This episode features highlights from the past 20 episodes. Economics Explored host Gene Tunny plays clips that illustrate key themes like using economics as a scientific framework, considering different perspectives, and remembering the limitations of models. The clips feature discussions on COVID policies, the role of experts, projections of resource depletion, nuclear energy, and the challenges of development economics. Gene hopes listeners find the highlights thought-provoking and looks forward to feedback on improving the podcast in the new year.
Economic development, critical thinking, and foreign aid. (12:41)
The limitations of economics and the need for interdisciplinary approaches. (19:25)
Takeaways
1. Economics is a powerful framework, but we should remember its limitations and consider insights from other disciplines like psychology.
2. We must be open-minded and tolerant of dissenting views when relying on experts to inform policy decisions.
3. Numerical models and projections should be viewed cautiously as they can exaggerate outcomes, given the complexity of real-world systems.
4. It’s important to think critically about all options when analyzing issues and not come to them with preconceived notions or biases.
5. Effective policymaking requires understanding incentives, weighing tradeoffs, and considering how people may respond differently based on cultural and social factors.
Transcript: The Power of Economics: A Look Back at the Past 20 Episodes – EP221
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.
Gigi Foster 00:03
Even if you think that I’m under balling that low balling that, in fact, even if you think the Prime Minister’s estimate of 40,000 people who would have died is correct. If you look at the costs of lockdowns, they still weren’t worth it. Right. So even if I’m totally wrong as Prime Minister’s right, the lockdown still shouldn’t have been pursued.
Gene Tunny 00:25
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist 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, Happy New Year. It’s the first episode of 2024. In this episode, I’m going to play some highlights from the last 20 episodes. I’ve chosen these highlights. So they’re consistent with the theme of using economics in a scientific way to better understand our world and to make better decisions. Take to simple principles that people respond to incentives and that things must add up and you end up with powerful insights. You start to see constrained optimization problems everywhere. You start with a presumption that people are trying to make the best decisions for themselves based on the incentives and constraints that they face. And you think about the trade offs involved in decision making. It’s not a perfect framework, but it gets you a long way in analysing important issues. And I hope I’ve demonstrated that on this show through various conversations that I’ve had over the last four years. One of the other points I make on the show a fair bit. And this has guided my choice of highlights is the importance of being open minded, which I’d argue is consistent with the scientific approach. One quote I think a lot about us from Richard Feynman who said that the first principle is that you must not fool yourself, and you are the easiest person to fool. We should be open to a wide variety of views, and be open to vigorous debate on important issues. Okay, please let me know if you have any reactions to the clip, I play into this episode or anything that I say or my guests have said, I’d love to hear what you think. Also, please let me know any ways that I can improve the show in 2024, you’ll find my contact details in the show notes. Right. So let’s get into it. I hope you enjoy these highlights from our last 20 episodes. The first clip I’ve chosen as a highlight is from Episode 201. On the role of experts in a democracy, it’s with Peter Kirti, from the Centre for independent studies. So I’m an adjunct Fellow at CIS. And Peter’s one of my colleagues there and he’s, he’s always a great person to chat with about these big philosophical issues. I really like are Peter reminds us about the importance of being open minded, and tolerating dissenting views. Here’s the clip.
Peter Kurti 03:11
What I’m saying is that if we’re going to use experts, as we are bound to do, we, as citizens of a liberal democracy in Australia, need to be thoughtful about the way in which we engage them in ways in which we hold them to account. And we also need to be stronger about defending freedom of speech in the sense that I think we need to be more willing to tolerate dissent, we need to be able to say, well, this group of scientists over here says, you know, there is a climate catastrophe, for example, whereas this group of scientists over here saying, well, warming, and cooling is just part of a trend. These are parts of trek, these are trends that that take place in on on the earth over a period of years. We need to be able to tolerate dissenting views. I’m not saying we are necessarily able to determine which view is correct. But we are increasingly reluctant I feel to tolerate it today. We’re reluctant to tolerate dissenting views, because we want to have the right answer and we want to know what the right position is the right solution is. We saw that during COVID, of course, debates about the efficacy of vaccine mandates or mask mandates or social distancing, dissent was not tolerated. And I think that if we are going to make an intelligent use of experts, we do need to be willing to tolerate dissent and to live with perhaps the discomfort that comes from having dissenting views.
Gene Tunny 04:41
Yes, yes, exactly. Yeah. It makes it difficult for politicians, though, if, if the experts don’t agree so how, how do we think about that or what’s the relationship mean? You mentioned tolerating dissent. That’s one of your rules or your tips for getting experts like using them effectively. I mean, there’s obviously a role for expertise and people who understand the issues and they provide the advice to the government of the day. How do you think about how those experts should be used? And I mean, what the decision makers do when there is a situation of of that have that dissent to mean? Is it up to them to judge where the weight of evidence is? I mean, because the politicians will say, Well, look, the bulk of evidence is in favour of this hypothesis. It could be climate change, for instance. So yeah, how do you think about that, Peter, how should politicians use experts?
Peter Kurti 05:38
Well, I think it really adjust the way that you have outlined by examining what it is the experts are saying, By assessing the evidence by determining where the bulk of opinion lies, and then using judgement and skill to make a decision. We can apply that sort of framework to any policy area, we might think about. Migration levels of migration, there are people experts who say Australia, we can’t have a big Australia, others say we can have a big Australia, and each side will mount will present evidence to bolster their own arguments. And I’m sure believe quite passionately, the evidence that the cogency of the evidence they present, but somebody then has to make a decision about how we do that, and an elected government has to take a position, we can see it in terms of going to war, or whether we supply arms, for example, to Ukraine, we went into Iraq 20 years ago, very controversially, but we did so on the bait, I mean, at the Howard Government did so on the basis of evidence that was presented. And as we remember, because we know those around at the time, there was a huge amount of dissent in this country about that. At the end of the day, it’s elected representatives who have to make the call and are then held accountable. So I think it’s a it’s a difficult role. And I’ve never been an elected politician. So I’ve never been in the position of having to implement this. I’m simply really someone on the sidelines who’s advocating for a certain, as it were a certain style, of style of living, if you like. But I think it’s bias by weighing and assessing, carefully, evidence that is presented. And I think not allowing fear, I talked about the importance of political courage, not allowing fear of adverse consequences to deter somebody to do to take you from making the right decision, for example, when I mean, how many years ago was it now it’s, it’s must be nearly 30 years, since the Port Arthur tragedy. And the Howard Government decided that they were going to take a stand on on firearms. And there’s a lot of controversy about that at the time. I remember not being in Australia very long. And the view was that people living in the country or people who are really attached to their weaponry wouldn’t be happy with this. And there were arguments on both sides. But I think the weight of public opinion, or rather, I should say this put it this way. I think the Howard Government made it made a decision based on on the evidence and the politics, and also having to judge which way public opinion whether public opinion would accept this. And it was a controversial decision. But I think, given the horror of what happened at Port Arthur, the Australian public did accept it. But there was no telling which was the right what was the right decision or not. I think it’s in a sense, you only know whether you’ve made the right decision with hindsight.
Gene Tunny 08:52
This next clip features the one and only JG foster professor of economics at the University of New South Wales, in Sydney. Tim Hughes and I spoke with Gigi and Episode 205, which was on the costs of COVID policies to young people. I really liked this clip, because it reminds me why we should be careful when we’re relying on the results of numerical models, particularly projections, which show that something is going to get really bad, or, you know, we’re going to end up in a doomsday scenario. So these type of models were heavily relied on during the pandemic. I think that models have their place of course, but we need to remember their limitations and what their underlying assumptions are. Okay, let’s see the clip.
Gigi Foster 09:34
In mid March, you may even recall Neil Ferguson’s ICL modelling came out saying that, you know, 60 million people around the world were going to die or something. And of course, as we know, the COVID death count even now is you know, an order of magnitude less than that. And by the way, Niall Ferguson had been wrong in the past. These epidemiological models that are run in a simulated environment in a computer that necessarily do not include all of the real World variables that are actually relevant to whether people die or suffer from diseases are notoriously exaggerative of the bad outcomes that may occur from the new disease threat. Right that has happened again and again. And again. We’ve had SARS and the swine flu and the you know, all these different fluids that have been modelled and they’ve basically always there has been some coterie of doomsaying epidemiology, people who have said, based on my model, everybody’s gonna die, right? That’s just a common thing it happens, right? And you know why? Because the, you know, the media loves that stuff. It’s, you know, they get ahold of a guy like that, who will be, you know, put on a bleeding headline, that will get eyeballs, right, and they get status, and they get to be the person who really cares about people, because if you care about people, then you know, don’t you care that they’re all gonna die, or I mean, that becomes this whole narrative. And it really crowds out actual science, actual science is based, at best on real data, real data, right? Of course, we have theories about what happens, and we need to use those to structure our understanding of our world. But our world is so incredibly complex and dynamic. And there are endogenous factors that are happening and shocks that we can’t predict. There’s just so much going on, that all models are wrong, as somebody said in my discipline, but some are useful. That’s how you should see a model. So what I did in order to produce that estimate of how many people in a counterfactual non lockdown Australia would have succumbs to COVID is I looked with Sanjeev we looked at the countries in the world that had low restriction levels. So obviously, Sweden is one. Yeah, but it also used another counterfactual, which was about six I think other countries with populations over a million that had low restrictions, mostly in Europe, I think Taiwan might have been in there as well. And we basically took, you know, the average deaths from COVID. This is real data, real data, what they actually experience not something that comes out of a computer generated simulation, but actual data, because we just believe that much more. And then we of course, adjusted for population and then applied it to Australia. And we say, well, this is our best guess right now. Even if you think that I’m under balling that low balling that, in fact, even if you think the Prime Minister’s estimate of 40,000, people who would have died is correct. If you look at the cost of lockdowns, they still weren’t worth it. Right. So even if I’m totally wrong, if my minister is right, the lockdown still shouldn’t have been pursued. Right. But I also think that the Prime Minister is using these simulation models, these SR models or something like this, or you know from the Doherty Institute, or some other kind of, you know, institute that was supporting the narrative and coming out with these doomsday scenarios, to come up with that figure and make himself look like a saviour.
Gene Tunny 12:41
This next clip, which is a short one is from Episode 208 on degrowth, with Oliver Hartwich from the New Zealand initiative. Again, it’s on the theme of the limitations of modelling and making forecasts and projections. It reminds us that we should be sceptical regarding any predictions of impending doom. Let’s hear from Oliver.
Oliver Hartwich 13:02
The other idea of course, in all of us resource depletion seems to be one of these ideas that you simply cannot ever refute, keeps coming back. Going back to amorphous Of course as the starting point, but William Stanley Jevons in the 1860s actually predicted the world would run out of coal. But it’s this general tendency to linear thinking where everything is always continuing on a certain path. I mean, there was a letter writer, I believe, in the London Times in the early 20th century, predicting that London at some stage would be under six feet of horse manure from all the offices in the city, it has this tendency to always think we’re just continuing on the same path and it will never change.
Gene Tunny 13:44
The next clip is from Episode 202. On the net zero transition with Andrew Murdock from RK energy. It reminds us of the importance of thinking through all available options, and not coming to an issue with biases and preconceptions. Let’s play the clip.
Andrew Murdoch 14:01
We certainly should be considering nuclear as one of the options. The engineering me likes to consider things with a sceptical and inquiring mind. So what are all of the options? What are the ones that will work? What are the ones that won’t work? What will they cost? What are the probability that we will achieve the outcomes that we’re trying to achieve? So in the context of assessing any type of technology, we should be looking at? What is it going to cost? What are the consequences? How does it impact our society? How does it impact our landscape? My personal view is that that advanced small modular reactors have a role to play, particularly when we’re getting into the very deep baseload. So the power that has to run 24/7 at very high levels of reliability, that’s going to be very difficult and expensive to do with intermittent renewables and it is possible to do it with independent renewables. It’s possible to deal with intermittent renewables and storage and gas topping, but another arrow in the quiver of decarbonisation tools that we could use is small modular reactors.
Gene Tunny 15:11
This next clip is from Episode 209, which was a recording of a seminar that I spoke out with the University of Queensland students that were students in the politics, philosophy, and economics degree. It illustrates the importance of thinking critically of really thinking through the implications of a course of action. I talked about a notorious incident that occurred in the history of convict transportation to Australia. It was the second fleet and 7090 rather than the Third Fleet, I should note, I mentioned the Third Fleet in the conversation with the UQ students. So I must remember that I’ve linked to an article in the show notes, which explains all the relevant facts, so you can check that out. Around two out of every five convicts in the second fleet died either at sea or shortly after landing. The contract is transporting the convicts were paid based on the number who bought the ships in England, rather than the number who disembarked in Australia. And they had the right to sell whatever provisions were left over from the voyage. The results were tragic. Let’s hear what I had to say.
Joe 16:16
As someone who’s working in the consultancy industry at the moment, what’s your take on the ongoing scandals that have been happening involving PWC and other consulting firms at the moment? Do you think this may be raises questions or concerns about the efficacy of outsourcing public policy?
Gene Tunny 16:36
Oh, look, I think there’s always been concerns about the efficacy of outsourcing. And if you look at the history of contracting out, I forget which fleet it was, but was it the Third Fleet, there was one some of the convicts ships are all put out to tender right by the by HM Treasury, or the Admiralty in the UK. And the Admiralty or the the Treasury they want. They want the most people to get out. They want people to come to Australia, they don’t want people to die on the ship. Right? They actually want people to survive the voyage. But the ship owners, the ones who are who win the contract, they want to fulfil the contract to just to the letter so they can get the payment from the Treasury. But they don’t really care much about the people who were the people survive unless you make that explicit in the contract. So and there was a scandal with one of the convict ships, if I remember correctly, I can look it up and we can put it in the show notes. So yeah, there’s always been issues with government contracting, there’s always been concerns. And so I’m a great believer in outsourcing because I think it does save money. But you’ve got to do it for specific things for specific jobs that you can keep a close eye on and where you trust the people to deliver those jobs. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 18:03
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Gene Tunny 18:32
Now back to the show. Rado, this is an ultimate clip is from my conversation with Dr. Paul Rivera, from Episode 213 Regarding the American dream. At the beginning of our conversation, we talked briefly about Paul’s work and economic development for USA ID. He told me a story that well illustrates one of the fundamental challenges in providing foreign aid, again, is on the theme of being open minded this clip about thinking critically and not having preconceptions. Here, the preconception came from a standard model of economic development. So this clip is a good reminder to economists that we shouldn’t fall too much in love with our own models. We need to think about whether any psychological or cultural issues may be relevant to the situation that we’re analysing. Okay, let’s listen to the clip.
Paul Rivera 19:25
One of my first consulting jobs that I ever that I ever took was with one of these large international financial institutions, which shall remain nameless, but they had a they had been working in Western Africa somewhere with these with these fishery fisherman communities. Somebody had the idea that, you know, in my last situation, they said they had worked somewhere in East Asia, I think, I believe it was in Thailand, and they had worked with Fisher communities and they had created this project through which they purchased sort of these laws. on boats with motor but with motors that would help the fishermen they said basically, that the problem in that situation was that there was a sort of a low level capital investment. And so they just infused this capital. And that’s what was needed to bring our productivity. And so they said, copy paste, it worked in East Asia, so it’s going to work in West Africa. And they they did absolutely no consultation. Okay, so I came in actually, as an ex post evaluator, about three years after the project had been completed. And so I go in to this community where I know they had worked. And I started asking about the boats and the fishermen and how things are going and people are looking at me with blank stares, like what are you talking? I’m like, I’m like, a few years ago, there was this project and this organisation came, and they’re like, Oh, you have to talk to the chief. And so this particular country still had sort of a chief says chief type chiefdoms society organisation, right? So they take me to the chief, and the chief walks me down to the beach, and I see 10 of these boats upside down, sitting on the beach completely rotted out, and there’s no motors. Okay. And so what they, when I started asking about it, he said, Well, what is what essentially they didn’t understand was that their society is a very highly structured society. And the fishermen, they were considered to be sort of not high loss, high status, folks. And so this organisation had come in, and given a very high status gift, in effect, to a relatively not high status person. And so the natural thing for them to do was to say, I can’t accept this gift. So they gifted all of the boats to the chief, the chief is the chief. So the chief doesn’t fish. He doesn’t, he’s not a fisherman. So the chief basically sold the boats, sold all the motors, he used the income to buy himself a new house in Switzerland. And that was it. Right? So what happened, right, and I can, I can give you five other similar examples. There was there was basically they external parties came in, they gave some sort of analysis of what they perceive to be the problem, they copy pasted a solution. And they put in millions of dollars for it. And at the end of the day, there was no real impact from that, because they failed to secure the buy in from the community, they failed to do the basic consultation that would show you know what it is that was actually needed in those communities. So you know, that’s our, that’s our big thing is really, really engaging in listening. You know, before, you know, when we talk about wasting taxpayer dollars, and that sort of thing, it’s our responsibility to make sure that that’s that that’s going to be used in a proper fashion, you know.
Gene Tunny 22:44
Now it’s time for our final highlight. It’s another clip from my wide ranging talk with UQ students. And it’s another reminder of how regardless of the power of economics as a way of thinking, economists do need to consider insights from other disciplines. The clip begins with a question from the event MC Joe Christiansen, let’s hear it. Russ Roberts, who is the host of econ talk a podcast, he refers to economics as an imperialistic discipline, this idea that, you know, being like, you know, economists often try to apply economics and economic thinking too broadly, to domains where the assumptions may no longer hold, and its utility is questionable, I guess, someone that might come to mind is someone like Gary Becker, you know, bringing the idea of economics and supply and demand to the family and areas that typically it hadn’t been applied to before. And for you personally, what do you think the limits are of economics as a discipline, and other things that economics can’t explain? And we might need other sort of perspectives to understand? I think, certainly, I mean, even economics requires other perspectives. So I mean, I think economics is an incredibly powerful tool. And I mean, you know, it’s a science of the economy and studying the economy there. There’s some core economics, you need to know, where it gets difficult is trying to predict behaviour and, and in in cases where people don’t act fully rationally. And that’s what you need to bring the psychology. Right. So I think any idea that economics is the imperialist discipline, and we’ve got all the answer is I think, that was destroyed by the financial crisis. I mean, maybe up until 2008 People could have believed that, but after 2008, I think there was a recognition that okay, we haven’t really solved the business cycle. We thought we’ve solved the business cycle is this Great Moderation. markets aren’t always rational. You can’t. There are periods of irrationality and economics is not going to help you there. That’s where you need psychology to bring Psychology and that’s why behavioural economics is trying to bring in psychology with economics. So, yeah, I think there are clearly limits to economics and one of the one of the important limits or considerations, is that economics to the extent Well, if it’s, you could say it’s a science or it’s a study a field of study, it can answer questions of fact, or we can make predictions. Or we could argue, analyse what might be the most efficient course of action from the perspective of consumers consumer welfare, or from economic welfare, broadly construed. What we can’t necessarily answer is what’s the best thing to do for society? Because then you’ve got ethical issues, value judgments, how do we okay, if something is affecting the environment, for example, and that affects future generations? How do we, how do we analyse that that those can be difficult issues? Or how do we make choices regarding health policy measures? So it’s not always they’re not always issues where economic considerations are the final determinant, you may need to bring in value judgments? The whole distinction that thing was David Hume between isn’t bored. Yeah,
Joe 26:14
yeah. Yeah. Yeah, good. All.
Gene Tunny 26:19
Right. Oh, those are all the highlights that I have for now. If you’re a regular listener, I’d like to thank you for tuning in over the last 12 months. In 2024, I’m aiming to dive deep into some critical issues, and to really explore all the relevant theory and evidence on them. Next week, I will talk about some recent things that we’ve learned or relearned about the limits of fiscal policy based on our experience during the pandemic. If you’re a new listener, I hope that you continue listening to the show. Whether you’re a new listener, a regular listener, or an occasional listener, please let me know how I can improve the podcast. Over the years I’ve been grateful for all the feedback on what’s been said on the show, about the types of guests you like and the topics that you’d like me to cover. I want this podcast to be as informative and as objective as possible. So please get in touch with any ideas on how I can improve it. My contact details are in the show notes. That’s it for this episode. And all I have to say now is Happy New Year 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.
28:06
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
John August, a Sydney radio host and Pirate Party of Australia official, returns to provide feedback on recent episodes about nuclear power, COVID policies, and government outsourcing and consulting. John discusses his generally positive view of nuclear energy with some qualifications and provides his thoughts on the analysis of COVID restrictions presented in a recent episode by Prof. Gigi Foster. John also weighs in on the challenges of government service delivery, noting potential upsides and downsides to outsourcing and cautioning against contractors dominating policy development.
John August is the Treasurer of the Pirate Party Australia. John does computer support work in retail and shareholder communication. He is passionate about justice and ethics in our world, particularly as it plays out in law generally and intellectual property in particular. He has stood on behalf of the Pirate Party in the Federal seat of Bennelong and also as a Councillor for Ryde City Council.
Along with technology and law John is also interested in spoken word and poetry. He broadcasts on community radio and hosts the program “Roving Spotlight” on Tuesdays from noon-2pm on Radio Skid Row Marrickville Sydney, and writes about his ideas on the website www.johnaugust.com.au. You can keep up to date with what John is up to via his Facebook page.
Nuclear power holds promise as an energy source, but challenges around risk management, technology development, and public perception still need to be addressed.
In John’s view, there are reasonable arguments on both sides of the debate around COVID restrictions, with disagreement centring around difficult-to-determine counterfactual scenarios.
Outsourcing can benefit the government, like additional capacity and fresh perspectives, but oversight is needed to avoid issues like mission creep or perverse incentives.
Transcript: Nuclear Power, COVID Policies, & Outsourcing: Thoughts on recent episodes w/ John August – EP220
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.
John August 00:03
Over time, the Public Service changed from this institution that was giving Frank and fearless advice to one that was basically mindlessly implementing government policy without challenge or question.
Gene Tunny 00:20
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, it’s the last episode of 2023. And I thought I’d take the opportunity to share some feedback on recent episodes from listeners. I caught up with previous guests and regular listener John August recently for some of his reactions to some episodes. If you’ve listened to my previous conversations with John, you’ll know he’s a radio show host in Sydney. He’s a member of the Pirate Party of Australia. And he always has interesting things to say. So I’m glad I caught up with him for his reflections. We talked about nuclear power, about COVID policies about consulting and outsourcing. So these reflections of John were inspired by recent conversations that Tim and I had with David Hendry, and with GG Foster, and about a conversation I had with university students. I’ll put links to those episodes in the show notes so you can check them out if you haven’t listened to them yet. If you have any thoughts on what genre I have to say in this episode, or ideas about how I can improve the show in 2020 for them, please get in touch in find my contact details in the show notes. One really great bit of feedback I’ve had recently came from radio it was in a shale. He had some kind words to say about recent episodes with John Cochran and John danced. So thanks for that shale. One of the really good points he makes regards health insurance, so quoting shale, regarding health care and social security. Those are both sticky wickets because of the adverse selection problem. Any medical system whether entirely socialised entirely private or some mixture of the two suffers from the fact that people in their working prime have little incentive to contribute to pooled insurance or annuities, which benefit older strangers more than themselves. Privatisation risk spiralling costs socialisation risks long wait times and rationing of services. I think this is a really good point about the trade offs involved. And one I’ll have to explore in a future episode. So if you think this is a topic I should do early next year, then please let me know. Right. Okay, let’s get into it. I hope you enjoy my conversation with John August. John Agus, good to be catching up with you again. Yes.
John August 03:02
Good to be talking. Again, Jean, you’ve got a lot of interesting discussion on your podcast. And I’ve obviously stuck my order in and a lot of ways on a lot of topics along the way on my own show. But yes, good to be here again.
Gene Tunny 03:14
Excellent, John. So some of the issues I’d like to chat with you about based on the conversations we’ve been having in response to some of those podcast episodes, keen to chat with you about nuclear energy, you’ve got some views on nuclear, and also the episode that I did with Gigi Foster on COVID. And then consulting and outsourcing and possibly we might get on to crypto if, if we have time to start off with on nuclear energy? What’s your position on nuclear? So we’ve had a lot of discussion in Australia about possibly, you know, opening up or allowing these small nuclear reactors? Do you think that’s actually feasible? So one, there’s a question of feasibility. And two, there’s a question of desirability. What are your thoughts on that, John?
John August 04:07
Well, I think it’s desirable, it may not be feasible. But to try it as well, I’d say there’s a lot of ideas I have swirling around and I will get started on them. Like, one of my favourite ideas is to take our existing power stations and retrofit them with a nuclear boiler. And that, you know, people talk about just how long it takes to make a whole new nuclear reactor. And that is true, it is quite an amount of time. But you know, if we had that technology knocked that out, then you know, I guess retrofitting existing new power stations with nuclear actors would be a good thing. And then you also have your small modular nuclear reactors and one of the things you’ve got to say about those reactors as much as I am feeling so positive about their promises In a potential, the technology isn’t there yet. Now, my more contingent statement is, you know, let’s have a list of things once the technology does five or six things in will officially say it’s a goer, and then run with it. Now, one of the things that I sort of straddle the fence between nuclear and renewables. And if you go back, you know, 10 or 20 years ago, there all these people promoting renewable saying, you know, one day we’ll have good solar panels, one day, we’ll have this one day, we’ll have that. And if you look at the last 10 or 20 years, I think we have made considerable progress on those fronts. But the point is just like I was willing to give renewable power a bit of slack back then, in the same way, I’m willing to give nuclear power a bit of a Slack now and say, Look, some of these things aren’t quite nutted out at the moment, but maybe they will be in the future. And you know, that’s a reasonable position to say, let’s wait till these things are sort of working. But in broad terms, going back to nuclear power itself, you know, regardless where we’re talking about new technology or whatnot, there’s like, so many, so much criticism of nuclear power that I think is ill founded. And one of the things that people claim is that, oh, there’s no new nuclear power stations coming online. And I believe there’s one coming online just reasonably soon, or in the next six months or whatever, in the US. Admittedly, it’s been stalled for about 10 years, but it’s finally coming online. And, you know, one of the things is that, like, you’ve got, I think, nuclear reactors elsewhere in the world, I think India, some countries in, in and around Saudi Arabia, are building them. And, you know, you can wonder why are these other nations thinking that this is a reasonable thing to do? The cynical comment would be, you know, they don’t value human lives that much. Or you could just say, Look, they are a sovereign nation, which is making their own calculations and their own decisions, and they think it’s a reasonable thing to do. So in broad terms, I’m actually quite positive about nuclear power. Because even with Shinobu, in Fukushima, and so on, you grind through the numbers. And basically, conventional coal fired power stations built kill a lot more people on a per kilowatt hour basis than nuclear. Because your nuclear accidents, look, they are quite spectacular. Let’s not deny that. But there is some details underneath that, that with a coal fired power station, every bit of coal has to be mined in the mind and transported to the power station with nuclear power, that you have a certain amount of mining and each step down the track, it becomes more and more concentrated till it’s this lump of uranium, you’ve just got to get to the nuclear power station, you don’t need to do it very often. So there’s, there’s basically less fatalities overall. And also, this is one of the things that even though I’m an atheist, I suppose sometimes I tap into concepts like original sin, and so on. And look, with Shinobu, I think we can legitimately say, that was an artefact of the way they did things in the Soviet Union. And like, the reactor had its own faults Built in, the people running it weren’t properly trained. And they did some stupid things, and so on. So so that’s one thing you say there. And with Fukushima, there was a problem with the fault analysis of it. There’s something in engineering called failure mode and Criticality Analysis. And it’s my view that if they properly assessed the Fukushima reactor, they might have actually uncovered this floor in this design, the possibility that tsunamis would not get out, and basically take an action for that maybe elevated their backup reactors to the point where, you know, they were not in a basement that would get flooded, or whatever. But having said that, this is where I talk about original sin, because I don’t blame that nuclear technology. But I do wonder about our human ability to properly manage this risk. And maybe that’s an inherent problem, but the other side of it and who knows, maybe we’ll get into bureaucracy, later on. But I was speaking to a administrator of a nuclear reactor in the US. This was probably a good 10 or 20 years ago, and he was telling me a story that he felt he was being paid by this the signature not by the hour, because in a given day, he signed 500 different bits of paper. Right now, the point is, look, this is a dangerous technology, it needs to be regulated by the government in an appropriate way. Okay, so I think we have to acknowledge that but when they say nuclear power in the US is really expensive. You wonder if it really is expensive. If, or it’s expensive because of the excessive bureaucratic overheads that are piled on it. So, you know, that’s sort of one of the things that I think about. And the other thing is that people say, while nuclear power can actually be very cheap, once you get the reactor running, it’s such an investment to get going, that like the financial markets, you know, they struggle to deal with that. So you might say, you know, sometimes it is interesting that, you know, with, with some people who are critical of nuclear actors, how a lot of the time they’re critical of the market, and maybe that’s a legitimate thing. But then when it comes to nuclear power, they suddenly think that the insurance market is absolutely perfect, while at other times they think the market is totally dysfunctional. And so I sort of say, well, how do we deal with this risk? How do we insure it? And you know, if you look at the deeper picture that basically more people get killed in coal fired power stations, and I don’t know, it was 10 years or more, I think I was checking out an eclipse in China. And I checked out in the newspaper, and they said, you know, some sort of headline like, last year, we had an amazingly good year, only 40,000 people died in coal mines. Right. Right. So so they have a different way of looking at things. Obviously, we’re pretty good with power mines in Australia. But if you look at the global picture, you know, there, there’s more going on there. So what some of the stories that the idea that nuclear waste, is that obnoxious, I tend to think there’s a fundamental trade off here, either you have a lot of pollution in the atmosphere all around you, or it’s all located in one place, and you can point a finger at it. And I have to say, I am much more comfortable with it being located in one place where you can point a finger at it, then it sort of being everywhere. So I’m actually comfortable with nuclear waste. Okay.
Gene Tunny 11:57
And John, is that the Pirate Party position? Are you are you still with the Pirate Party and the I
John August 12:03
am still with the Pirate Party? And I suppose look, we mostly, let’s say there’s a diversity of views on within the Pirate Party. I think our main position, though, is we shouldn’t let we shouldn’t lift the ban on nuclear power, and let things unfold and progress and develop. And, you know, that’s, I think that would be a fair assessment of the position of the Pirate Party on nuclear power. You know, that we don’t put Well, the official position is not to particularly favour it, but let me know, let’s set up a situation where if it’s good, it can show itself to be good.
Gene Tunny 12:43
Yeah, yeah, I think that’s, that’s fair enough. Okay. We might move on to the COVID discussion I had with Gigi Foster. So you had some reactions to the conversation with Gigi, would you be able to take us through First, what were your reactions to Jay Jay’s thoughts on COVID? And the big? I mean, Gigi has analysed, you know, she’s run some numbers. And she’s concluded that, you know, the COVID restrictions, lock downs. In particular, school closures ended up costing young people so much more than any benefits they gained. And I mean, her conclusion is that from a societal perspective, it didn’t make sense, either. So could you take us through what your reactions to that episode? Were please, John?
John August 13:37
Oak? Okay. Well, the point is, I can think of lots of concerns I would have with her analysis. But let me also say at the same time, I haven’t actually sat down and cranked out the numbers. But still at a conceptual level, I could see so many problems with the way she had done her analysis. Now, let me first off say that, you know, I think it’s a healthy thing to do these styles of economic analysis. I think that Jodie Foster was, I guess, you know, basically people were having a personal galette are harassing her and, and I don’t condone that I’m very sympathetic to her in that situation. I think it’s very sad that that happened, because part of me says, I think she’s wrong, but she should be allowed to speak that wrong and we shouldn’t try to censor her. So, but at the same time, there was a certain amount of emotion in her argument where she was presuming that she was correct straying that she was engaging with people, and they were just talking past each other. And there was no, there was no accommodation, no engagement. But I also know that it did seem to me that on the one hand, she was claiming to be this objective economist that was just going through the numbers, but you could also see some definite, I guess, emotional leakage. In the argument that she made, but to try to sort of talk about, I guess the problems I saw with her analysis was where she wasn’t working through what I consider to be some illegitimate costs of COVID. And basically, looking at Rip, because there were the things that we saw in Italy, in the US of, you know, basically funeral homes being overwhelmed with hospitals being overwhelmed. And, you know, I will look, I’ll listen to a detailed argument, if you want to say that those pictures were misleading and not representing the underlying statistics. But, you know, I would be very surprised for me, you know, they let it rip in the US, and Italy, and things got quite bad. Another thing is to sort of say, look, Gigi was saying, oh, you know, the people were asking for, for lock downs, and clamp downs, and so on. And if you look at what was going on in the US was just so many people saying, on our COVID is not a problem, we’ll sort of just, yeah, people are talking nonsense. It’s just a little flu. And, you know, there are a number of tragic cases of people who just thought, Oh, this isn’t going to be a problem, and they caught it, they died, or they got very seriously ill. And then they suddenly thought, oh, cripes. COVID really is a thing. So I challenge that narrative in terms of what did actually happen in the US. But look, you know, I now have a doctor in Melbourne, who was saying, Look, guys, this is a respiratory disease fundamentally, and people are overreacting sort of worrying about surfaces and so on. And but, you know, he was actually saying, Look, you know, breathing on each other is an issue, but surfaces really isn’t an issue. And you know, there was sort of an overreaction there. And I do remember, I think I spoke to an epidemiologist on my own show. And he was willing to say, look, in the latest stages, maybe we should have lifted the lock down sooner than we did. But certainly, he was going to say, look at the early stages, lockdown was worthwhile. Now there was this whole story of flattening the curve, and the hospitals being overwhelmed. And you might remember that concern. And I think that was a legitimate concern. And you know, some of the stories about Sweden, you know, a lot more old people died than they expected, their health services were overwhelmed. You know, the story about rounds wound Sweden was not as rosy as is made out from the outside, though, certainly they took a different approach. And that’s worth paying attention to. But you know, the other thing is, as far as young people is concerned now, you know, sure, it’s good, that they’re educated, it’s good that they have a job. But in a sense, it’s also good that there’s an economy to provide services for us all. And if that economy is disrupted, then that’s a bad thing. And you can say, look, how much is it going to be disrupted when the health services are overwhelmed? You know, when there’s so many people having COVID, so many people going off work, they’re not off work, because it’s locked down. They’re off work, because they’re ill. You know, that is what I guess you call the counterfactual of a situation in Australia being somewhat like that in Italy, or the US. And you know, your GI, we’re talking about qualities. And I would still say that there is the whole thing of like, Sure, it’s, maybe some people just get COVID Very lightly. I remember I had, you know, two decent nights of fever. It was a bit strange, but no, I have actually had worse, I guess, infections or flus and COVID had had a different trajectory. But equally, I think I’d had two in two backs vaccinations at that stage, so maybe it could have been a lot worse if I hadn’t been vaccinated. But the point is, you can actually get long COVID. And if you have long COVID, that means you have a health impact, where you’re knocked around for for quite some time. And I remember a woman I know, she got COVID. And I think a month later, you know, she had, she was struggling to walk upstairs. You know, that’s how badly off it affected her. And I think there’s that sort of effect, ongoing effect on the hill. So you don’t just say, look, either you’re alive or you’re dead. And there’s no grey area in between, I think the grey area in between is quite significant. And once we had vaccinations, alright, you deal with it differently, but before you have vaccinations, then it is appropriate to say, let’s contain the outbreak. And I do remember there was a time I think before, before Delta That’s right. And you know, we Australia had been cleared of COVID and you know, I was sitting at the beach looking at the looking at the beach and thinking this is part of the shoreline of Australia and We’re here and we’re protected by ocean and were safe. And that was truly an uplifting feeling. And keep in mind politically in Western Australia, they had what you might call a pro COVID reaction, because we in the, in the eastern states, were looking at the US and Italy and shaking our heads, and Western Australia, they were looking at the eastern states of Australia and shaking the head and thinking, thank God, we’ve gotten away with COVID. And yes, they wanted their lock downs, and they got their lock downs. And then you know, that government was returned with an astounding majority, because partially because of its behaviour around COVID. So, so I guess that’s going off on quite a tangent. But the point is, you know, you’ve got to contrast against Western Australia to the to the eastern states and their experience of it. But what’s the other thing is sort of like, during the lockdown, some businesses would have reviewed their processes done all the maintenance that have been putting off. So, you know, you want to have a productivity boost when you came back. But the other thing that Judy also mentioned was, look, we got our put ourselves into debt. And I will actually have to say that some of that money may not being targeted, as well as it could have been, you can wonder, was that an honest mistake? Should they have known better? Okay, that’s a more complicated issue. But I’ll certainly say that. But you know, the Liberal Party finally figured out what it was like to be a government and you had to spend some money from the government coffers, I suppose. So then they finally finally got to find out what it felt like. But, but the thing is, in going into debt like that, you’re hopefully giving the economy a soft landing, it’s not crashing into a wall. Now, the problem is, Gigi might well say, Well, I avoided any sort of soft landing hard landing, you would have the consequences, you know, would have been like Sweden, that would not have been that bad. But I believe we manage COVID, we went into debt, we went into debt so that our economy didn’t hit a wall. And in fact, you know, some people were surprised at how the economy bounced back. After like the COVID Depression, the economy just came back. And, you know, one metaphor was that, you know, we had the embers that were still warm in the fire, and were able to come back, you know, we had all the cycle couriers keeping things going during lockdown. And so the economy was able to recover. But I guess what I’m trying to say is, look, my argument is yes, we went into debt, some of that money was ill spent, but broadly speaking, we got the benefits for going into debt. And, okay, and a few things that I will say about that I agree a teensy bit, or think about the possibilities with her argument. Look, okay, SARS, various other I think it was swine flu. Maybe some people were saying, Oh, this is gonna be bad. And it wasn’t as bad as it was. But keep in mind go back at 20 or even 30 years, the smart people were saying, the next pandemic epidemic was spread across the world, through the airline system. And that’s what they said, what happened? And that’s what happened. So, you know, I think so I engaged with both the fact that God legitimately says, Look, some people were overstating the story. And she’s talking about people voluntarily catching COVID To, to sort of give themselves immunity. And this is where I sort of have this engagement of like, you know, an honest volunteer response that makes a conscientious reaction to the situation, I would have thought engaging. Well, Judy says, maybe you get a whole bunch of young people who are willing to catch COVID, take them out to the country, put a campsite there, bring a few people with COVID, everyone gets COVID. And then once everyone has got COVID, and everyone’s got cured of it, then you bring them back into society. And you’re as it were isolating the group of people that do that. And I personally think we could have been a bit more flexible with COVID, where if you wanted to attend a funeral, or some event, you define, let’s say, 20 or 30 people ahead of time, and two weeks out from the event, you isolate yourself at home, and people just drop off eskies of food at your door. And then you all go to that event and then for two weeks after people drop off excuse of food at your door. So you’re still allowing people to attend funerals, but there’s also this this hybrid of sort of quarantining you more stringently than would have otherwise been the case. So notice, and I do engage a little bit with some of Judy’s ideas about we could have gotten immunity and deliberately caught COVID to help things along. So admittedly, okay, there’s my reply to what she said. I don’t know how structured that was, but yes, I thought I blurted it all out anyway. Yeah,
Gene Tunny 24:59
yeah. minutes no doubt that GGS GGS views are I suppose you’d say controversial. I mean, I think there’s a, it’s a good work she’s done. And I think it’s great that she has tried to put it in a framework where we might be able to come up with a rational answer to this. Although, you know, it is challenging because there are, as you said, the challenge is, understanding what that counterfactual is what would have happened. I think my idea
John August 25:29
of what we avoid now is very different to what Gigi, we avoided. I think that’s that’s a fundamental point of disagreement. And as I say, I’m just reacting as best I can. I let me be honest, and say, Look, I’m interested, I’m passionate, but I can’t afford to spend the sort of time on this that Gigi has. So you know, she’s, she’s got one up on me there.
Gene Tunny 25:52
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 26:28
Now back to the show. So a couple other points, Mike. So you talked about, you know, all of the debt now. And we came roaring back. And I mean, partly that was because of all the additional money that people had in their bank accounts that was that was financed by all that borrowing. And so, yeah, we just had this extraordinary recovery. And then we had the inflation because of, you know, too much money chasing too few goods, so to speak. So look, I think, yeah, the stimulus was definitely over done. I think they we recognise that, in hindsight, having worked in Treasury, and having, you know, worked on a stimulus package, the one in 2000, and 809, I know that at the time you don’t have, you just don’t have a lot of time to be able to develop these things as rigorously or as well targeted as you might like. And I think they did the best in the circumstances. And yeah, and I was just thinking about job keeper. I mean, that was at a time when we thought the world economy was just, it was just collapsing, right. And I mean, there was so much pessimism in late March, and they just had to come up with something in a few days or a week or however long they had to design it and announced it. And it was as simple as that.
John August 27:51
I suppose the different layers are, do you want to say it was a mistake or not? And then do you want to say it was an honest mistake or not? You know, do you want to say really, they don’t want to say, well, they maybe they made a mistake, but Well, fair enough, you know, that that’s, I guess the range of ways you can relate to it.
Gene Tunny 28:12
I think they did the best they could in this in the circumstances. But you know, looking at it, you know, some of the design features. In hindsight, were pretty bad.
John August 28:22
I’ve actually spoken to someone in business. And he thought that the way that you would prove that either there was a loss related to COVID, or you would or wouldn’t shed shed staff or whatever, he thought it was very easy to put up your hand, even if you weren’t going to be affected by COVID. And he said that, and I won’t mention the guy’s name, obviously, look, he thought he put up his hand just like everybody else did. But you know, he was actually thinking about what hoops do I have to do to prove that COVID is affected my business and he even he felt you know, the the the the hoops yet to jump jumps through weren’t that stringent? You just put up your hand and I will give you some money sort of thing. That was that was his view of it? And I mean, admittedly, it’s good, good, good one two years since I had that discussion with him. But that was a story that he told me at the time and and then there is a whole thing of these businesses that claimed all this COVID help. And then, you know, however down the track, their their profit margins went up considerably. And you thought I thinking well, hang on, maybe you should pay some of that extra profit back to the government. Isn’t that the reasonable thing to do? And, you know, but that okay, but that’s perhaps going off on a bit of a tangent, I have to say,
Gene Tunny 29:32
yeah, there’s a, there was a good review of job keeper, which I’ll put in the show notes. I thought it was well done. And it did raise a lot of these issues and, you know, issues with the design of it, and okay, if we did it again, we’d probably do it differently. We’ve learned from this experience was done by Nigel Wray who was my old boss in Treasury. So I’ll put a link to that in the show notes.
John August 29:56
I suppose tomorrow. I think it’s the counterfactual. Oh, yes, we got into debt. Yes, we got inflation but the economy didn’t hit a brick wall. Now how valuable is it that their economy didn’t hit a brick wall? You know, that’s that’s to my way of thinking. That’s that, that those are the things you got to balance. Yeah.
Gene Tunny 30:15
Yeah, yeah. Yeah. I agree with you there. Okay. And the other. Oh, yes. The point about lock downs and the all of the restrictions. I think there is a consensus emerging that we probably did go too far isn’t there. I mean, maybe early on, there was a need for a reaction, but there was an independent review by Peter shergold and some other academics and public policy and public health experts, which I thought came to the conclusion that we were imposing them lockdowns when we shouldn’t have or interstate border restrictions. I think they came out against those. So we just went we went too far in our, in our restrictions. And I think that, you know, that possibly, you know, lends some support to what Judy’s been arguing. I mean, we probably we should have listened more.
John August 31:14
Talk to the Western Australians and see what they think about that. Not the Western Australians. Yeah, yeah. Yeah,
Gene Tunny 31:21
I mean, Queensland is too. I mean, we loved it in a while. I didn’t but other Queenslanders seem to love it. And, you know, Anastasia, Paula, che was reelected resoundingly. So yeah, look, people did did love it. But gee, gees argument is that it was, you know, her argument is that it was driven by fear. It was irrational. Now, I mean, that’s, that’s a difficult thing to figure out.
John August 31:44
All I can say is, I haven’t spoken to a bit if I had discussed it, whether I would like to think I would have had an objective and moderately dispassionate discussion whether or not been one of the people whose brains were totally blanked as well. I’m not, I’m not sure. Well, but that’s not the exact words, but the sort of sentiment that she was driving it.
Gene Tunny 32:06
Right. Okay. Well, I think it’s, uh, I mean, I think you make some, make some good points there, John, and ask them good questions. And I’ll, I’ll put a link in the show notes to the episode with Gigi, because I think it’s really worth listening to, I think Gigi is, you know, she’s thought a lot of thought a lot about these issues and done some really provocative, really thought provoking analysis that I think is definitely worthwhile. Okay, one thing I wanted to get back to John, I just remembered about nuclear. You mentioned there was one reactor being built in the states that you’re talking about this one, you’re not talking about this utar project idea that was abandoned because it was news last month, maybe? I don’t know if you saw it about new scale, new scale NS utar project in blow to US nuclear power ambitions. Was that the one you? You thought you were thinking of?
John August 32:56
So yeah, but that that story you have there is, is not to do with a regular nuclear reactor, that that sort of installed for 10 years, and finally came online just recently. And the reason why I was talking about that, who knows, maybe you want to actually link to my own show where I had this discussion, but there was someone involved in brains. And they were saying, look, there’s no nuclear reactors being built anywhere around. I did my research. And I found, you know, there, there were a few in the Arab nations, there was this one in the US that had just come online recently. And I guess I was pushing back saying, you know, maybe they may not be building that arrayed or not. But you know, I think, particularly South Korea is is cranking them out. You know, there’s basically a decent number of them being built around the world, which is contrary to what this gentleman was saying. And I do think you got to say, look, if now if the Indians are making their assessment of the South Koreans are making their assessment, the French are making the assessment. Do we want to say that they’re all stupid? And really, that’s sort of the thinking I was saying, and what the CSIRO have said that, you know, small modular nuclear reactors are not a mature technology, while and maybe they’re onto something there. That’s why I say I’m contingent. I say once you tick enough boxes, then we’ll say this is a goer.
Gene Tunny 34:16
Yeah, yeah. I think you’re right about one coming online recently. I’ve just found on the Energy Information Administration, that’s a federal government US agency. Newest reactive anti Commercial Services Unit three at the Elven W. votable. probably mispronounced that VAG TL E electric generating plant in Georgia.
John August 34:38
That sounds that sounds like it, look, I mean, it’s gonna take me you know, a good three to four, three to four minutes to check through my notes, so I could actually try to find out what these references are. Who knows I can even email them to you after the show.
Gene Tunny 34:55
Yeah, that’d be good. But that’s 31 July 2023. So that sounds like The one you were you were thinking of?
John August 35:01
Yeah. And this was sort of like some International Nuclear Energy Agency, which had, you know, we’ll have all the ones in the US and South Korea, and here and here and here and here and all across the world. And as I say, it’s not a bucket load, but there’s a moderate, moderate number of new nuclear reactors coming online of the conventional variety, not the Small Modular variety. Okay. That yeah, okay. I’ll track that down and send you the notes of that. And obviously, I think you may have listened to some of the show where I had that discussion. So very
Gene Tunny 35:33
good. Okay. Well, that’s so chat about nuclear and COVID. Finally, good. Just so we keep this to a manageable length, we might just cover the outsourcing and consulting issue. So you, you listen to that conversation I had with the university students, the UQ PP. E. S. Society, that that’s correct. Yes. Yes. Yeah. And you had some thoughts on, you know, the use of consulting and outsourcing that’s been quite controversial in in Australia, recently. And now there’s some, you know, I guess, worldwide. There’s the LSE, economist. whose name I won’t try and pronounce it was Mariana
John August 36:18
Mazur. carto. Right. But, yeah, she’s been talking about the experience with outsourcing. But this happened in the UK Government. And there was one time where she mentioned some stuff happening in Australia. And, you know, basically, they’ve had a similar experience over there. And she’s got some perspectives there. But, but, okay, look, I will actually rip in and sort of say that, you know, part of me part of the Pirate Party, we do actually say, look, it’s very easy for there to be excessive bureaucracy. And we do have a more general feeling that there are too many people calculating numbers, but you know, statistics or universities or schools or whatever, and too few people actually doing stuff. So that’s the broad brush thing will actually say about bureaucracy. And also, I think in Queensland, it was Dr. Patel, if you remember him, and our cynical remark was look at how much the Queensland Health bureaucracy Brut grew over the time leading up to Dr. Patel. And it seemed to be mostly concerned with trying to stop the minister from getting embarrassed rather than actually doing good. And you would think if that grind bureaucracy realised its promise, it would have been able to figure out there was an issue with Dr. Patel, as it were, as a result of the regular workings of its own processes. And it was actually as I understand it, some courageous nurses who stood up and said, Hey, there’s a problem here. It wasn’t the regular workings of the bureaucracy. So you know, whether it be me or the Pirate Party, we certainly have a lot of criticisms to make bureaucracy, you know, but we will also say that sometimes the government has got it correct. We do actually think that the CAS did a good job. And it’s been replaced with numerous private providers with twisted incentives, and the whole thing’s quite a mess. But let so so there are those things there. But I guess there’s a whole lot of other things that add to the mix that basically Mariana Meza, Carter has actually said, look, we’ve infantilize the public service to the point where the public service isn’t actually smart enough to properly scrutinise the contracts that they are feeding into the private private service. Because let’s just say, Look, if you’re in a government department, you’ve got some report that needs to be done in three months time, you’ve got a bit of a squeeze on your resources, let’s get this outside firm just to square this on you. That’s probably a very reasonable thing to do. But what he’s saying is that, you know, the private companies, the contractors have taken over, like the comprehensive policy development thing, and sort of taking the lead. And she’s sort of like saying, look, so often, why do we think that the contractors or the will actually have expertise? Now if we want to know what’s going on with health, we ask that the you know, the health bureaucrats if we want to know what’s going on with science, we asked to CSIRO and Marianas political story was looked, you know, the government could have got the CSIRO to make an assessment of climate risks, but they actually got a private contractor to do that. And her suspicion is that they wanted a political answer rather than the objective scientific one that the CSIRO would have would have given. So, so there’s a lot of sort of abuse of that. And to some degree, there’s this like laziness. have sort of like starting to push more and more of your policy development notes, as I say, Sure, a contractor to fix a particular issue, you know, perhaps reasonable, but to take the lead on policy development, and to also think that these these contractors will have good expertise in health in science, like to my way of thinking if you’ve got an issue, you talk to the CSIRO, some academics in a university or an engineering firm or something like that, you know, that’s that if you need to reach outside of government, you know, that’s what you do. Now, one of the things that contracting firm might just have, they might have the outsider’s perspective. And maybe that’s a useful thing to bring in. But you shouldn’t let the outsider’s perspective, you know, stop the insiders, from actually figuring out what’s going on as well. You know, okay, a fresh out pints perspective, maybe that’s the one legitimate justification you might have. But the idea that this ad hoc bunch of consultants would know their science better than the CSIRO seems a bit strange to me. But what’s some other things going on with bureaucracy? I know that if you go to that, I think it’s the cyber the programme, you actually have Malcolm Crompton, who was once a Privacy Commissioner. And he’s actually talking about how I think evil was Whitlam was starting to sort of change the way department heads were hired and fired and allocated. And that this was to try to give the public service more flexibility. But is also saying that over time, the Public Service changed from this institution that was giving Frank and fearless advice to one that was basically mindlessly implementing government policy without challenge or question. And he does say that the right sort of started with Gough Whitlam. But you know, to actually try to be politically neutral. You know, it was John Howard that took it even further. And the original sentiment was good, let’s give people flexibility to prove themselves to demonstrate themselves that free up the public service. But you know, John Howard started to take it away from, you know, the tradition of Frank and fearless advice to, to mindlessly implementing government policy without challenge or question. And you could say that it ended up in the whole Robo debt fiasco. So notice my, my more complicated thing, where I have actually acknowledged that you can have too much bureaucracy going in the very wrong direction. And I’ve sort of introduced that at the start of my talk. But I’ve also said, Look at what’s happened, and I suppose this controversy with those contracting bodies, and just how they’ve basically, you know, basically, you know, had confidential information from government that they have abused and then sold to other corporate clients. And that’s been a betrayal of trust. And yet, you know, on paper, these firms will say, you know, oh, there’s a wall between these different sections of the firm, and that wouldn’t happen. And, you know, well look at you, well, we I can see you’re sort of smiling or shaking your head. But let’s just say, Look, I’m here, I don’t want to mention any names, but it’s amazing how tangled and convoluted any firm can get over time. And, you know, there’s just so many things that are boiling over and you’re, you’re you’re putting out fires all over the place. It’s, it’s amazing how chaotic things can end up. And this is an affirm that I won’t mention names, but it was a good firm, it made a damn good quality product, but by golly, under under the surface, just how, just how, yeah, you’re putting out fires all the time. And I can imagine a similar thing happening in the public service. So or are these private organisations were on paper, you know, you’ve got these rigorous processes and procedures that everyone follows to the letter and you’re sort of going oh, yeah, right. But anyway, so that’s me blabbing about those sorts of things. So that’s my hybrid thing, and unlike the Pirate Party does have their position about bureaucracy and rent seeking. And we do recognise that as a real and substantial problem that by golly, there’s a lot of problems to think about, if you want to think about them.
Gene Tunny 44:20
Yeah. You know, obviously, I’m, it’s a challenging issue for me, because I’m someone who has done some contracting for government and I have, but it’s more along the lines of, you know, occasionally coming in helping out on a report or doing an independent analysis of a specific issue. Now, yeah, there are challenges with this infantilization of the public servants. That’s an interesting way of putting it and I do wonder myself about whether the capacity of the public service has been reduced because of so much outsourcing I think that is a legitimate concern, something that that’s worth thinking about. And you just see it with NDIS. At the moment, like we’ve contracting out so much of that. I mean, that’s just a big, you know, this huge social welfare programme, the National Disability Insurance Scheme in Australia, and there’s, you know, big reliance on delivery by the private sector, and yet it’s overseen by this National Disability Insurance Agency. And it’s not clear to me whether the we’ve got those I mean, I guess we don’t know the rules, right. There’s all of the there are all these inquiries into NDIS. And we’re trying to tighten it up. So it just doesn’t become this huge, cost blowout. But it looks like there’s a lot of women, there’s problems with definition, who’s in and who’s out. But there’s also problems with just blight and rotting by both of these in firms that are NDIS providers. And the government just says, the regulatory agency just seems to lack the capability to to stop this.
John August 46:01
Well, that that is a strange thing. That note, notice earlier on in my narrative, I was saying, Oh, look at these bloated bureaucracies that, that don’t actually deliver on their promise. But at the same time, it’s a strange sort of thing that I will also say, it does feel like a lot of guff government, regulatory agencies just are not sufficiently resourced to do their job properly. And, you know, you end up in this this strange sort of thing where, you know, there’s a mistake made, you get some sort of inquiry, and they point out all these things, and the inquiry probably says, Oh, look, they could do with some more money, and then they don’t end up getting more money. So notice, I’m saying that in some cases, the bureaucracy seems to get bloated. And at some stage, other cases where you really do need some resources, it stopped. So yeah, it gets hard. You know, I
Gene Tunny 46:51
guess if you’re handing out $50 billion a year in, in contracts, or, you know, in funding, which the NDIS is, I don’t know if that’s the right amount, but it’s, you know, it’s 10s of billions of dollars, then you need some you need enough oversight to make sure that that’s not been recorded, and I’m not sure we’ve got that right at the moment. Well, I would
John August 47:11
broadly say I suppose. Yeah. Dealing with these these contracts is not easy. Yeah. That’s that’s, that’s, that’s the generalisation. I’ll make and
Gene Tunny 47:22
a couple other things. You mentioned Patel. So this was Jaden or Patel. I think Jaden Patel, he was a doctor at Bundaberg hospital. And it turns out he wasn’t very competent, and all of these patients died. Really just terrible situation. And I’m trying to remember the circumstances now. Partly is because I mean, there was a shortage of doctors. I mean, we so we were letting I think he was a he was an immigrant, if I remember, and so that I think there’s some question about his exact qualifications, and whether they were actually legitimate or not, or whether they were comparable with with qualifications here. And yeah, part of the problem, I guess, was just poor, administration, poor oversight by Queensland Health. And also we we just weren’t training enough people in, in medicine here in Australia, we just weren’t training enough doctors?
John August 48:22
Well, who knows? Maybe we’ll see common cause here. I mean, admittedly, look, they are obviously we’re trying to be flexible in letting this particular doctor in but I do have the feeling that, you know, our, you know, our medical profession are really don’t want to have sort of people coming in from overseas because it dilutes the amount that they’re able to sort of secure for their services. So having said that, it does get very complicated, where, you know, my my own position, I think it’s reflected in the Pirate Party is like, if we are importing skilled people from nations that are less well off than we are, we should really be making a virtual subtraction of those training costs to our foreign aid budget. And, you know, there is the whole thing of you know, do we want skilled people coming in now, how they’re going to contribute to the economy and so on. And, you know, and sort of like leaning on all those students coming into Australia as a source of foreign revenue, and, you know, oh, my gosh, should get get get sort of complicated. And then people say, Oh, yes, yes, we want to have skilled immigration, I’m thinking, well, if we’ve got skilled people coming in from nations less well than ourselves, aren’t we abusing those nations, you know, and, you know, that’s where the whole thing gets complicated. But let’s say if we quarantine that issue, I think it’s it’s fair to say that doctors in Australia are are protective of their monopoly,
Gene Tunny 49:51
I guess you would say, Yeah, I think that’s that’s correct. Yeah. So that is a that is a an issue. And you know, there’s a there’s a supply side restrict Near and dear. That’s partly the reason yeah, we’re not. We aren’t training enough doctors, arguably and so in because Queensland had a real big growth spurt in the 90s, lots of more, lots more people. Lots of people coming here, big growth in population and therefore, more demands on the health system. And so we maybe our standards did drop in. And it was, it’s quite scandalous. I was just looking at the details. And it turns out there were complaints about that doctor, so giant Patel, in other places who work before Queensland, so in in Buffalo in New York, and hang on, it looks like there was some issues in Portland, Oregon. And so these are things that, arguably our Well, I’d say they should have picked this up, they should have done their, their due diligence. So yeah, that was a that was a huge scandal. That one. The other thing I thought I mentioned is you talked about the CIA is now I mean, we have another CIA, I mean, that brought me, you know, took me back to the 90s. I think they abolished that 96. Didn’t know and how it got and that was a Commonwealth employment service. And yes, yeah, look, I mean, I, I wasn’t sure about how effective the CES was. But I do take your point. I mean, what we’ve replaced it with, there have been all sorts of problems with with that, and concerns about the level of service being provided by many of these. Well,
John August 51:28
one anecdote from an okay, unfortunately, it’s going to be hard for me to map this out and flesh out the details. But, you know, he was telling me a story of, you know, he saw 30 people in a day and place 15 of them in a job. And you go to one of these private agencies, you got to place an appointment, like three days in advance and your front up, and they might well see three or four people that morning, you know, and there’s sort of saying that there’s such a contrast between the effectiveness of the CS versus and, and, you know, I guess you perverse incentives, that there, there are stories of basically people being dragged along to buy become long term unemployed, and then then the agency is finally taken seriously, because there’s extra incentives replacing long term unemployed as compared to short term unemployed, but the CIS had no such distinction, you know,
Gene Tunny 52:18
you get those details of the specifics of the contracts. Right. So you got the incentives, right, or you can have all sorts of problems. So, yeah, yes. So definitely, there’s, there’s issues with outsourcing. I mean, I’m, I think, you know, we shouldn’t be doing looking for efficiencies, and in many cases, it makes sense to outsource but then in other cases, it doesn’t particularly well. And when you do outsource, you got to be extremely careful about how you do it, then you got to make oversee those contracts and make sure that there isn’t any rotting.
John August 52:54
And I’m very pleased and more by accident than design, but I didn’t bite the hand that sees me notice. I was saying that the worth in you know, hiring a contractor to fill in this particular report or this particular issue, but that’s quite different to basically taking over policy development. holdest Bowlus? Yes,
Gene Tunny 53:12
yes. Well, I guess what the some of the big four firms and also BCG, Boston Consulting and McKinsey seem to do very well is really get they get really into the government and or they get their people embedded in some of these agencies to and they’re very closely associated with the policy development and then delivery of of policy, I
John August 53:35
can only suggest let’s listen to some of the videos by Mariana. Cassie, when she sort of goes into that. Yes.
Gene Tunny 53:42
Yeah, I’ll I’ll definitely definitely have a listen. Okay. John Agus, this has been great. Thanks for all your your feedback on and thoughts on those recent episodes we covered? Is there anything else before we wrap up? Oh,
John August 53:58
my gosh. Okay, well, let’s say just say that there’s so many things that I can talk about. There’s a few different guys that you had you had a guy talking about, you know, productivity being a crisis, but he did say some interesting things about intellectual property or junk. I found that that quite Yeah, I found it found, found some of the stuff he was saying quite interesting. And I think you had a guy talking about valuation of businesses. And he was saying, you know, let’s sort of give banks equity in the property for when it gets sold rather than just, you know, to turfing, the turfing, the people who were paying the interest out, but I know you also had someone talking about crypto and some of the I don’t know the details of that show. Let’s say I’ve listened to quite a few shows but maybe not that one. But I would you know, I’m still saying before that the problem with crypto is a whole lot of amateurs are in the field. You can sort of say Oh, I’m in crypto and then you’re on some exchange and my my glib state would be, unless you have some sort of code on your phone that you can write down and transfer to another another phone that is actually engaging with a crypto network beggar theory, or Bitcoin or whatever. If you’re just plugging into an exchange and you’re playing with Lego blocks, you’re not actually doing crypto. Yeah, that that’s my and you know, it is the old cliche that you know, you should only invest in what you’re familiar with. But all the who worry about crypto is to try to get people who know nothing about crypto to be involved in crypto. I think that’s sort of a bit of an issue there. And what am I also thinking about crypto, gosh, that thought is slipping through my fingers? Oh, yes, the thing about crypto is at the moment. The discussion space, if you like, is dominated by snake oil merge. Now, that’s not to say there are some general genuine crypto people out there, you know, hidden behind all the all the all the all the noise, who genuinely want an alternative system of currency because they have problems with the way the central banks and the regular banks relate to our mainstream system of currency. And they are genuinely interested in an alternative. And there may well be people there who are the true believers. But the scene if you like the scene, sad to say, is dominated by the snake oil merchants. And until somehow the genuine players can achieve greater prominence and it not being just all this hooey. You know that the sad thing is that crypto has it has betrayed its promise. It’s gone down this path with all with with the conceptual space, the thoughts face, whatever want to call it being dominated by the snake oil merchants and the true believers being suppressed. You know that the way I’ve described the scene, and in a sense, it said, because I’ve heard the crypto advocates, I’ve heard the passion with which they talk about wanting to go down this alternative path. And while I’m not into crypto, it’s said that their passion hasn’t been realised, you know? Yeah, yeah, fair point.
Gene Tunny 57:25
I agree with you about, yeah, the snake oil, snake oil cycle merchants, I
John August 57:32
suppose. Or if you want to say as I call it, if you want to, say snake oil salesmen, yes, but there’s the old pump and dump thing about talking about some particular crypto. And, you know, basically, some, some prominent people might basically buy a little crypto, and then one week later, they go off and buy it back. Because they managed to suppress the value. You know, those sorts of games, you know, so that that’s getting a bit sad. And Sad to say, look, I’ve listened to a few other episodes. There’s so many thoughts that I have, but it’s hard for me to bring them bring them to mind at the moment. I have to say.
Gene Tunny 58:07
That’s, that’s fine, John. We’ve we’ve covered some, some important issues. So yeah, Happy. Happy to finish up there. So again, thanks for thanks for listening through the and thanks for all the great conversations. Yep. And yeah, I really, really enjoy hearing your thoughts and having having those chats so
John August 58:29
well. I do appreciate it. I know you had some some sort of sentiment that you didn’t want to interview people too often but I hope this is not too often. I know you’re you’re recycling guests to some degree anyway. So
Gene Tunny 58:40
Oh, yes. No happy this. Definitely not too often. I think we we caught up in June, didn’t we? That was when you visited Brisbane.
John August 58:48
Yeah. I think that was that was passing through Brisbane and, and yes, that was lovely. And I guess you had the dare I say you’ve obviously had better sound equipment there. But nevermind. It’s still good to have a chat regardless. Yeah, absolutely.
Gene Tunny 58:59
Okay, John, Olga’s thanks for your time.
John August 59:02
No worries. I’ll leave you to it
Gene Tunny 59:05
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 you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
59:52
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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 Podcasts, Google Podcast, and other podcasting platforms.
Show host Gene Tunny speaks with students from the University of Queensland Politics, Philosophy and Economics Society. They discuss topics such as private versus public sector jobs, the future of consulting, and the risks of outsourcing for government officials. Gene takes an historical perspective and goes back to the time of convict transportation to Australia. He also talks about, among other things, his time working in Treasury during the Rudd Government, and how psychology is relevant to economics. The students express concerns about the consulting sector in light of a recent scandal involving PwC partners misusing confidential government information.
Transcript: Private vs public sector jobs, consulting scandals & economics as an ‘imperialist discipline’ w/ UQPPES – EP209
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 00:03
I mean, I think economics is an incredibly powerful tool where it gets difficult is trying to predict behaviour and, and in in cases where people don’t act fully rationally, and that’s what you need to bring the psychology in. Right. So, I think any idea that economics is the imperialist discipline and we’ve got all the answers, I think that was destroyed by the financial crisis. 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. If you’ve listened to my recent episode on degrowth, you would have heard a little bit of the recent event that I spoke at. The event was hosted by the University of Queensland PPE society where PPE stands for politics, philosophy and economics. This episode features the rest of the conversation that I had with the students. We talked about private versus public sector jobs, the future of consulting and the risks that government officials need to watch out for and outsourcing. In the conversation I picked up there many of the students appear especially concerned about the future of the consulting sector, which is a major employer of graduates. The context is that we’ve had this big scandal in Australia over some PwC partners allegedly misusing confidential information they received from the government. They allegedly used it for private gain. As you’ll hear the students were super interested in the differences between working in the private and public sector, and which was the better option for economics students, I gave the best advice that I could on this question among many others. As with many questions, there’s no easy answer. It says good things and bad things about private and public sector jobs. And a lot will depend on people’s individual preferences and personalities. As you’ll hear, I think that the public sector provides a better training ground for young economists. The work environment and training opportunities are generally much better. But there are challenges in the public sector. As the higher up you get, the more you get exposed to the political side of government, which brings new challenges. That said, there are some people who thrive on that. So it depends on just what you’re looking for. If you have your own thoughts on working in the private versus the public sector, or any of the other issues that we talked about this episode, then please reach out and share your thoughts. My contact details are in the show notes. Okay, let’s get into the episode. I hope you enjoy it.
Joe 03:04
Welcome, everybody. Thank you very much for coming. My name is Joseph. I’ll be your emcee for this evening. And I’d like to say a very, very warm welcome to esteemed economist gene Tunny. He is here with us tonight. He’s the Director of Adult economics, and a 1997 CIS liberty and society alumnus. He is a former Australian Treasury official, and has worked on a range of domestic and international consulting projects. So we’re very lucky to have someone with such expertise. Joining us tonight to answer some of our questions about economics. So I guess to start off with Jean, could you maybe tell us a little bit more about yourself about the work you’ve done and how you maybe came to work in consulting?
Gene Tunny 03:50
Yeah, so I’m an economist, done a broad range of things are taught at this university in the past. So in this very room, subjects such as cost benefit analysis, there’s probably macroeconomic policy that I taught in 2015 in this room here. So I’ve got a background in macro policy budget policy when I was in the Treasury in Canberra, so worked on a lot of issues there, industry policy issues to do with the car industry, the budget debt, so we had to borrow a lot of money again, during the financial crisis. So I was heavily involved in that. And yeah, around probably around 2009, I started thinking I’d be good to for a bit of a change. And a friend of mine, Tony, Hans, was heading Mars and Jacob up here, the consulting office, and he was doing a lot of good stuff, cost benefit studies of all the new water infrastructure we needed because we’re in a drought. And I thought I’d be great to come back to Queensland I think it might have been a wedding that was up at nursery or went up to a wedding, a friend’s wedding. And you know how magical nurseries and the reception was at sales and a probably had a couple of glasses of champagne and thought, what on earth? Why would I want to go back to Canberra when you’re on the beach here and beautiful? That was partly why I wanted to come, I came back. So I worked here at uni, I worked in state government, as a public servant do different analytical roles, workers compensation, industrial relations, then treasury. And since 2009, I’ve been doing consulting since 2014, my own firm and yeah, work for a huge different range of clients, agribusiness companies, some government agencies, industry bodies, major corporations, ANZ Bank, for example, say all sorts of clients,
Joe 05:39
you know, you said in, you know, you were thinking of wanting for a bit of a change up coming back up here and working in consulting what, because for us, consulting and public service are too so the main employment pathways, could you maybe give us some sort of insights into the differences between the two, the, you know, the positive sides of both, and perhaps some, some negative sides or things you didn’t like, as much from either?
Gene Tunny 06:06
Yeah, so the public service is a good training grounds, and there are a lot of a lot of opportunities. They look up to you. So I think if you’re beginning in particular, you’re studying PPE, places like treasury, productivity commission, Reserve Bank, de fat, foreign affairs, and trade, I think they’re excellent places to go to learn about the issues and potentially get training opportunities or international postings that they can be really great opportunities. And public sector. Yeah, it’s different. I mean, the different The obvious difference is that, in one, there’s a mission that set by the government of the day and there’s a, you know, there’s a bureaucratic national, you’ve got to achieve some tasks. So that could be improving the health of the population, running the health system, or the education system, educating people, or could be Treasury where it’s this broad concept of well being, and you’re overseeing a whole range of agencies, you got to make sure that the budget is in good shape. So that’s, that’s a bit more of a, like, every agency has got a different mission. And that’s, that’s what determines that. In the private sector. It’s about profit. So profit. I mean, that’s, that’s what Yep, you need to make money to be able to keep the operation going. So there’s a clear goal, and that ends up driving a lot of things and forcing efficiency. So when I think one of the challenges in the public sector is because you don’t have that, there’s not that focus on profit, things can become a little bit inefficient. Yeah, there’s not the same sort of laser focus on, on doing things efficiently. And going after profitable opportunities. Your mission is set by politicians. And that can be problematic, because sometimes they can change their mind. Sometimes the politicians, I mean, maybe some of the things that they that they’re aiming for aren’t necessarily sensible. But yeah, as a public servant, you do have to try and achieve the objectives of the government of the day. To me, those would be the major differences. But if you want to explore that any more feel free either. Because because I’m not sure about answer that question very well. But that’s just what occurred to me. And with the private sector, I mean, you’ve got like, I work for a whole range of clients. And it can be a different project, like one day, it can be looking at lb farms. So there’s a client of mine, who’s built a big lb farm out at Dundee windy, and he’s trying to extract Omega three rich oil from the the algae. So now he can make some money out of that. And so I’ve helped him get a grant from the state government to do the r&d. And that’s fascinating. But then another day, I might be looking at parcels and issues to do with freight transport. So there are a whole range of things that you study, whereas if you’re in a public service agency, one of the risks is you could what you want to avoid is staying in the one spot and just doing the day to day because there is a lot of day to day responding to emails or letters from the public and writing Minister replies writing speeches, writing question time briefs, you want to get into an area where you you’re not. You’re not doing that day to day public service stuff, but there are a lot of good places like treasuries, terrific. Reserve Bank, doing rigorous analysis trying to inform the monetary policy decision that that’d be a great place. Yeah.
Joe 09:32
Super interesting. Yeah. I mean, I would never have even sort of imagined that consulting firm would be working out in Gander windy.
Gene Tunny 09:40
Oh, well, I mean, I mean, in Queensland, Australia is huge in agriculture, okay. And you’d be blown away if you if you go out there and just see how advanced a lot of these operations are. Here. There’s a lot of work for consultants. I mean, economists are probably I mean, we would have only a very small part of the work I mean, this has worked for Engineers is work for agronomist experts in agriculture. Yeah, there’s all sorts of all sorts of work and in a lot of things are automated. Yeah, they’re increasingly used. I think they’re even using AI now to work out, you know, optimal irrigation and optimal spraying of pesticides and things like that. Yeah, right. Yeah.
Joe 10:21
Very cool. That’s a good point. I think that you said that, you know, economist consultants would be doing a small part of it. And I guess, for your firm, or just for consultants, in general, as you say that the jump between lots of very different projects from different clients? How do you sort of go about preparing for a new client or, you know, perhaps in an area that is not necessarily somebody that you’ve worked before, but still have to deliver services or help your your client in some way? Well, you’ve
Gene Tunny 10:54
got to be a quick study, you have to get across the issues as best you can. And it’s like, if you’re doing an assignment at uni, you want to start early, you want to get all the resources, do the reading, learn as much as you can ask questions. So I mean, when you’re doing consulting projects, the the client is they’re motivated to help you to assist and to provide all the information they can see, it’s about being a detective or a journalist, and asking questions, to get all the information you need. But you do have to be a quick study. Ultimately, the, the Principles of Economics are the same. And I guess you learn a process of gathering the information, you sort of get an idea of what they might have on hand, what you might, sometimes you might need someone else to help out, you might need an engineer to come in and, and help work out how to solve a particular problem like in, in on their farm or in their factory, and they might have an estimate of what that will cost. You might need an architect or a quantity surveyor to do lifecycle cost estimates for a building that you’re doing a cost benefit analysis on. So there are the experts that you might have to bring in. But yeah, you need to have a, you need to plan you need to think think with the end in mind, begin with the end in mind, which is one of the seven habits that Stephen Covey talks about, it’s so true, you got to think about what’s the ultimate thing I need? And where am I now? What needs to happen to get there, you got to figure out the most efficient route to get there. So a lot of problem solving.
Joe 12:26
Yeah. And that’s, I think, a really big, exciting thing about economics and about, like studying policy and things like that is that a lot of it is problem solving? Would you have any advice for any students studying economics, or PPE, or any sort of related discipline in sort of getting into the consulting world, post
Gene Tunny 12:46
graduation, I mean, I wouldn’t get into consulting unless you are super passionate about it. Or, I mean, there are some good places that are working to death. I mean, if you get a, if you get a really good GPA, I don’t know what you need to get now that if you can get into some or like McKinsey, or BCG or aubaine, they’re really good training grounds for getting into C suite or, or getting into a, you know, really top job. So I think if you if you could get into one of those coming out as a grad, that’d be great. Other places where signing, you’re probably better off going, you want somewhere that will give you I mean, it sounds silly. It sounds terrible. What’s the word I’m trying to think of the word, but you want something that looks good on your CV, right. And so you want something that is recognisable, and that’s why Treasury or productivity commission or RBA works so well. So I’d be applying for somewhere like that and get good training and, and learn how to and what’s good about those biases is that they have high standards, and they teach you how to write well and communicate. And I think that’s very important. And they can also give you international opportunities. So one of the things that I that blew me away when I went into treasury was just all the international opportunities there. You work on issues with OECD or G 20, or IMF, World Bank, and Treasury people get postings all over the place. Beijing, Tokyo, London, Jakarta, Washington, DC. So that’s, yeah, that’s, that’s a good way to get a national experience and D fat too, of course. But that’s what I’d be doing. I’d be trying to get into, you know, as you probably all know, this, you got to work hard, study hard, try and do extracurricular things that will impress people have a reasonably good interview performance. And yeah, that’s, that’s all I can recommend is just work hard. You’re probably doing all that already.
Joe 14:39
Some of us maybe not awesome. Thanks for the advice. Like it’s really helpful, especially from someone who’s working in the industry. Yeah.
Gene Tunny 14:49
I mean, why I’d say that I mean, I mean, I enjoy consulting but I always see it as something that I’ve sort of fallen into. I mean, it’s good for me because it allows me to do a lot of interesting things and work with different people. And you know, potentially develop a business and grow the business. So what you ultimately want to do is specialise create products. So that’s the path I’m on now. So you probably don’t want to be doing lots of different things. I mean, I’ve been opportunistic, I’ve been trying to, you know, get the contracts in. And to do that I need to work on a lot of different things. Because partly, it’s because I’ve got a wide range of experience. So I’ve dabbled in different areas, and I can do those for a wide range of things. But ultimately, I’d like to sort of niche down and develop products that, that provide that recurrent revenue, that’s what you ultimately want, I think. And I think consulting can be difficult when you’re at the beginning, I wouldn’t say the bottom. But you know, the Finder mind their grinder model? Have you heard of that? But they talk about it, like Deloitte and PwC. The big four? Well, the finders, the partners, they’re the ones who have the connections, they’ll have, they’ll know the CEOs, they’ll go cycling with him, or they’ll play golf with them. And the CEO will ring them up, and can you do this analysis for us? Can you crunch the numbers for us on this project, and then there’ll be no partner or go, Okay, that’s great. Well brought that in the Finder, they don’t want to do the work, they just want to go to the, you know, the soirees, they just want to do the networking, and bringing the projects ever mind who’s a senior person, and not necessarily that senior, just there a few years or five, five or 10 years, they’re the managers. And so they’ll manage the projects being done. And the people who are doing the projects are the grinders. And today, the analysts, and that’s where the grades come in. And they could just work ridiculous hours. And partly because it’s a tournament because everyone wants to get up to the next level and prove themselves. And to get into one of those firms, you have to be really good generally. And so you’ve got young, ambitious people, they’re all competing against each other. But it can be very difficult that people work ridiculous hours. So that’s why I wouldn’t necessarily recommend consulting to start off with you better coming in later on when you’ve got some experience. So you can come in as a manager, or you could come in or you can do freelance on your own or set up your own business. I think it’s much more enjoyable then.
Joe 17:16
And then you get to work on your golf skills as well.
Gene Tunny 17:20
Yeah, although cycling, I know, golf used to be the big thing. I think it’s more cycling now. Yeah, yeah.
Joe 17:27
Awesome. Well, I guess speaking about the Big Four, as someone who’s working in the consultancy industry at the moment, what’s your take on the ongoing scandals that have been happening involving PWC and other consulting firms at the moment? Do you think this may be raises questions or concerns about the efficacy of outsourcing public policy?
Gene Tunny 17:50
Oh, look, I think there’s always been concerns about the efficacy of outsourcing. And if you look at the history of contracting out, I forget which fleet it was, but was it the Third Fleet, there was one of some of the convicts ships are all put out to tender right by the by HM Treasury, or the Admiralty in in the UK, and the Admiralty or the the Treasury they want, they want the most people to get out, they want people to come to Australia, they don’t want to people to die on the ship. Right? They actually want people to survive the voyage. But the ship owners, the ones who are who when the contract, they want to fulfil the contract to just to the letter so they can get the payment from the Treasury. But they don’t really care much about the people who were the people survive unless you make that explicit in the contract. So and there was a scandal with one of the convict ships, if I remember correctly, I can look it up, and we can put it in the show notes. So yeah, there’s always been issues with government contracting, there’s always been concerns. And so I’m a great believer in outsourcing, because I think it does save money. But you’ve got to do it for specific things for specific jobs that you can keep a close eye on and where you trust the people to deliver those jobs. So I think the problem with PwC is you have too much trust was placed in people that they shouldn’t replace that trustee and given the incentives on their end their ability to make money out of it. Right. And so the, arguably the people in the government should have seen that as a risk and pay closer attention to it. At the same time, what the partners in PwC did, what they allegedly did for the lawyers appears unethical. And you know, just just terrible. I mean, I’d like to think that if I was in the same situation, I wouldn’t do the same thing because I’ve been on the I’ve been on the other side of that in the treasury, in government. And I know just, yeah, there are opportunities all the time to profit off information that the government has, and I don’t know if you’re aware There’s an insider trading scandal with the lad who was working in ABS and he had a maid in Melbourne, and he was leaking the inflation data to him. So yeah, you’ve guessed that’s the problem in the public sector, you’ve got to there’s what I’m trying to say is there’s information in the public sector has is valuable. If you’re giving outsiders access to that, you’re going to make sure that there’s controls on it, you keep an eye on it, at the same time, what the PwC partners allegedly did was unethical, really bad form. Will it stop outsourcing? No, because there’s a lot of benefits to it. There’s a lot of expertise out there, that people who can help government from time to time they’ll take on things that are really big, and they need the outside advice and the outside labour outside assistance. So I think we’ll still need it. But there are lessons. And but that’s outside, as I was saying those lessons, we’ve been learning them for 200 years, and we keep forgetting them.
Joe 20:56
Do you think I remember reading a few months ago, there was quite a bit of talk about this new in house consulting section of the Department of Premier Prime Minister and Cabinet that they were bringing in? Do you think that that might be sort of a potential solution to that sort of issue, or
Gene Tunny 21:14
I think it will, it’s worth trying, I just don’t know how well it will perform partly because of the role of the profit motive in motivating consultants. So consultants to get jobs done, because they know that if they don’t get the job done, the client won’t pay the money. And then that looks bad for them. And if they’re, if they’re the actual proprietor or if their partner, then their compensation is gonna directly depend on that. And even if they’re, they’re an employee, then that can affect their progression, or they could even get the sack if they really stuffed something up super badly. There’s a lot of incentive to get the job done and get it done efficiently work weekends work long hours. I mean, there are some times I’ve stayed up till God, yeah, I’ve done at least one or two all nighters. Some people will do multiple all nighters to get jobs done, but you will really push yourself. Is there the same incentive? And in that government body? I don’t know. And, and I don’t know to what extent they’re going to be constrained by the the APS pay structure, and to what extent bonuses can be paid. So I think that’ll be the test of that. Look, it’s worth trying out. Yeah, I’m a bit sceptical about whether it’ll work or not. Yeah, that you got to make sure you get the best people in there. And if I was in government, I’m not sure I’d want to go to that team. I’d probably rather be in PMC or Treasury if I was federal, yeah, yeah. Yeah. So the idea that it was in PMS? Yes. I think it’s supposed to be a subsection of, of the PMC, portfolio or whatever. But yeah, you’d want to, I’d be concerned, if I was in the public service, I’d want to be in one of the core areas where I was working on the really juicy policy issues. And yeah, where you got the potential to advise the ministers, often directly, some will sometimes directly up at Parliament House, that’s that they’re the really interesting things to do. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 23:16
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Gene Tunny 23:46
Now back to the show.
Joe 23:51
I guess another sort of perspective that I was thinking about is having independent public institutions like the Productivity Commission, for example, or the RBA, that you mentioned before, that are not necessarily beholden to a particular department, but still part of the public service. How do you see the role for those sorts of institutions evolving?
Gene Tunny 24:15
Yeah, I think they’re terrific. I think that’s, that’s a good idea. I think the PC has done a lot of good stuff. But we’ll have to see how it goes under the new commission head. So Danielle wood, who’s an old friend of mine, we’ll see how it goes. And I think she should be she should be great. She might have a different focus, she might be more focused on social policy issues than than some of the previous Productivity Commission heads. But yeah, I think Productivity Commission is a great idea a lot depends on the terms of reference. It’s given by the government though. So it can be it can be effective if the government uses it right. But a lot depends on what the government gets us to do. Yeah. The other one that’s interesting is the parliamentary Budget Office, which is really good. So I’m not too familiar with that. So that’s That’s in, that’s based in the parliament itself on the hill, rather than in a public service agency. And what it is, is it’s an independent costing agency, and it estimates the cost of policies. So if you’re from the opposition or the grains, or your tail, you can go to the parliamentary budget office and say, Hey, I’ve got this policy idea. Can you produce a costing for us and tell us, you know, what, what do you think this would cost? And so that, that provides a service to the whole parliament. And it provides a service to the public, because we’re not just relying upon the Treasury, which works for the government of the day. And potentially, I mean, I’d like to think they wouldn’t be influenced by the government the day but there’s that perception that maybe they’re not independent? Well, they’d certainly not independent, but maybe they’re not. Yeah, there’s a perception that they could be influenced to extent by the government. So therefore, it is good to have something like parliamentary budget office. And it’s really, it’d be a really good place to work. They’ve got an amazing data set, they’ve got a 20% extract of the ATO is taxation data, right. So all data on all the taxpayers out there, the the PBO has got a 20% extract of that, and that helps them work out, you know, the impacts of policies is pretty impressive.
Joe 26:25
Yeah, very interesting. I’m surprised that it doesn’t come up more as sort of a, an option.
Gene Tunny 26:30
Yeah, it’s either that I think it’s a textbook tax, the tax database, or the census that’s linked to the tax database, I’ll have to, might look that up as well. But it’s impressive data set that they’ve got. And that enables them to do really detailed, precise estimates of the cost of policies, because there’s policy at the Commonwealth level is so complex, because of all of the rules around social security payments, superannuation and taxation. It’s everything so complicated. And so therefore, you need really fine, detailed data to be able to cause some of these policies.
Joe 27:06
Yes. super interesting. And I guess really, like sort of a dream for an economist or quantitative economist to have access to all that data? Yeah, yeah. Well, I
Gene Tunny 27:15
guess I mean, that’s one of the things that’s really changed. And just the the amount of data that is available now. All these big longitudinal or panel data sets, blade, the business longitudinal data set Hildur, household incomes, Labour dynamics, Australia. And you can do all really neat statistical methods with them lots of good econometrics. So if you’re into econometrics, and yet see if you can get somewhere like PbO, or there are some think tanks that are really good like Grattan Institute, or II 61, you would have heard of those places. So yeah, I’d, I’d highly recommend either of those. II 61, the research director, there is an old UK boy, Dan Andrews, who worked at Treasury OECD, he’s good value,
Joe 28:00
no relation to the Victorian
Gene Tunny 28:06
though he’s not a dictator, that’s a good guy. Wasn’t a political COVID.
Joe 28:20
Also, thank you for that sort of tour of the landscape of policy and consulting that was super interesting and hopefully informative for all of us going out there into the world. Moving sort of to another topic, I guess, there’s been obviously over the last year or so inflation has been one of the main policy points or issues, pretty much any sort of discussion about the economy is related to inflation. And a lot of there’s been a lot of media coverage talking about wage growth, particularly over the last six months and and how that might be contributing to inflation or might potentially contribute to inflation. So we have a question here asking, is it misleading for the media to highlight wage growth as a contributor to inflation? Given that, in Australia, we are experiencing negative real wage growth at the moment?
Gene Tunny 29:18
I don’t know to what extent the media has been blaming wages, I mean, that what we’ve seen is that the central banks that reserve bank is concerned about this concept of a wage price spiral that if wages take off, then that’ll feed into prices, and that’ll force up wages again. Now, we haven’t really seen that yet. Okay, so look, some of those concerns may be misplaced. There’s a bit of a debate about that. At the moment. The Australia Institute’s got a lot of press, arguing that it’s all because of greedy corporations. This greed inflation. I’m a bit sceptical of that I’m not sure whether to what extent corporations are any more greedy than they were previously and whether the markets more concentrated than it has been in the past. So I’m sceptical about about that story too. But essentially, we had, it’s the classic story of too much money chasing too few goods, right? We had this big COVID stimulus, additional hundreds of billions of dollars more in bank accounts, and, therefore, extra money, not enough supply prices a bit up the whole wage price spiral thing that central banks have been worried about. Yeah, that that actually hasn’t happened. So maybe you could say it’s misleading, but I’m not sure that’s been I think that’s been what some of the economists and central bank governors have been talking about. I don’t know, to what extent the media have been blaming them or talking about that. I think, if anything, it’s that great inflation story that that’s been dominant. Yeah, I think there’s problems with that, too. I mean, essentially, it’s just prices have been rising, because there’s been a lot more money, and there’s been the shortages and your businesses have, yeah, they’ve put up their prices. And that’s helped them, you know, that’s encouraged them to expand, supply where they can. Yeah,
Joe 31:08
I agree that it definitely has sort of picked up pace in the media over the last few months, this idea of, and often you see it linked to earnings calls or record profit margins. Oh, yeah. Do you think that profit margins should sort of receive more scrutiny from economists as a sort of concept, especially when we’re thinking about inflation?
Gene Tunny 31:32
Well, I guess, what you’re seeing is you’re seeing a correlation, right? Because we’ve had, we did have a very, very strong rebound, after the pandemic, okay, when we came out of lockdown. And so you’re going to expect high profits, okay, because the economy was really performing strong, it’s slowing down. Now, as we all know, and we’ve got this per capita recession that they’re talking about. So yeah, it was natural that profits would increase, because we had such strong economic conditions, that’s just the business cycle. And at the same time, we had inflation because we had all of this extra money chasing only so many goods that could be produced profits, I mean, we do want companies to be profitable, I think you should be looking at what’s causing the profits, if there is market power, or if there is concentration, if they’re abusing it, then we should be looking at that. And that’s what the a triple sees. Therefore, now you could argue that may be the a triple C isn’t as effective as it should be the a triple C’s, it’s looked at groceries in the past, it’s looked at all sorts of sectors in the past, and now we’ve got a competition policy review. And I think it’s looking at the airlines, that’s where we should get. So maybe there is a case for there’s possibly some restriction of competition, or in the airline sector, maybe weak that could be more competitive, it’s a lot better than it used to be when it was super regulated back in the 80s. And it was really expensive to fly around. But no one be jetting around to different cities, it was a certain it was very expensive. It’s because we deregulated it back in the 80s. And we allowed in a lot more competition. Now, this is why this whole issue of the Qatar decision not letting them in on those international routes. That’s why that’s become so politically difficult for this government, because that was something that could have helped reduce the cost of flights, particularly to Europe. And so so you could argue cornices was getting some protection from the government. And so we shouldn’t be thinking about what are their barriers? Are there? Is there a problem with an issue with the market structure? Is there too much oligopoly or monopolistic power? And are there levers that the government can can use to stop that? In cases where it’s where they’re clearly doing something anti competitive? Can we prosecute them under the age of the consumer and competition policy? I can remember the exact name off the top of my head. But yeah, we should. It’s definitely something we should be concerned about. And it is something that, that economists do study. Yeah.
Joe 33:59
Awesome. Thank you for that. Yeah. I mean, as a personal anecdote, I remember I wanted to catch a flight to Europe a little while ago, and I had to go fly with cuantas to first before I could even get a Qatar flight and it was so much better, that I’m going from Perth, Qatar Airways. I will. I think they’re really good. So yeah, it was an interesting decision. We’ve got another question here. Again, sort of taking another step. Russ Roberts, who is the host of econ talk a podcast. He refers to economics as an imperialistic discipline. This idea that, you know, being like, you know, economists often try to apply economics and economic thinking too broadly, to domains where the assumptions may no longer hold and its utility is questionable. I guess, someone that might come to mind is someone like Gary Becker, you know, bringing the idea of economics and supply and demand to the family and areas that typically it hadn’t been applied to before. And for you personally, what do you think the limits are of economics as a discipline? And are there things that economics can’t explain? And we might need other sort of perspectives to understand?
Gene Tunny 35:15
I think certainly, I mean, even economics requires other perspectives. So I think economics is an incredibly powerful tool. And, you know, it’s a science of the economy and studying the economy there. There’s some core economics, you need to know, where it gets difficult is trying to predict behaviour and, and in in cases where people don’t act fully rationally. And that’s what you need to bring the psychology and right. So I think any idea that a court economics is the imperialist discipline, and we’ve got all the answers, I think, that was destroyed by the financial crisis. I mean, maybe up until 2008, people could have believed that. But after 2008, I think there was a recognition that, okay, we haven’t really solved the business cycle, we thought we’ve solved the business cycle as this Great Moderation. markets aren’t always rational, you can’t, there are periods of irrationality in economics is not going to help you there. That’s where you need psychology to bring psychology. And that’s why behavioural economics is trying to bring in psychology with economics. So yeah, I think there are clearly limits to economics. And one of the one of the important limits or considerations, is that economics to the extent Well, if it’s, you could say it’s a science or it’s a study a field of study, it can answer questions of fact, or we can make predictions. Or we could argue, analyse what might be the most efficient course of action from a the perspective of consumers consumer welfare, from economic welfare, broadly construed. What we can’t necessarily answer is what’s the best thing to do for society? Because then you’ve got ethical issues, value judgments, how do we look if something is affecting the environment, for example, and that affects future generations? How do we, how do we analyse that, that those can be difficult issues? Or how do we make choices regarding health policy measures? So it’s not always they’re not always issues where economic considerations are the final determinant, you may need to bring in value judgments? Yeah, the whole distinction that thing was David Hume between isn’t board? Yeah, yeah. Yeah. Yeah. Could
Joe 37:34
all Hume who I guess himself was sort of an economist when he talked about Yeah, money and things like that? Yeah. Well,
Gene Tunny 37:42
anyway, he wrote a famous essay on the gold standard on price, the seaflo mechanism? I think it was, yeah, yeah. I
Joe 37:50
think the argument was that, yeah, it doesn’t matter if you if you have the money supply, and prices have as well, like, every, the welfare of everyone is the same, essentially, I think I only remember that because Polanyi then talked about it. Yeah. He was a pride our economist. Yeah, for sure. Yeah. So that’s all the pre prepared questions that we’ve got. I’m gonna go over to the lectern mic, and then we’ll be handing the handheld around to the members of the audience, if they want to ask gene any questions.
38:21
Just going back, I guess, to your discussion about public and private. And I guess, us as university students entering into the workforce, I just wrote a question down. So as university students, we are involved in Dubai, developing a variety of skills that, I guess were not explicitly taught in university, but that we hope to apply when we get into the workforce, from your experience, or what schools have surprised you from the recent generation of you know, incoming university graduates, and what do you think, you know, is missing from you know, they’re the skills that they’ve developed that they might not have been taught explicitly? Throughout University?
Gene Tunny 39:00
Okay. What’s most surprised me is just how savvy or how brilliant uni students are at producing PowerPoints, like slide deck, Oculus nowadays, we’re all competing in these case study competitions. I’ve been blown away. So yeah, that’s really impressive. Otherwise, yeah, just, I guess maybe I’ve been lucky. But yeah, I found the slide decks. The students type employed generally have good presentation skills, very good at research, good at getting across data and information. I think the skills you need to learn, like everyone needs to learn them, it’s it’s about writing as clearly as you can. Being proactive. It’s hard once you get out of uni because uni, you’ve got the targets to hit, you know, when the you’ve got to lodge your, your papers or when the exam is on, you got to turn up to it. It’s more structured work can be a bit unstructured at times. And so you got to, you’ve got to learn how to manage yourself, manage others get others to help you out a lot of those interpersonal skills, it’s just about building those up, you’ve probably been developed in developing them here at UNI. Anyway, that’s what I, I’d say, the I’ve been really impressed with UQ students in particular.
40:18
G’day, Gene, thanks for the talk. And for your time, I just want to go back to, again, back when you were talking about the distinctions between working in public and private sectors you mentioned as a downside, or a potential downside of working in the public sector was perhaps changing ministries disagreement with, I guess, the government of the day and, you know, a general sense of inefficiency about projects that you’re doing as a possibility. Did you find that your experience in the private sector was a bit more alleviated of those concerns? Or did you also have times where you disagreed with the direction of your projects,
Gene Tunny 40:54
I guess, you’ve got choices in the private sector. So you could actually refuse to do a job. But then you want to try and do a job if you can, if the client is going to pay you, that you have so many clients, you can move on and you can you can sack clients in a way and go okay, I’m not working with you again, if there if, if you didn’t enjoy it, or if it was just hard work. So that’s, that’s what I was getting out there. Whereas with, with government, if the government’s in for several years, and like, I think you’ve got to work for the government of the day, this isn’t a matter of politics. I’ve worked for both labour and coalition governments. And, and I don’t think the quality of the work, I actually think it’s more related to the people in charge at top, I think it relates a lot to their personal characteristics rather than their politics. So I don’t think there’s any correlation between the political strife of government and how good it is to work for, but yeah, you’ve got to be you’ve got to be flexible and realise, I mean, some people enjoy it. I can be challenging. Yes, Minister might be too old. But there was a show for two years, you know, yes, Minister, from the 70s and 80s with Nigel Hawthorne, and, and Jim Hakka. Do you remember he played Chewbacca, too? Anyway, it was a great show. But there’s a line in it where Bernard who was the principal Private Secretary to the Minister was talking to Humphrey says, I don’t understand why the minister wants to do this. How do we how do you cope with all of these changes in in policy direction and sound free says look, if I actually cared about what the policy direction the government was, I’d be stark raving mad because one minute, I’d be pro nationalism, nationalising steel, I’d be then Pro D nationalising steel, and then I’d be pro renationalising steel, because those things change. You’ve got to be flexible in government, that maybe that’s not for everyone. And politicians, I think can be difficult too. Because, you know, working for the government is can be challenging, because there’s a lot of media, there’s a lot of light on the government, and there are a lot of crises. And you can be called in at odd hours, particularly, like, the craziest time in Australian politics in the last 20 years was the Rudd Government. And I mean, it was just completely different from the previous government. But you know, a lot to his credit. I mean, Kevin Rudd wanted to do things, he he saw urgency, he had a great sense of urgency, he was an incredible hard worker himself. But that meant that there were requests coming in at odd hours, he’d he’d be flying back from a meeting a DC, he’d be there for the first time g 20. Meeting, and then he is playing with land in Hawaii. And then we get a call that the wants a paper on. So it’s such it’s such an issue by the time he lands in, in Canberra. And so this is might be on a Sunday or something. So it can be a bit crazy. But that’s what you get, if you want to be in that sort of environment, because there’s that political aspect to working in government. Some people really enjoy that they thrive on it. Others find that find it difficult. So yeah, that’s just Yeah, who knows? I mean, my experience could be a bit idiosyncratic. So that’s one thing to bear in mind to
44:09
sort of on that with the PwC scandal, they ended up selling all of their public sector work company, do you there’s been talk about whether all the big four companies are gonna end up having to do that. Do you think that that will happen and also just sort of see that as a good path forward
Gene Tunny 44:27
in terms of preventing corruption or in front of the think? Yeah, I think I mean, PwC has been forced to do it. The other firms, I think, would rather not do it. I’m trying to remember if v y looked at it and try remember where EY was trying to split its audit from its the rest of its business. And I don’t think it went ahead. I’ll have to look at the details of that. There are probably other ways to stop that, that conflict. I don’t know if that’s going to happen with the other firms, or not close enough to the people in those firms too. Uh, to make that judgement, but yeah, I don’t know to what extent it would look, if you got a job at one of those big four firms, then, you know, that’s, that’s going to be good, it’ll be good experience, even still at PwC is probably still good experience, despite the scandal, they’ll bounce back, they’ve got so many connections, they had a good reputation for a while, I’m sure they’ll be able to turn around eventually. Now, I’d have to wonder, like, as if you want to do consulting work, I’m not sure whether you’d want to go to a company just focused on public sector work. Because then why not just go into the public sector itself, if you like, if public sector is your thing, I’d go into government itself, because one of the things with consulting, I enjoy it, because I actually get to do a wide variety of things. I found personally, I found government difficult because I’m reasonably opinionated. And like, I wasn’t the Sir Humphrey cat character who could been just changed, not not care about the political, you know, the actual policy direction or, yeah, I thought I’d find that very difficult to do. So I actually quite enjoy being on my own or having freedom to, to write to comment. Whereas you can’t do that in government, you can’t say anything critical of the government. It’s difficult. There are advantages, because you can then get involved in, you know, in the policymaking and the decision making. You can work with the minister’s office, even the ministers. But if that’s what you want to do, you’re more likely to get that to do that in the public service, than if you did a public sector, in a public sector consulting organisation that consults to the to the government just depends on what you’re after.
46:43
This is kind of flowing on from that question a bit. Do you see any other consequences coming out of the PwC? Scandal? And I guess now, the KPMG scandal with defence contracts, I think, that kind of flow onto other consulting firms outside of the big fall? Or do you think that I guess, kind of trust in interpersonal relationships that might already exist? Kind of, I guess, being more important than that? Maybe?
Gene Tunny 47:09
Yeah, I think government public servants will be more conscious of the risks. And it may be harder as a consultant to work for, to work for government clients, because they may not automatically trust you. It may be harder to get access to information, you may have to sign more documents. It can be difficult, it’s difficult already working for the government agency. So projects I’ve done, Nicholas grown and I and another colleague did a job for services in Australia recently, looking at my gov and looking at the the investment in that and the benefits of of improving the Margao functionality. And I mean, we had to sign all’s we had to sign those documents that said we wouldn’t share this information. Of course, we wouldn’t. And you know, then PwC, they I think they probably their person who allegedly breached the trust signed documents to and they should have, they should have taken it seriously. And it looks like they didn’t. But what Services Australia did was they wouldn’t let us take documents away. We could only see some documents physically, in a Services Australia offers, because they’re highly confidential information relevant to the budget process. So they had the right controls in place. I think you’ll see more of that there. There’ll be less trusting. I think they’ll still be consulting opportunities. I think I think that they need the expertise from outside so much. They’re not going to cut back on that. But it’ll be more difficult. There’ll be more constraints in terms of access to information, they won’t automatically trust you. But I think they’ll still be, they’ll still be jobs that consolidate if you want to do that. Yeah.
Joe 48:44
Awesome. Well, if there’s no more questions, we just want to say thank you so much gene for coming along. And we’d like to offer you this gift. This is the statecraft which is our PPE society, student magazine. So lots of different articles from all sorts of students. Yeah, so thank you so much for coming and sharing your knowledge with us. It’s been really great and really appreciate you and hope to see you again in the future.
Gene Tunny 49:15
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.
50:02
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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 Podcasts, Google Podcast, and other podcasting platforms.
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.
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
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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.