It’s an illusion of the individual, me, so much of the focus of economics is on the individual and what’s best for the individual in the assumption that whatever’s best for the individual is best for society. So I unpack that and think about the debates over that question. It’s an illusion of choice. I mean, economics sort of sets itself up as the science of choice. But it’s always framed this choice at the margin, right, the choice of the next incremental decision. Yet, when you add up all those decisions together, we very often get into situations that the original decision makers never would have voted for. Right. And ultimately, it’s an illusion of growth and illusion of, you know, a sort of fairy tale or dream of infinite economic growth on a finite planet.

Gene Tunny  03:52

Gotcha. I think it’s interesting. You mentioned that there were these debates, and they’re not always well covered in economics. I remember. I remember learning at least about Malthus, and there was the Malthusian prediction or his his view that, well, we’re in trouble because any economic growth we had, we just ended up having more children, and we’d be back to subsistence. Whereas I think the way that economists started to view that was all well, we solved that problem with technological progress. And, but I mean, look, I understand the point that that’s in a few 100 years or over the last couple 100 years say we’ll be able to do that. Who knows if that can continue indefinitely? I mean, who knows what shocks are coming? So, I mean, maybe, is that what you’re arguing? We could be we could be too optimistic based on recent history.

Jon Erickson  04:48

Well, look, I mean, we’re recording this in the second week of November during that latest Conference of Parties for the UN Framework Convention on Climate Change. And there’s ample evidence to show that this economic system we’ve created is putting dangerous strains on the global climate system, right? A climate system that is, is increasingly called as chaos as in danger of, you know, collapsing the whole experiment of the economy. So, you know, we can go back to Malthus if you’d like. But we’ve always seen that a growing economy creates benefits, and costs. And what we’ve seen, particularly over the last three or four decades is as those benefits have become super, super concentrated. And the costs have been spread out on more and more people, and especially on future generations. So we’re in kind of, you know, yet again, a kind of Malthusian tragedy.

Gene Tunny  05:51

Right. And so is that your biggest concern at the moment, climate change, or other other concerns,

Jon Erickson  05:58

tThere are plenty of concerns to go around. But having a habitable planet is a big one. It’s a big one that fellow economists are concerned about. You know, economists have been part of various signatures, signatories to various pledges of action. It’s a concern that’s related to mass extinction. It’s a concern that’s related to growing inequality and persistent poverty and declining quality of life, even in the richest countries. You know, I think it was, I think it was Alcoholics Anonymous, right, that said, you know, when you do the same thing over and over again, expect something different. You know, that’s the kind of insanity. And that’s what this book is about.

Gene Tunny  06:39

Right? Now, you mentioned, well, you talk about the fairy tale of economics, you mentioned you were trained in economics, do you still consider yourself an economist?

Jon Erickson  06:50

I mean, I often describe myself as an ecological economist, because I’m really trying to understand interdependencies between the economic system, and society and culture and the social system and the environment. I see this work as reforming economics for sure. I’d love someday, where we didn’t have to have all these kind of competing camps and different flavours of economics, we could just call it economics. But since I really don’t identify with the mainstream of economics, I tend to call myself an ecological economist.

Gene Tunny  07:22

Right? And you tell a story in the book about how just something like that was it the JEL, the Journal of Economic Literature codes, and you were stunned? Yeah, the way that Yeah, could you tell that story because of those fascinating, I’d never thought the JEL. Yeah, would be so controversial, or yeah, but please tell the story. I thought it was a good one.

Jon Erickson  07:47

I don’t know that they were controversial it just it just gave me pause. When I saw that ecological economics was given its own code, and treated as a sub discipline of a field that we were trying to overturn or be the alternative to. And this really is, you know, this, this is, you know, reflect on kind of why I wrote this book. You know, it’s a reflection on my career in Ecological Economics, when ecological economics was formalised in the late 80s and early 90s, before it got to JEL code, books and journals and organisations and degree programmes, and folks like me were supposed to be created to try to question the mainstream and reform it. So in many respects, this book is kind of my midlife crisis book, where I take a critical look at the history state and fate of this movement of ecological economics as an alternative to the mainstream. Funny story about 10 years ago, I was the president of the US society for Ecological Economics, and one of these professional societies that have emerged to support this field. And I was at our conference at Michigan State University, and I had thrown my back out. So I was like, during most of the meeting, I was horizontal in my hotel room, just miserable, just really grumpy. I was laying on my back, trying to write notes for my presidential address right, to the society’s membership. And I just was so grumpy, so grumpy, so grumpy. And it really got me thinking about the state and fate of ecological economics, and made me think about like this code, Q 57. Right, the seven hundreds plus subject areas of economics, and how ecological economics was increasingly being absorbed by the mainstream, including by folks who call themselves ecological economists. In fact, at that meeting, there were just, you know, all of these sessions on monetary valuation of ecosystem services, which I saw as, you know, a real slippery slope, you know, can we sort of challenge the mainstream with the logic of the mainstream and commodify nature. So, in a lot of ways that kind of grumpy week in Michigan, set the stage for this book, and, and my desire to really critique my own field.

Gene Tunny  10:16

Right. Okay. So I probably should provide some background on so these JEL codes, they’re the codes that you would put at the bottom of an abstract for a journal paper or a conference paper to signal this is the field or that the field of economics are the sub discipline of economics that it’s in. And so that helps them identify where it should go in conferences, for example, which session. Now, it’s interesting you mentioned how environmental economists have come to start valuing nature or to quantify environment, environmental damage, or to value what a wetlands are worth or in I mean, as a, as an economist, I’ve done various exercises like that in the past. I just want to understand where you’re coming from, do you think that’s the wrong way to go about it, to think about the the economy or the environment to think about? Well, we’re doing this many dollar dollars of damage to the environment, and therefore we need to impose this, this cost this charge on people who are damaging it, and to make sure we have, you know, where I’m going, what we’re trying to get ya get some sort of, we’re getting some solution by having the right taxes and charges in place or Pigovian tax, for example, what do you what are your thoughts on that, Jon?

Jon Erickson  11:43

Yeah, that the field of environmental economics and and before that natural resources, economics, really preceded this field that I’m describing of ecological economics, really treating the economy as an ecosystem, and environmental economics has its roots in the late 1960s, early 70s. And, you know, reaching back to Pergo, in the 20s, and 30s. And fitting the environment inside the marketplace, right, using prices to correct the so called market failures of what were framed as environmental externalities. So that’s how I was trained at Cornell University, I was in an agricultural economics department, learning natural resource, environmental economics, and kind of, you know, buying into that logic of, of the environment is just a failure of the marketplace. Ecological Economics. So that’s valuable. And that’s pragmatic. And I’ve done my share of work that is trying to make the case the economic case for environmental protection. The challenges is when that tool when that approach, when the sort of expansion of cost benefit analysis to environmental concerns, when that rises to a worldview, right? When you commodify all of nature and when you reduce all social relations of humanity to market logic, we start to run into what economic historians or people in the 40s and 50s The Economist name is escaping me right now, the fellow who wrote The Great Transformation, Karl Polanyi. Yeah, the Karl Karl Polanyi warned of the merging market society, right. Whereas the rules and priorities of a market system that envelop the democratic system, that envelop our social and environmental values. So I’m okay using economics as a tool and treating economists as mechanics or janitors to sort of tune the market system. But when economists are sort of framed as overlords of the social environmental system, right, or conveyors of a master worldview, that’s where my hairs go up. And that’s, that’s largely what this book is about, and thinking about the progress solution of economics.

Gene Tunny  14:08

Right? Is the problem that we have this objective of maximising economic growth where we’re concerned about GDP, are you arguing? We’re not as concerned about these environmental measures? How do you what do you think we should be concerned about? Or how should we be making decisions as a society?

Jon Erickson  14:30

I’m making the case that 21st century economics should reflect 21st century problems and values. I think when the mainstream of economics or what we often call neoclassical economics was formed in the late 1800s, early 1900s. Maybe the focus was well placed on growing an economy of the efficiency of market system right, of taking power away from the church and state and putting it into the hands of the consumer. and producer. You know, it’s much like thinking about an ecosystem at the early stages of any ecosystem. It’s the pioneering species that are prioritise its growth and competition and resource exploitation, that is prioritised. But as the system matures, as the system grows into a fixed, fixed environment, the goal should change, right, the goal should move away from growth and towards maintenance, bitterness, towards durability, towards resilience, away from competition and towards cooperation right away from sort of thinking about the number one priority is to grow our way out of problems, to realising that growth itself creates problems that growth can’t fix. So Ecological Economics reflects a maturing of economic thinking, that reflects the challenges of the 21st century.

Gene Tunny  15:59

Right. Okay. So it seems you’re, you’re concerned about the problems that growth can’t fix. Okay. You don’t think regulations can help? I mean, because we’ve got cleaner air?

Jon Erickson  16:12

Not exactly. I mean, I think we need to move beyond just economic instruments to fix things using the market to fix market failures, right. But really trying to find that balancing act between market mechanisms and government regulation between improving and making government work better, instead of the opposite narrative of, you know, government is the problem, not the solution. No, in this book, I reflect on kind of my own upbringing in the United States, and my parents generation, you know, and growing up in the Kennedy years, where the narrative was, you know, you know, ask not what your, what you can, what your country can do for you ask what you can do for your country. And I grew up in the Reagan Thatcher generation, right. And the Reagan narrative was, you know, it’s all about the individual, it’s greed is good. Don’t ask what you can do, you know, do for your country, get government off our backs, you know, that’s what we need to do. So, I think in an age of climate chaos, in an age of the sixth mass extinction, and an age of growing inequality, the narrative has to change, the story has to change, we have to recognise that a system and an economics that was created in the context of a 1940s 1950s expansion out of the Great Depression had its day. And now, the realities of our time, need to need to start to shape a new reality.

Gene Tunny  17:44

Okay. And so what does that? What does that mean, Jon? Does that mean, we need? Do we need redistribution policies? Is that what you’re arguing for to address inequality? We need greater environmental? Well, we need to prioritise the environment. I mean, that’s gonna be I mean, obviously, the environments important, I’m not denying that. I’m just thinking in in Australia here. I mean, it’s we’ve got very stringent environmental regulations already. And if we have more stringent environmental regulations, it’d be very difficult to develop anything. So I’m just wondering what it all means is it? Does it mean, we have to accept a lower standard of living in the future? are you pessimistic about technological change or ability to to innovate our way out of these constraints? Could you talk about that, please?

Jon Erickson  18:38

Yeah, I think that’s too narrow of a frame. When you think about economy environment, and what I’m concerned about, there is reams of evidence show that so called advanced economies, such as the United States and Australia, built on hyper individualism, built on the legacy of a social disease that sociologists call affluenza, right, or this addiction to consumerism, that this model of progress has leaves a little lot to be desired. And that in fact, maybe we’ve been in a progress recession for some time now. Scholars in the United States and Australia and dozens of other countries around the world have been estimating for years now. What’s called the genuine progress indicator, something that is meant to be compared to the more common gross domestic product. And what this indicator does is it recognises that a growing economy has benefits and has costs. In fact, I first discovered the GPI when I was in grad school in the early 1990s. And in the US, we were in in the the bush one recession. And there was a beautiful article written in the in the Atlantic and it had the title of something like if GDP is up. Why is America so down? Right? We were kind of in this recovery state. And people were, you know, economists are saying, hey, the economy’s growing, we’re all good again. And the average American, I’m not good, I can’t make ends meet. I’m miserable. And the same narrative has popped up at the tail end of every recession ever since ever since. In fact, it started working on this book at the tail end of the so called Great Recession. And the same thing was happening, we were using the instruments of economics using mainstream thinking to grow our way out of problems. And the average person was saying, who is benefiting? And who does who? Who’s paying the cost? Yeah. So the GPIO through this series of 26, some odd calculations and says, What are the true benefits of a growing economy? And what are the costs? What are the environmental costs? What are the social costs, and have shown quite convincingly that since at least the night, late 1970s, for a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown grown. But these alternative metrics, whether it be GPI or surveys on quality of life, or the ecological footprint, these things have not improved, they have not kept up with the pace of growth, right. So we have to start asking at these kind of higher levels. What do we do with this for right? What’s, what’s the new balancing act in a maturing economy? How should we reprioritize what is the good life? And how should we I mean, you frame it as accept the lower standard of life, the standard of living the material standard of living, I frame it as as asking the question, how do we live better? How do we how do we live well, within our means?

Gene Tunny  21:47

Yeah, sure. I can, I can understand that. I guess what I’m thinking, Jon, is that at the moment, in Australia, one of the big issues is, well, the rising cost of living, high inflation relative to wages, and the lack of housing, I mean, we’ve got a dire shortage of housing here in Australia. Now. I mean, look, there are a variety of reasons for that, possibly. But I mean, at the moment, when I’m looking at things, I’m thinking a bit more economic activity to construct houses would have been good over the last 10 to 20 years. And, and we’ve got rising cost of energy. So yeah, I take your point, I think I think a lot of people out there would be concerned though, about this. Yeah, that they that, yeah, I’m not I’m not necessarily wanting to criticise what you’re saying, I understand where you’re coming from. I’m just yeah, that’s where I’m coming from, if that makes sense.

Jon Erickson  22:51

Yeah, that makes perfect sense. And that’s the big question, right? Like, can the same kind of thinking that got us into these current messes? That is making the billionaire class hugely, hugely more material well off, while the rest of us feel like we’re on a treadmill, just barely getting by? Can the same kind of system, right? That has privatised the benefit of growth and socialise, the costs? Can that continue? Or should it continue? Right? Should we sort of create a social movement and start to ask, what is the economy’s purpose? Who is the economy? And growth for whom and for what? Now, you know, when I debate economists, they always say, like, come on, come on, you know, you’re not being fair economics is just a model. It’s a model of progress. All models are wrong, some are useful, right? They quote George George Box. Right? All models are wrong, some are useful. And I said, Yeah, I, I agree, all models are wrong, some are useful. But what box didn’t ask is useful for? Right. So in the US, we’re seeing these energy prices, and we’re seeing record profits to oil companies. In the US, we’re seeing housing shortages, right? Yet we’re seeing record rents to the ownership class. In the US, we’re seeing families, you know, struggle to get by in these kinds of post pandemic months and year. And kind of returning to, you know, try and train as quickly as we can to get back to normal, right? Pre pandemic years. And a lot of us, and a lot of folks that are most vulnerable in this current system, are saying we don’t want to go back to normal normal was already in crisis.

Gene Tunny  24:47

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

Female speaker  24:55

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Gene Tunny  25:24

Now back to the show. Okay, can I ask about that genuine progress indicator? Who’s producing it? And can I ask him about what, what some of the the variables that go into? It are? Please, you’re really interested in that? Because look, I understand the criticisms of GDP. And I mean, at least if we’re destroying, or we’re subtracting from the environment, or we’re, we’re damaging the environment that you probably should recognise that as some sort of disinvestment or a loss of capital stock. So yeah, would you be able to explain the genuine progress indicator, please?

Jon Erickson  26:04

Sure. I mean, it starts with the basic premise, right, that the economy is subsystem of the environment, and that when the economy grows, it has opportunity cost. So I mean, it’s a basic, it’s built on basic economic system has benefits and has opportunity costs. So with GPI, we start with consumption, the biggest part of GDP, and we say, Okay, let’s take consumption, and then let’s correct it for income inequality, to recognise which what Pergo recognised in the 1920s and 30s, right, that growing incomes grow and give diminishing returns, right, that the next unit of of income to a rich person creates far less welfare society than the next income, a next unit of income to a low income family or a low income person. So we correct for income inequality. We then go through a series of calculations that for example, take consumer durables and GDP and say, you know, a society a GDP benefits by building a throwaway society. With durables, washing machines, automobiles, long lasting expenditures, if they were out often have to be replaced. That’s great for GDP. Right. But is it good for progress? So we say, Okay, here’s the expenditure of durables, and here’s the benefits of durables, right? Over time, these things are supposed to last more than a year or two or three years. So there’s economic adjustments, there’s an adjustment for over for underemployment, right. Idle work, people who wish they could work more. So it’s got that kind of basic economic logic built into it. But then there’s a whole category of depletion and pollution costs, right? We shouldn’t be treating depletion of our soils, our water, our air, as income. In fact, any business that treated depreciation of capital assets as as income instead of costs wouldn’t be in business very long. But that’s exactly what we do in our economic book keeping for nation states. Then there’s a whole series of interesting calculations on the social side of thing, right, we have to recognise that the GDP only recognises the value of your time in a market, earning income, earning wages earning profits. And so what the GPI the genuine progress indicator says is that there’s, um, use trade offs, right? Every hour extra hour work, the opportunity cost of that is an hour, not with your family, an hour, not in your community. And now we’re not leisure. So rather than feeding every single hour at work as a benefit with no costs, GPI goes through and says, let’s be honest here, right? Work is good, up to a point, income is good, up to a point consumption is good, up to a point. But we have to recognise that consumption and income and growth have diminishing returns. And at some point, at some point, the growth of an economy creates more costs than benefits. What Herman Daly, one of the founders of ecological economics, who, unfortunately passed away a couple of weeks ago, called an economic growth, right, a growing economy that creates more cost and benefits. Okay, we could do a whole podcast just on GPI, so don’t get me going.

Gene Tunny  29:40

Yeah, that’s fine. I might. I’ll have another look at it. Because, I mean, it’s one thing that comes up in various conversations I have, and I’ve been looking at the national accounts recently, I’ve had people on talking about that and their conceptual foundations and we’ve, we’ve we’ve mentioned that every

Jon Erickson  29:58

time we have a recession Yeah, the critique of GDP comes up, right? Yeah. Like, hey, wait a second growth isn’t providing what’s going on here. And every time coming out of recession, we question the metric. And then we kind of start growing again and says, Okay, let’s go back to normal. Yeah. But we have to kind of keep revisiting these alternatives. You know, the original architect architects of GDP back in the 30s, and 40s. Were very careful to say this is not a measure of human progress, human welfare. This is a measure of economic activity, which contributes to human welfare, but is not in and of itself. human welfare.

Gene Tunny  30:40

Yeah. Yeah. I agree there. Now, what about what can be done? Do you have a set of policy recommendations? Jon, are there? What would What do you think needs to be done? Are there things that there will be things that need to be done by governments? Are there things that need to be done by individuals? I mean, it sounds like, Well, okay, maybe you tell me if I’m wrong here. But when I read your book, and I heard about the progress, I was reading about the progress illusion that concerns about how we were consuming too much, I mean, do we need to show that we as individuals be consuming less Is that is that part of your argument? We should we shouldn’t be going on as many overseas trips, we shouldn’t be using the car as often we should think about our purchasing decisions, not get a new washing machine or get a I only get one, when it breaks down, try to repair things. What are you arguing in this book? Is the solution?

Jon Erickson  31:40

Well, what would an economy look like? That was built on maintenance resilience and cooperation is that growth, efficiency and competition, right, a late stage maturing economy like yours in the Australian ours in the US? That’s, that’s what I’m asking, you know, an economy, a mature economy should have different goals than an economy at pioneering stages. So it really is about a reprioritization of our goals, especially on consumption, right? Because there’s ample evidence to show that we in the West are over consumers, and our kind of addiction to consumption is creating psychological problems, social problems, that consumption has been kind of become a cure for social ills, right? Like, it’s a distraction. I mean, the whole advertising industry is designed around the idea of kind of making you and I feel bad about ourselves, right. And to sort of fill the void with more consumption. And I actually think this is one of the lessons coming out of COVID. Right, as sort of people were, especially, you know, high income people who, who could weather the storm, better than most, were forced to slow down, were forced to pee at home, were forced to kind of reevaluate life’s priorities, and found out that, you know, this kind of ever, burning hamster wheel of economic growth isn’t all that it’s cut out to be. So it’s the reprioritization of goals, which is going to have to reprioritize policy instruments. Daily Herma, daily use the analogy of a plinth Plimsoll line, I’m not sure I’m pronouncing that right, of a cargo ship. Right. So this is the line that’s painted on a ship, very easy technology. And as the as the cargoes ship is loaded, it sinks into the water. And when it gets to the line, you’re supposed to stop, right, because you’re in, you’re in danger of overloading the ship. So if we sort of reprioritize and think about the principle line of an economy, we can’t just more equally or equitably distribute the cargo of an overloaded ship and expect it to be resilient. We can’t just more efficiently load an overloaded ship and expect it to weather the storm. As the pump, some land goes underwater, right. And there’s ample evidence to say that we are kind of in an overshoot on a lot of environmental parameters. You’re in danger of sinking the ship, especially in stormy waters. So this analogy implies that as we run up against planetary boundaries, planetary limits to growth, the scale of the economic system is way more important to stress than distribution or efficiency. And if we can’t count on a growing system to solve distribution problems, then we’re gonna have to quickly think about the fairness of this distribution of benefits and costs of that system. And then it only then can we get to efficiency, which is the priority of economics. So this means that you know, new policy instruments stuff that focused on scale distribution, then efficiency is the way to go. And I talk a lot about this in the last chapter book, as I kind of wrestled with the idea of how did I put it radical pragmatism? Right? Yeah, that’s a pragmatic things that we can do now, for example, to wean ourselves from fossil fuels, you know, home weatherization, and carbon taxation, and, you know, maintenance of our systems, electrification of transportation, transition to renewable energy. But all of these are really hard to do in an economy that continues to bloat an economy that continues to grow. So we have to be thinking about the scale of a system. And that’s probably the radical part of radical pragmatism, right? What’s it going to take to rein power away from the status quo, that part of the system that’s benefiting from this growth model, and create an economy that works for all?

Gene Tunny  36:05

Okay, so I’m just wondering what exactly that involves? And is this part of this whole idea of D growth? Is that what you’re arguing for? I’ve heard about this concept of D growth, that that’s coming up, and there was an article in the FT about it the other day. So you’re just wondering, what needs to be done? I mean, do how do we, how do we have that, though? How do we recognise those constraints? I mean, you mentioned carbon tax. I mean, that’s something that, but you’re also saying that that’s not going to be enough and mean, given current magic

Jon Erickson  36:41

bullet, but it changes that changes the system? Yeah. Yeah. I mean, degrowth is the sort of social movement side of ecological economics, if you will. It’s a question of, how do we orchestrate a just transition to a right sized economy. Now in some parts of the world, and for some people in the world, you know, growth still creates more benefits and costs. But there are plenty of parts of the world and plenty people in the world where growth, Grace, more cost and benefits, right. So we have to orchestrate a kind of Race to the middle. And in fact, if you plot something like the HDI, the Human Development Index, which is a UN level index, this used to sort of monitor, you know, the benefits of development. If you plot HDI at national levels against energy per capita, you get this curve, right that the initial development improves considerably, with just a little bit more energy use per capita a little bit more than final impact per capita, Right. but only to a point that we get into this kind of club of countries, where continuing use of energy continuing depletion of the environment, continuing materialisation of the economy, doesn’t improve development doesn’t improve the HDI. And you get this long tail with countries with the same HDI of countries that that consume 20 or 30, or 40, or even some cases 80% less energy and material. So countries like mine, the US were way out on this tail, where we’re not getting improvements in human development. Yet, we’re consuming way, way, way more energy than the average human right. And way more energy in the countries that have similar levels of development, similar qualities of life. So what are we doing? Right? We’ve got to orchestrate a race to the middle and whether you call that d growth for the rich countries, and to be more agnostic about growth for everyone else, like grow, where it makes sense and shrink where it doesn’t. That’s the kind of century that we’re in. That’s the biophysical reality of the new economy.

Gene Tunny  38:57

So Jon, do you need a command economy to actually to orchestrate this transition to a right sized economy? I’m just trying to think about how this would happen. Because I mean, people, a lot of people out there, just, you know, they’re trying to live their lives and do the best they can. And a lot of people have to a lot of families, the couple have to work two jobs. They’re trying to make ends meet. I mean, they Yeah, they probably wouldn’t see themselves as as living a hugely materialistic lifestyle, but then compared with other parts of the world. Yeah, sure. It probably is. Yeah, I’m just wondering how we how we can do that. I mean, I’ll

Jon Erickson  39:37

yeah, yeah. My trainer has economists. I assume you’re trained economists. We were sort of taught these, these two different DS, roughly two different models, market economy and a command and control economy. And we were taught that this command and control thing is inefficient and unfair and results in a kind of an over regulated world and we need to the market economy is not perfect, but may Is it better than command and control? I’ve come to realise that that’s a load of BS. The market economy is also a command and control economy, right? Markets are designed by those and power markets are social constructs, especially the last three or four decades of neoliberalism has created a kind of free market experiment, right? That is concentrating the benefits and widely distributing the costs. So talk to the average guy or gal on the street and ask them, Is this economic system working for them? And if they say no, do you say, well, let’s double down on the logic of the system? Or do we try something different, right. So we’re finding that more cooperative forms of of economies are resulting in more shared benefits and shared costs. Were working with a group called the next systems project that has been sort of systematically cataloguing different political economics systems, local skills, community skills, United States that have dramatically different outcomes and dramatically different structures. It’s not just either or of command and control of free markets. It’s blending things in between, it’s the continuum in between, that is the secret sauce. So I don’t buy that we immediately just have to go to command and control. Although in crisis, what we learned from COVID is what happened is the world’s government goes goes to command and control, right? If climate is a crisis, if, if environmental depletion is a crisis, we might be using the very system of free market thinking, to push us into a state where the only option is going to be command and control. And I don’t want that you don’t want that. People don’t want that. We want our basic liberties and freedoms. But we want to do it in a way that creates an economy for all for children and for for future. I also kind of reject the the narrative of economic freedom, right? Because that’s awesome. That’s also painted as freedom to do things. And instead of freedom from tyranny, right, freedom from the impacts of, of the environmental costs of a growing system, freedom from the social inequalities, of a system that’s geared towards making the billionaire class even richer. Freedom from the costs of growing economies, what we should be thinking about, not freedom to do things to our neighbours, to our environment, and to future generations that ultimately are going to come back and bite us in the tail. Yeah, a buy in any of this.

Gene Tunny  42:58

Well, I’m interested in the new systems project. I’ll have to make system next systems project. I’ll have to look into that. I mean, do you have any examples of those communities you’re talking about?

Jon Erickson  43:10

Well, it’s examples of of. So you take the US and you think that we’re this kind of, you know, outside looking in and the narrative on the mainstream news channels is that, you know, we’re this free market, capitalistic system. It’s actually not true. So much of what makes the US economy work is cooperative ownership, collective ownership, state run, companies, state state run banking systems, state state runs systems of have that make the the economic system work. Take the banking sectors, trillions of dollars and coops where the depositors get votes on the matters of their banks. Take agriculture and education, and even energy and electric utilities. So much of those industries are run by cooperatives. In fact, electricity cooperatives deliver electricity, the United States, to a well over half of the geography of the high states, to rural communities, where the sort of economics doesn’t work for for industrial companies. There’s experiment after experiment, after experiment of different kinds of political economic institutions that have that we have lots of lessons to learn from. And this is what I meant in the beginning, when I talked about you know, economics, part of the Progress illusion is this kind of illusion of history right. To think that the current economic system, the neoliberal system, the free market, system, is is is the only one is has been perfected, right? Is the kind of logical inclusion of everything along the way, and that we don’t have to learn from our history. We don’t have to revisit the debates. We don’t have to consider the morality of our economic choices, or their biophysical consequences. And yeah, there’s a lot. I mean, I speaking mostly as a, you know, from the perspective of an American, maybe it’s different in Australia. But man, we have this sort of US centric view of the world, that everything we do is right. And every thing that we do is the best that ever was. And we don’t need to learn from our history. And we don’t have to need to learn from other other experiments around the world. And where I land is, that’s some pretty insular thinking,

Gene Tunny  45:45

huh? Yeah. Yeah. Okay. We’ll start wrapping up soon, Jon, this has been Yeah, really thought provoking. So it’s good to have you on the show. could ask you about neuro neuro economics. So you talk about that in the book. This is a new field, I’ve only learned about recently, what what’s that? What’s your interest in that field? And what’s it broadly trying to tell us? Or what’s it found?

Jon Erickson  46:11

Yeah, sure. Well, so this is where, you know, I’m kind of researching the book, like, what are some alternative ways to think about the human agent and our economic models? Because the economics, we’re taught a very, very, very narrow version of humanity, right, which is sometimes called like a subspecies of human homo economic is, yeah, isolated individual at a point in time, right, who

Gene Tunny  46:36

just wants more? The rational utility Maximizer? Yeah,

Jon Erickson  46:40

exactly. Exactly. And both within economics and outside of economics, you know, we’re learning that when we test our theories, with real data, and not just abstract mathematics, that this sort of foundations of this rational actor model, unravel. So what I do in the book is I explore what you might call borderline disciplines, right? Where economists have cooperated with other disciplines, especially other natural science disciplines. And so neuro neuro economics is one of those examples where economists have collaborated with neurosciences to ask questions of proximate cause. Right. So in science, we think of proximate cause and ultimate cause. And then the case of economic decision making proximate causes asking how we make decisions, whereas ultimate causes more a question of why do we make decisions that we do? Neuro economics is an example of a borderline disciplined, proximate cause where, literally economists are taking tests objects, with their neuroscience colleagues, asking people to solve economic puzzles, or make economic choices that are watching their brain light up, right, and trying to understand where and when do the kind of precepts of the rational actor model hold up? And where don’t they? So it’s one of these Borderlands this was, such as neural economics is an example. But also behavioural economics, experimental economics, where we’re trying to kind of understand the brain in the case of economics, the whole human case of behavioural economics, groups of humans in the case of experimental economics, groups of groups in the case of institutional economics. And then there are entirely evolutionary history as a species in the case of evolutionary economics. So these are all examples of, of the isolated discipline of economics, starting to cooperate with other fields, and building what I call in the book, borrowing from the biologist, EO Wilson, a more conciliate form of economics, where we find the jumping together of knowledge to really watch it watch the 21st century version of this field.

Gene Tunny  49:13

Right now. Okay. Well, yeah, oh, it’s something I want to have a closer look at, because I definitely recognise the limitations of that. That standard economic model. I mean, for years, economists were saying, Well, it’s, we recognise that all the assumptions are a bit unbelievable. But as long as it makes good predictions, and it’s, then it’s fine, but it turns out, it may not actually make good predictions. So,

Jon Erickson  49:39

I mean, I gotta go through the history of you know, the running joke, of course, right is that economists have successfully predicted seven of the last three recessions. So it’s, this this model of the rational actor model turns out to be not a very predictive model, or a model. Again, all models are wrong, some are useful. But we should start asking useful for whom? And it turns out this this isolated model is useful for the billionaire class but not useful for the rest of us.

Gene Tunny  50:10

Right I so we might start wrapping up, I’m keen to just learn about, what are you hoping this book we’ll achieve? Jon, what’s your What are your hopes for this, this book,

Jon Erickson  50:22

my generation, I’m 50 birthday this month, I’m 52 going on 53 My generation was inspired by the works of a number of like, you might call a renegade economist, right? Who sort of solid different path. Folks like Herman Daly, who I mentioned to, we just recently lost that 84 years old. I mean, Herman was on a similar journey that I was he started out with aspirations to be a growth economist, he thought that the logic and approach of market fundamentalism could be sort of bred when he was training to be an economist in the 50s and 60s, to solve problems, particularly problems of poverty, right to grow the economy, lift people out of poverty, but in his own educational journey, set against the aspirations of the Great Society in the US in 1960s, the civil rights and environmental movements of the 60s and 70s You know, he was inspired by inspired, inspired by the work of earlier group of renegades folks like Nicholas Dzerzhinsky regime who wrote on energy and the economic problem, bringing the principles of physics into economics, Kenneth Boulding, who wrote the infamous article, the economics for the coming Spaceship Earth that was really coming to terms with the opportunity costs of a growing economy inside of a fixed ecosystem. John Kenneth Galbraith, who, whose social critique in the affluent society really sort of, you know, early on question a society built around, creating more and more affluence into an affluent class. And, of course, the 1962 book by Rachel Carson’s Silent Spring, which was really impactful on Herman’s thinking, and design of an economic study of economy inside environment. So, you know, these sorts of scholars were also inspired by long standing debates about the function and purpose of the economy, you know, really going back to the classical era of economics, when economics was seen as as a branch of moral philosophy, right. Not not a pseudo science hiding behind abstract mathematics. So Herman’s work was another kind of link in the chain. His work on economics, the life sciences, first big published article, his work on steady state economics in 1977. Book, his work on for the common good that he wrote in 1989, with a theologian, John, John Cobb, you know, he was created another link in the chain that was trying to build a study of economics as if people and planet mattered. So I hope, you know, this book is yet another link in this chain of link that comes from my generation, that can continues to build a kind of more modest, more humble economics that can contribute to social well being and environmental, environmental protection, and not just simply,

Gene Tunny  53:39

okay, well, I’ll put a link in the show notes. So if you’re in the audience, and you’re interested in, in the in the progress, illusion, and look, it’s got a lot of, it’s got a lot of great information in it. Lots of lots of great analysis, and it’s very thought provoking. So I certainly enjoyed or I learned a lot reading it. I thought it was good. I liked how you went through the evolution of of economic thought and all the debates and even what I was struck by was, I didn’t realise that was Tinbergen, the famous Dutch economist. Yeah, he had a bit of a Nobel Prize winner. Yeah, he ended up he started to question the whole the the economic growth narrative in the was it the 80s or 90s? Are some of the you tell the story along those lines, I thought was interesting. Yeah. Yeah. So I think there’s a lot of good stuff in there. Okay, Jon, any final thoughts before we wrap up?

Jon Erickson  54:42

Look, I really appreciate this. Thanks so much for your podcast. I was listening to a bunch of your past thoughts in preparation for this and this is such a great show. Very valuable show. And yeah, folks are interested in this book. It’s, it’s been published by Ireland press which is One of the bigger nonprofit publishers of environmental books in the US and give your listeners the secret code. If they order a book from Island Press they get 20% off if they answer the enter the code illusion so but on my capitalism have there for a second

Gene Tunny  55:17

okay, is that all is that this capitalization matter is what did you just tell me that and I missed it sorry was

Jon Erickson  55:24

no I don’t know that it needs to be capitalised. But it’s the word illusion is the code for 20% off.

Gene Tunny  55:30

Okay, good one. Well, I guess people try it and if, yeah, hopefully it doesn’t matter whether you capitalise it or not, or try and capitalise that, that doesn’t work. Without caps. Okay. Very good. Okay. Jon Erickson. Thanks so much for your time. I really enjoyed the conversation and really appreciated your insights. So that’s been terrific. 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 at economics explored.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

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Innovative cities, coffee shops & entrepreneurs w/ Christopher Hire – EP165

Cities worldwide want to be more innovative because innovation is a driver of economic growth. The Innovation Cities Index shows cities where they’re doing well and where they’re doing badly relative to other cities. Hear from Index creator Christopher Hire about the importance of having policies that are good for entrepreneurs and just how bad red tape is for innovation. You’ll also learn how the prevalence of coffee shops is a good predictor of innovation. And you’ll hear from Christopher about what cities are hot right now. 

Christopher Hire is Director of Data at 2THINKNOW, publishers of the Innovation Cities Index, a ranking of 500 cities for innovation, published since 2007. Christopher has given talks on cities and innovation to the OECD in Paris and the UN in Geneva. He’s a globally recognised expert on what makes cities innovative. 

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

See and download the Index in Excel:

https://innovation-cities.com/indexes

Substack Innovation Cities Gazette Newsletter:

https://innovation-cities.substack.com/

Get the data – Answer your research question with city data points:

https://citybenchmarkingdata.com

Connect with Christopher HIre on LinkedIn:

https://linkedin.com/in/christopherhire

Other Links:

https://Linktr.ee/Christopherhire

Transcript: Innovative cities, coffee shops & entrepreneurs w/ Christopher Hire – EP165

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.

Christopher Hire  00:02

Coffee shops are a driver of innovation because how many people who right now probably listening to the podcast or how many people that are writing a paper or working on something or new ideas are sitting in a coffee shop.

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 165 on innovative cities. My guest is Christopher Hire, director of data at two things now, publishers of the innovation Cities Index, a ranking of 500 cities for innovation published since 2007. Christopher has given talks on cities and innovation to the OECD in Paris, and to the UN in Geneva. He is a globally recognised expert on what makes cities innovative. So I’m really glad he’s come on to the show to share his insights. Cities worldwide wants to be more innovative because innovation is a driver of economic growth. Christopher’s innovation Cities Index shows cities where they’re doing well, and where they’re doing badly relative to other cities. Hear from Christopher about the importance of having policies that are good for entrepreneurs, and how bad red tape is for innovation. You also learn about how the prevalence of coffee shops is a good predictor of innovation. And you’ll hear from Christopher about what cities are hot right now, including Dallas, Fort Worth and Seoul Korea. Please check out the show notes relevant links and clarifications and the details of how you can get in touch with any questions or comments. I’d love to hear from you. Right now for my conversation with Christopher higher on innovative cities. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Christopher. Hi, welcome to the programme.

Christopher Hire  01:49

Thanks a lot for having me on your economics podcast. It’s a real pleasure Gene.

Gene Tunny  01:53

excellent. Yeah. Great to have you on. Christopher, one of my listeners, Dave attended a recent talk you gave. And he mentioned that you’ve done a lot of really interesting work on cities, you’ve got an innovation Cities Index. And I’d like to ask you about that today. But first, would you be able to give us a sense of the broad range of work that you do, please, Christopher?

Christopher Hire  02:18

Yeah. So currently, for the last over a decade now I’ve been working, running a small group analysts doing data about cities. So basically, we gather data from cities and we answer research questions. Now anybody who’s in economics or in the data field, and and I’m sort of I’m a combo I’m like, data math guy, and also a data science guy, but I was data science before they invented the term data science. Many of your listeners probably remember analyst programmers, yeah. Power, before Power BI it was Cognos, all those sorts of things, you know, the old, old stuff that it’s really the same thing. The Emperor with a new set of pyjamas some days. But yeah, so So basically lots of different data gathering about cities, difficult research questions, and usually who we help is if somebody has a research question about how to compare cities globally, there’s lots of data on how to compare Australian cities on the abs. But there’s not a lot of data on how to compare cities globally. And if you try to dig into the French system, you’ll hit some walls. And then if you dig into the Spanish system, you’ll hit some walls. And we’re sort of good at that. So we go through and we standardise global data kind of thing for cities. And it’s about 500 cities. And we do answer research questions. And we’d like to, you know, we’d like to do interesting things. So somebody gives us an interesting challenge. It’s quite fun.

Gene Tunny  03:40

Great. Yeah. keen to chat about cities. The one the indexes that I’ve noticed in the past are the rankings I’ve noticed in the past. The Economist, The Economist has a or maybe they, I’m pretty sure they still do a cost of living survey or across different cities in the world that’s aimed at I think it’s aimed at executives or professionals, what’s the what’s their cost of living in different cities. And also Monocle has a city’s index, what’s the best city to live in and that’s based on the Monocle, Tyler Brule’s magazine, exactly how cool they think the cities are. And one thing that’s interesting is that there was another index or another ranking of suburbs I saw the other day, which had Fortitude valley where my office is, which is one of the top 50 suburbs worldwide. But I think that’s in terms of some measure of coolness. But anyway, I want to ask you about your, your, your ranking or your index you you’ve got this innovation Cities Index. Could you tell us a bit about that, please, Christopher?

Christopher Hire  04:49

Sure. Look, most people know cities rankings as the livability indexes, and they are actually as you correctly identified, in the case of The Economist, more related to cost of living for wealthy expats, then really livability, but the marketing departments of cities love, just churning it out as were the most livable. But it’s really about cost of living a lot of the time. So Mercer and The Economist make those two. And then there’s a series of other rankings that we’ve often sometimes worked on, we’ve worked on Smart Cities rankings for IESE, and a couple of other rankings published by consulting firms that use our index as an input. So ours is a bit different. Because it’s not based on a utopian idea of cities. It’s based on the idea that you do the best you can with what you’ve got. And you try to create innovation. So in 500 cities that we measure, and we started off with 22 cities in 2007, because 500 is a heck of a lot. And we never thought we’d actually get there anyway. But the 22 cities we started with, we expanded it to 500. That kind of gives you a pretty good barometer of what’s happening in the world. And it’s a broad base concept innovation. So in other words, it’s looking at where you would like to live, where you might belong, where you might work or play, it’s sort of a broader space sense of innovation on what places are dynamic and water really good. But it’s answering that in a more systemic way than just, I happen to think this city is cool or not. And I think there’s a lot of newspaper ones, they really are all about who’s cool, who’s not. And it’s more about should be more about data. So we use data and quantitative and qualitative methods, but we use quantitative methods to create the index. So we have an algorithms that basically create the rankings.

Gene Tunny  06:42

Right. Okay. And what does it tell us? Christopher? What are the cities that are at the top of it? And How stable is the index? So the ranking? Is this something that is relatively stable over time, that you mentioned that it’s not just what people you know, what the analysts think is cool, it says its based on data, so these are these? These are data that have a lot of reliability? Or they don’t? You know, they’re not they’re not moving around a lot over time? Is there a? Yeah, what are your thoughts on that as well? As well as what’s the what are the ones at the top? Sorry? Yes,

Christopher Hire  07:20

yeah. So I’ll go, I’ll sort of unpack that in a few parts. And if you want to interject with a clarifying anything, if, if it doesn’t make sense, one of the things that many of us in this field suffer is reading too many PDFs. And with the $50 words, with a $5 word we’ll do and it rubs off on you after a while. So I’m trying to get out of the $50 words. So basically, the main thing about it is, is that the, you’re really comparing cities on their potential for innovation. And the way that you’re doing that is if I answer the second part, about the how we do it in a moment, but basically, you’re comparing the cities for innovation, based on looking at the conditions for innovation in those cities. And to do that we gather 162 indicators, and they have around 800 data points that we gather, and they’re very, like the indicators, the way the design is quite stable. So in other words, I have to put a little asterisk next to that. So the answer is it depends. But certain cities like Singapore, are highly stable. So cities that do very, very well in our index over time, don’t vary a lot. And you’ll see the same cities towards the top as long as they don’t shoot themselves in the foot. For example if they keep good government policy on innovation, like Malcolm Turnbull’s, federal government policy was very good. And I haven’t, I won’t go into that yet. But, but in effect, good policy on innovation, they keep a structural sort of a series of conditions for innovation, and they help encourage it, then they tend to be stable. So Singapore has done a very good job. Now, the first thing somebody in government said here is when I say Singapore has done a good job, how do we copy Singapore. And so that’s where our index is a bit different. We don’t say you should copy Singapore, we say you should be the best version of yourself. So Tokyo has also done an excellent job. But Tokyo is tied up in its culture. You can’t take Tokyo and just take some part of Tokyo say like, right, we’re going to copy all the vending machines in Tokyo and their robotics department. And we’re going to become Tokyo, a Sydney cannot be Tokyo. It doesn’t have the same structure doesn’t have the same culture doesn’t have the same transport system, spatial geographics, all these things, you just can’t be like that. So what we would say is each city should be the best version of itself and the cities that do the best that over time, like Barcelona historically has done very well except thing COVID basically cities like Singapore have always done very well. Seoul has been doing really well for a long time. Now. Dallas Fort Worth is another city that’s been climbing up our index for a long time. And I’m not mentioning Australian cities because people get into the Sydney Melbourne debate. So I’m just saying globally, Austin is doing very well, it has been for a long time. So our index picked up Austin early on in the piece. And we see it sort of cresting now. So Dallas is hotter than Austin in some ways. And Miami is another city that’s doing well with the exception of property prices. So each of these cities have a balance of factors. And if they do that, well, they remain remarkably stable. If they go off into left field and start creating dramatically bad policy, and I would say some of New Zealand’s cities are an example there, where they haven’t, they have the potential to be really great world leaders. And on a per capita basis, they’re amongst the best in the world. But they haven’t been doing good policy for a little while. And so they’ve lost their momentum. You know, it’s really, it’s a bit of, it wouldn’t take much to get him back. But it’s just that they, I think the, you know, when without the COVID thing, they’ve lost a bit of momentum. And the same with some Canadian cities, although the French speaking parts are doing quite well in Canada is bouncing back a bit now. So it’s hard to keep candidate down. So in effect, we’ve got these sort of great cities around the world. And if they get all their policy settings, right, but not perfect, then they go up. If they get their policy settings, bad, then they go down. And so in effect, our index over time, it has a thing called a five year average. And that five year average is pretty consistent. And so and it doesn’t matter how we run the algorithm, it can run, we run the algorithm to get a stable result, basically, relative to last year, we ran it 31 times. And at the end of 31 times we’ve got a pretty stable result. Bearing in mind there was COVID happening. So that’s a lot of answers to your question, sort of a junked points, but I’ll let you led on from that.

Gene Tunny  12:07

Yeah. I was just wondering how it comes together. You mentioned Tokyo was Tokyo at the top of your most recent index.

Christopher Hire  12:17

It’s been at the top a couple of years in the last few. So it’s one of the cities perennially has won. We’re the first index, I think put an Asia city at the top. We’ve also got Seoul near the top, and Singapore near the top.

Gene Tunny  12:30

And Sydney. Sydney’s top five at the moment?

Christopher Hire  12:34

Yeah, yeah, at the moment. That’s an outlier year, that’s largely COVID related. At the time we were doing the data, they were doing the best on COVID. And that sort of affected the COVID variables affected that but Sydney should be top 10 in the world. And Melbourne should be in there in the mix, too. But it depends on policy settings. And, and it’s complicated, because there’s not just councils and state governments often responsible for different things, and there’s community organisations responsible. So it’s a multi stakeholder thing that makes a city, whereas Brisbane has one council, which is much easier.

Gene Tunny  13:12

Right, What are the most important indicators, Christopher? Or what are the most important? Yeah, the most important indicators that distinguish between different cities? Is it governance? Or is it the amount of skilled labour you have? Or is it the museums or the art galleries? The what would you call them trying to think what you’d call that? I’m trying to think about? Cultural? Cultural? Exactly. Yes. Yes, those factors? Yeah. What are the most important? Are there a few that are much more important than the others? I mean, you’ve got it sounds like you’ve got a huge range of data. Perhaps what I’m getting at is what are the common factors? What Look, you’ve got all of these different indicators? A lot of them are going to be highly correlated or getting at the same thing. Can you give us a sense of what the most important data items are?

Christopher Hire  14:04

Well, the indicators don’t necessarily. So the indicators overlap in different ways. And so they’re designed to make it difficult to game. The problem with a lot of rankings is they can be gained easily by just announcing filings. And you’ll see this where cities that are capitals nationally become very prominent, you get these weird outlier cities and the outlier cities you think how did that make the list? That outlier city sometimes is caused by data, for example, for the whole country being filed in one city. So you get these sort of weird data problems? I think, realistically speaking, it’s best way to look at it is to look at what does it mean underneath and it means that individuals and businesses and stakeholders are broadly decentralised into different categories. So in a sense, it’s, it can be a central city if it’s a small place, like Singapore. But in many cases, there’s a lot of entrepreneurship happening in Singapore. And so you have to bear that in mind. So, in general, the correlation is to dynamic, entrepreneur driven cities, not centrally planned resilience. For those from an urban planning, background, Brasilia was a wonderful looking city from a from a photograph. But it didn’t work as an urban planning city. And just centrally planning everything, you can’t make a perfect city, what you have to do is you have to devolve some elements to different indicators. So by taking all the indicators, and looking at them broadly, there are some certain commonalities. So for instance, we have 14 transport related indicators, which would indicate the transport or mobility, and most of those are public transport. And so mobility is extremely important, as we saw during lock downs. So there is a correlation between mobility and creativity. If people stay in their cubicle, you don’t get many creative ideas. You don’t get creative ideas sitting in a cubicle. Most people, if we asked a group of people this question, they’ll say, Oh, I get a creative idea from going out into the bush, that’s one of the common ones. In the shower. The other one is that I get a creative idea of museums and art galleries. So that’s the that’s where the ideas come from. So if you don’t have those ideas, how are you ever going to keep up with China where they, they think tanks have IQs of an average of 150. And they select the very, very best and brightest people to go in their think tanks, yes, they might have procedural things. But they do give some leeway within their think tanks. And they have 150 IQ emission standards or some of the think tanks. So, you know, I don’t see some of our media, Talking Heads competing with the Chinese on the intelligence level, that they have their analysis, but they can compete on the creativity level. So that less we and one of the biggest, biggest, most annoying things you see when media talk about innovation is they keep talking about control and centralization. The problem with that is you kill the goose that lays the golden egg. It’s actually you have to decentralise the non strategic parts of it in order to allow it to function. If you centralise everything, you’re really just going to you control it, but you end up controlling less and less innovative economy. So, in effect, the main things driving this decentralisation in some respects, and centralization and others is okay. It’s a kind of interplay between all these things. And there’s lots of research into various things. Like, for instance, coffee shops, are a driver of innovation, because how many people who right now probably listening to the podcasts, or how many people that are writing a paper or working on something, or new ideas are sitting in a coffee shop, how many people are doing that, and coffee actually inspired the whole age of enlightenment, and was coffee houses that inspired all that. And there’s a lot of interesting texts, which I’m sure we’ve, we’ve we’ve read or videos we’ve watched about that. So coffee is a very important part of the Enlightenment, and coffee houses and Lloyds and all that sort of thing. So I think coffee houses incredibly important innovation, but they’re not really considered very often. So that’s a small indicator in our mix of indicators. But it clusters around people coming up with ideas and making the environment conducive for the person that’s, that’s, that’s ready, who has the means to come up with ideas to create innovation, and to develop things. You know, the best ideas often don’t come from the expert in the field. The best ideas come from, from random people who basically have some part of the expertise they need. And they invented. I mean, what the steam engine wasn’t invented by wasn’t invented by a professor was invented by a boiler maker, you know, it’s often but he was in that university environment is a boilermaker. So it’s often you need randomness for things to work, you know. And so, our index is designed to measure conditions for creativity. And it builds on a whole series of texts and papers and things that people wrote over, you know, from the period of about 1990s till about 2008. A lot of it. And there’s lots of great stuff out there. I mean, this. Thomas Stewart wrote a great book, Joel Kotkin writes some great stuff. There’s a whole series of papers by a guy called books by Nigel Harris, David Landis from Harvard. There’s a whole series of interesting things you can take, and you can extrapolate it, but our model kind of saves time and puts it into one place. So it’s not so complicated. I mean, you can read 5000 books or you can read use a model.

Gene Tunny  20:02

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

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Gene Tunny  20:36

Now back to the show. Christopher, can I ask? Are the the indicators that you use? Have you got a list of them somewhere? Or is it proprietary?

Christopher Hire  20:49

Yes, the indicators are all on the website. And people can order the data. Okay, so it is possible, we don’t sell the data, we don’t provide the data for free. Because we wouldn’t exist if we did. But we sell the data. And we also sell the data to city governments to benchmark themselves. So that’s how we get some money for doing the index. Otherwise, it would be the world’s greatest charity project. Well not the world’s greatest but it would be a big charity project. So you get some infamous revenue from selling the data to cities and benchmarking cities. And corporations use it like insurance companies and, and banks and those.

Gene Tunny  21:28

Oh, good. And so you’ve got coffee shops, per square kilometre, or cafes per 10,000 people or something like that. It sounds like.

Christopher Hire  21:39

There’s about four or five Cafe variables, the cafe indicators. And we have a special algorithm that say forget outliers and cafe shops per square kilometre. And you can get outliers and total number of coffee shops. And you can get outliers in there’s no matter which variable you use, you can get an outlier in it. So we have a way of sort of kind of nutting that down to what’s a good score from that and then giving a score for cafes. And I was just looking at the cafes data this morning. That’s why I had primacy in my mind. Yeah. And it was interesting to note that the lockdowns saw some cities reduced one in five coffee shops, one in five coffee, close, you think about the flow on effect of that through the economy. It’s one in five coffee shops shops in some major European cities. Interestingly enough, some cities grew by 12%, which means one in eight coffee shops open. So that’s really interesting. And it’s not it’s an it changes the narrative about so it tells us something about the economy as well as coffee shops. So it’s all their small businesses and that and that their economic activity and how confident people are when people don’t buy coffee, if they’re not feeling relatively confident. They might cut back on their coffee. Yeah, avocado toast, as it became, yeah, smashed avocado. We don’t buy them anymore or something. So what was

Gene Tunny  23:01

So what was that time period you’re talking about there you mentioned? Some cities actually, there are more coffee shops. I’m just trying to remember this year. Okay. So post COVID.

Christopher Hire  23:12

So as of now, as of now, last month, okay, yeah. And more coffee shops opened, but they’re not. They’re interestingly ones that didn’t lock down as much or they went into the lockdown sooner and came out sooner. So that’s the sort of thing or they have. There’s a couple other explanations, but yeah, its interesting.

Gene Tunny  23:33

What are some of those, you know, off the top of your head what some of those cities are.

Christopher Hire  23:38

So I don’t want to misquote because I just looked at the data. There are cities in a couple of most that London has suffered from, the UK has suffered not long, I can’t say for sure London, I don’t remember the number. But UK has suffered shrinkage. And in generally in the coffee shops. And a lot of the French cities have suffered shrinkage in their cafes, but growth in some Swedish cities and want to say, East European countries. So Sofia has had some growth, Tallinn apparently. But that can also be that some people have decided that casual dining now is more profitable. So there’s a shift from some of the cities have shrinking numbers of bistros and growing numbers of cafes. So what they’ve done is they’ve converted to a cheaper business model where they can operate coffee shops, so they they sell coffee once upon a time we would have sold only meals. Yeah, so they convert their classification to a coffee shop, but continue trading rather than closing their doors and they get rid of all the white tablecloths and napkins which happened in Melbourne. You know, a couple of decades ago. So it’s it’s sort of an interesting thing that’s happened in but there’s growth in a lot of Eastern European cities per coffee shops, and shrinkage in a lot of West European cities. And a couple of German cities have grown, I think Dresden has grown a little bit, but I can’t have been a huge amount. But most of the rest have shrunk. The lockdown has really affected the small to medium sized enterprise, which has a flow on effect to the money multiplier through the economy and a whole series of other stuff. So it’s really, it’s not just coffee shops, it’s like there are bellwethers for small business and startups and all that stuff.

Gene Tunny  25:22

Yeah. One city that people have been concerned about is New York City, because it was very badly hit by the pandemic. And I don’t know, one in five small businesses or something like that closed down, maybe that’s an over estimate. That’s the number I think James Altucher quotes on his show. And he was basically saying New York City’s dead, right. It’s all over. And I don’t know if you’ve got any thoughts on what’s happening with New York, how it’s performing in the index?

Christopher Hire  25:53

Well, we’re doing look, the interesting thing is, I believe that narrative as well, to some extent, because there are some very strong numbers that showed people leaving New York prior to the pandemic. So one year prior, people were leaving New York, and people had continued to leave New York throughout the pandemic. And when I say New York, I’m referring to the five boroughs definition. But then you have to consider that some of those people have moved out to metropolitan New York, and then move back to the five boroughs. So it’s, it’s not as clear cut as all that. So New York still continues to do well, which surprises me greatly. And it may be that there’s just some lag in the data, but we are getting the data we’re getting in his COVID data, and COVID period, data’s 2021, some 2022. And it’s really quite interesting that, that they’re still they seem to be, it always bounces back. I mean, it’s one of those cities, it’s a perennial city like Paris, London, New York. And I think that always bounce back, you know, they don’t seem to ever stop being the great cities of the world. And you may think the data may do something, but then some other indicator compensates for it, they seem to be like a magic machine. I don’t know exactly how to describe them. But Melbourne has this attribute as well, to some extent, in the end, it bounces back. But, you know, New York is still up there in our list. And it’s not, it’s not totally and utterly. I’m surprised when I’m looking at the data because I expected to for more. And I made the point that I think there was so much movement to my hand Miami of capital and things during the pandemic. But that seems to be a biting now. And Miami does very well. I mean, we did this thing of industry diversity. And Miami is amongst the most diverse. There’s a certain way we measure this, but it’s showing up as a bellwether sort of happening economy, but the property prices are very high. So that might be putting a cap on it. And it’s I’m interested to see what will happen next year with that I don’t know what’s going to happen way. I mean next year, but Miami has been climbing our index and everybody says Miami, Miami, but it’s been climbing to index well before people started noticing and moving there during the pandemic. So it’s got a very good free enterprise and entrepreneurship vibe and in Florida in general, and Texas also, of course, they both support entrepreneurship. So surprised they do much, much better than cities of equivalent population. They do much better than they should basically, because they’re open to entrepreneurship, and cities that are kind of being you know, everything under control. And the Karen’s are in charge for lack of a better word, Karen’s with clipboards, measuring and monitoring everything. They’re killing the economy, and they’re killing. They’re killing their own wealth in the long run. So it’s not exactly intelligent. You know, how do you how do you take a how do you make a two bedroom house? You take a four bedroom house and divide it in two? Did you soak up your wealth and be more wealthy no matter what you do? Yeah. Eventually your tennis court gets cut down. So it’s sort of like you have to you have to let the economy run.

Gene Tunny  29:17

Yeah. So in terms of indicators, then you could have things like tax rates, you could have things like that. Yeah. How easy it is to start up a business or how quickly you can start up a business economic freedom. Yeah, yeah, that sort of thing. Okay, that’s all good

Christopher Hire  29:32

Company, we’ve got a really good company set up indicator that’s better than the World Bank’s one. It does use World Bank as an input. But when I say that is a lot of people have problem with the ease of doing business index. There’s been a lot of complaints about it. It’s kind of methodological black hole in there. And so we have a better way of capturing that. We do manually, and we’ve been doing that for a while. And we sell that quite a bit of that one. And the also, as you mentioned, The economic rights of what you consider as city level economic growth could calculate some version of that. And or estimate some version of that. And we have whole series ones around the setup of companies and different things. Yeah, the sort of things you mentioned.

Gene Tunny  30:17

Yeah. Okay. Now, you said before New Zealand has had some New Zealand cities have had some bad policies, what type of things? Would you say there are bad policies in those New Zealand cities?

Christopher Hire  30:30

Well, there’s a lack of focus on growing the economy. And there’s been a whole series of aborted social programmes that haven’t achieved. I mean, the housing initiative that was federal government in New Zealand just didn’t achieve anything. I mean, so the problem is, it’s not enough to say chair in policy and expect chair to happen. You know, a lot of people who are naive on policy, they think you can say something hasn’t happened. And something’s just not possible. You know, you can say that your concern no child wants is going to live in poverty, poverty, as Bob Hawke or and Bush have said, but whether it’s achievable or not, what you’re better off doing is making some incremental improvement. So an incremental improvement is making sure that 100,000 kids get laptop computers. So that’s a good policy, right? That’s a policy that is tangible, measurable, and you can say, well, we’ve got 100,000 Kids laptop computers, as long as they’re reasonably recent laptop computers and Celoron’s from five years ago. But so you’re better off focusing on stuff you can achieve and grandiose statements that just just don’t get anywhere. And I think New Zealand’s had a lot of grandiose stuff, and it hasn’t really, it’s that desire to be the most important and, and, sort of, you know, little is that is the tyranny of distance. It’s that Australia gets into it, too. We want to be the world leader in something and then you go over to France and, and Spain and you talk to them and they don’t care. They’re like, what we don’t care. You know, a lot of stuff we do, they don’t care. We think we’re impressing them with they don’t care. The French and the Spanish don’t care, European Union don’t care, the OECD don’t care. They might we think we’re impressing them by being this great leader in something, when we’re actually just talking to an echo chamber of ourselves and a bunch of media talking heads. I mean, we really, we just, sometimes I feel like you turn on the TV 20 years ago, you hear the same conversation, don’t you about, about everything, and it’s still the same now, you know, you’re still having the same conversation about the same issue going on about same thing. And you just think, well, I just turned it off and 20 years later to see if it’s still there, and nobody’s done anything. So it’s better to do small incremental changes that help. It can help people like so if you know, do something about domestic violence phones is that programme is doing that’s a practical thing, you know, practical stuff helps. And I think airy fairy stuff, you know, airy fairy announcements that never can be achieved or never be verified or loved by politicians, but, but not much used to the average punter.

Gene Tunny  33:00

Yeah. So Chris, you mentioned that your indexes of the data and your behind your index has been purchased by many different customers by city governments, presumably? Do you have any examples? Or have you noticed? Well, has it been a wake up call to any particular cities the data and has that inspired action? Have they changed things on the basis of this index?

Christopher Hire  33:31

We have, we don’t always know 100%. Because sometimes we do work by consulting firms. And so we’re not always sure of who the customers are. We know we had a lot of input into the UK’s innovation strategy, because we went through a consulting firm, and it got soaked up by that consulting firm, and it got passed into their innovation strategy. So we know we had a lot of input into that. A lot of input came in, we had some input from Australia’s innovation strategy at times because various policy things that I wrote, got picked up and implemented, but we don’t always get credit for it. But specifically, where we’ve helped, we’ve got credit, we’ve we’ve had done quite a bit of good work in the Emirates, and in the United Arab Emirates, we helped with some innovation policy there and they’ve, they’ve really run with it, and particularly in things like safety and, and areas such as road toll and things like that. A number of years ago, we had workshops that help them innovate, and they came out and then met some Australians who reduce the road toll here and we helped connect them up and we gave them a process for innovating in that area. So they rode top fell, it has stabilised, but it’s not as good as it should be. I mean, you can literally see people dying on their roads, still, but it’s better than it was. So that’s something where we provided the data. We provided innovation methodologies that helped them and we developed we work with them on, not specifically on that, but on the innovation methodologies that help their the government. And yeah, so we find that that’s been a really good, was a really good example from the past. And a number of clients, a number of people who attended training I’ve done have won awards in their particular for innovation in their particular finance related or insurance related roles. So we’ve done that sort of thing as well.

Gene Tunny  35:28

Okay, but it’s not just one more question if you’ve got time, Christopher, I’m interested in this. Yeah. What makes for a thriving or prosperous cities? I’m just trying to understand your insights, what you’ve discovered from your analysis, and you mentioned decentralisation. So you mentioned entrepreneurship. So I’m guessing you’re low. Low taxes and charges, I’m guessing. Yeah, the we talked about ease of doing business.

Christopher Hire  36:02

Yeah, yeah, there’s low taxes and charges. So that’s, that’s where we get into trouble. Because what it is not a pure policies, policy prescription. So for example, if I was a full on Republican, I’d say, get rid of all taxes and charges and the economy will do better. And if I was a full on, Democrats say, No, we have to have social programmes and social programmes will create the great economy. And if we don’t have the great society won’t have the great economy. And in truth, I think there is an element of yes, Dublin, for example, has done very well in our index, but they’ve hit a ceiling in some respects. And that’s because they did reduce their tax rates. So I don’t I don’t think we’re really saying reduce a purist would say reduce tax rates to zero. And yes, that’s one way you could do it. And that might work for, say, Dubai, or an Gulf country. But they have a resource backing for that. So we’re not sort of being idealistic, we’re saying, it’s a balance of things. And one of the things so if we’re talking about Australia, for God’s sake, get off people’s backs about entrepreneurship and mid sized corporations allow midsize corporations to grow. There’s an element in Australia where we favour large corporations constantly in every area, and that creates an issue where we don’t have, we just don’t have new companies being added to the ASX, we just don’t have that growth that we should have. And we can do that. But we just got to allow the policy settings to do that. We’ve got to allow manufacturing, we’ve got to encourage manufacturing, not follow this silly notion that we shouldn’t manufacture stuff. I think we’ve I think we’ve been disavowed of that, after during the pandemic, when you couldn’t get toilet paper, and you couldn’t get a face mask, and you couldn’t get medication. If someone I know couldn’t get their heart hasn’t been able to get their heart medication for three months and has to take a generic, the generic doesn’t work. It doesn’t reduce blood pressure. So I mean, it’s really problematic that we don’t manufacture things. And so if I was talking specifically about Australia, we need to in that particular situation, we’d need to keep our tax rates reasonable and increase our reduce the bureaucracy. And the problem we have is we have too many things the government is controlling and monitoring. And the problem with that is that takes up too much time from the business owner, therefore they can’t focus on innovation, they’re focused entirely on compliance. The only companies that survive compliance are big companies, where compliance is a much smaller percentage of the operating cost of the business. So if you’re, you know, you’re turning over 6 million a year or more, then it’s still a pretty big burden. If you’re turning over a billion a year, then compliance is just something you outsource to KPMG. And you can get away with that or someone similar or VAs or something. So you can outsource it to a middle small or large accounting firm, but, but to some extent, we just we put too much burden on business in Australia. And that really is the thing that does damage. And we need to encourage people to think outside the existing power paradigm of businesses, you know, we need to think of new and interesting types of businesses and create new and interesting business. And we need to just enable those conditions. So the conditions really are that you basically give people a little bit less bureaucracy, but it’s not just you can set a tax rate of 21%, you can set a tax rate of 28%. There’s pluses and minuses. But increasing sales tax, for example, would be very bad for the economy. But on the other hand, you could do that if you reduced compliance burdens elsewhere. So there’s always trade offs and everybody who’s in this field. Probably sympathises empathises and feels pain you say to her trade offs, but but that’s what it is. There’s trade offs, but Australia should basically encourage more dynamic manufacturing related industries and not promote so much very single minded large corporations controlling everything we have. We have a bit of a problem with that we’re going to we’re going to hit a hit a wall one day if we don’t watch ourselves.

Gene Tunny  40:16

Right, I’d like to ask also about how housing policy or urban development policy is one problem in Australia, and also some other cities while other countries and their prominent cities around the world. It’s becoming so expensive to live in them. And some economists are saying, well, that’s because of zoning policies which prevent developing redeveloping existing properties. There’s all this protection of existing a world heritage or character properties. Is that an issue?

Christopher Hire  40:48

I’m not so knowledgeable in that I’m not so knowledgeable in zoning, I did attend an excellent presentation. I can’t remember his last name is Italian gentleman, you should have him on the show. Sergio. He from where he’s from, I can send you his details. He’s written a book called The End of the Australian dream or something along those lines. And I’m sorry to say, Gee, I can’t remember the exact title it is sitting on my desk, but I haven’t had an exact title or something like that. He talks about greater density housing and things like that, I think I think more I would probably lean his understanding of that. I would say there’s an optimum rate of density. And there’s an optimum population size for cities before you get problems. So when cities go over 4 million pop, they hit problems. And I think there’s rings a population that makes ideal size cities. And so Melbourne’s problem started once it got a bit above 4 million, and didn’t have the infrastructure to support the extra million. And that’s sort of course Melbourne. transport infrastructure, you drive three kilometres and it takes you 45 minutes, you get a transport three kilometres, it takes you 35 minutes, it takes you 37 minutes to walk. So you’re almost better off walking if the tram breaks down. So if you’ve got to walk, if you cycle, but you’ve got to change clothes, and you’ve got to, you know, have a shower probably, or at least end of trip facility size, it’s very becomes a very difficult problem for when you hit that extra million. I don’t envy the public servants got to solve it.

Gene Tunny  42:23

Yeah, gotcha. Okay, Christopher to wrap up, is there anything we’ve, we’ve missed it or anything important that you’d like to, to explain or to talk about, regarding your innovation Cities Index?

Christopher Hire  42:36

Yeah, I’ll probably just give a summary because there’s a lot in it to unpack. But I would say that it’s an index that basically measures the ability of cities to have conditions for innovation. So it’s sort of correlates to where you would want to live, where you might want to work and play. And if you’re using it just in a general way, you’d look for cities where your language that you prefer, if it’s not English, is dominant. So if you were Spanish speaking, you might move to Barcelona, you might look at Barcelona, if you were speaking various dialects of Chinese, you might look there’s a list of Chinese cities in there, which are favourable, and and might depend on a whole series of characteristics. But =in the end, you might look at the politics to say, well, I want a Democrat city or a left leaning city, then you end up in Chicago. But if you are New York or something like that, but New York’s a bit more complicated, but if you want a more right leaning city, you might end up in Miami, or you might end up in Dallas, Fort Worth so so it’s sort of it’s there’s a balance for everyone in there. And we’re not trying to judge too much. And force anything, we’re just saying, there’s a general tendency mathematically, for cities that do a bunch of things. Well, but not best. You don’t have to be perfect. You just do them well enough, you will actually get ahead and the cities will become better places. And that’s really what we’re saying is they’re the sort of perennial cities like Paris and London always do well, because hey, everybody moves there, no matter what happens, you read a book about 1940s Paris, and pay it how horrible it was. You read a book about 1980s, Paris 1990s. There was a period in the 90s when Paris went for route, dark decade, I think, and then bounces back you know, so people will move to New York again, people will move to London again, their perennial cities and just the same as Tokyo is the Japanese perennial city and I think Seoul is becoming a perennial city now. So and I think Sydney and Melbourne will eventually be perennial cities as well. So Brisbane is on its way.

Gene Tunny  44:38

Yeah, because they get that critical mass you get the or the accumulation of knowledge and know how in the city, you get these established businesses and yeah, and so it’s a matter of population and skills and and the right policy settings. So, yeah, okay, well, that’s great, Christopher, I’ll put a link in the show notes to innovation Cities Index. And I’ll have another look through the, well, I’ll have a look through the, the all of the different indicators that go into it.

Christopher Hire  45:18

I could send you some links that people can download the actual indicators, not the data, obviously, we sell that, but the list of indicators. And also, I’ll send you a link to a newsletter we putting out we’ll start putting out on substack. So oh, it’s much easier to put it out in a newsletter format. It’s still early stages in the newsletter, but it’s just that we’re putting that out in stages, because it’s better than trying to put it out as one big block. Once a year sort of thing. So we think it’s better to trickle it out. And we go.

Gene Tunny  45:49

What’s your substack newsletter called?

Christopher Hire  45:53

Innovation cities. innovations.com hasn’t got a dash in that line, because they won’t allow a dash in that one. So and websites got innovation-cities.com, but the substack just innovationcities.substack.com

Gene Tunny  46:06

Good one. Okay. So, Christopher Hire, thanks so much for your time. I’ve really enjoyed talking about innovation cities. It’s been terrific. Thank you.

Christopher Hire  46:15

Thank you very much, Gene. And thanks to your listeners for listening to the podcast to the end. So I’ve heard this message, they heard the end. Thanks a lot. If anybody’s got any questions, they can hit me up.

Gene Tunny  46:26

Excellent. Thanks, Christopher. 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@economicsexplore.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

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