It is amazing how a fifteen minute chat on parallel imports and an earlier e-mail ends up with a one-liner that gets it wrong. But that was the case in an article in the Age today. Let me summarise my views and for those interested, the full e-mail to the journalist is below.

• On the information in the article, there is no issue of ‘price fixing’ (or collusion) but may be issues of resale price maintenance (RPM) depending on the actual contracts or agreements. The ACCC has been following this closely for internet sales generally;
• There is almost certainly no issue of abuse of market power with the sort of businesses (small fashion houses) referred to in the article;
• Exclusive distribution licenses for Australia are not illegal but can raise competition law issues if businesses abuse market power or ‘substantially lessen competition’. For a summary of a previous related decision see here.
• The Bricks and Mortar complainants are like children putting a finger in the dyke that is about to breach. Unless they get business models to compete with on-line businesses they will be swept away. Attempts to block parallel importing just hurts consumers and will be ‘avoided’ by clever entrepreneurs. The government should act to assist this form of competition, not to block it, despite the squeals from the vested interests in the retail sector.

So what should the ACCC do? Keep a look out for RPM (and I would be surprised if they were not doing that already).

(Original e-mail to journalist)

Hi Rachel

A presentation at the SSNED workshop last week highlighted that businesses are still playing the same tricks after 100 years of competition laws. These laws are known as ‘antitrust’ because of their US heritage. In the 1880s, Standard Oil used an old legal concept – a trust – to combine the decision making of a group of otherwise competitive companies. Under the trust structure they could cooperate rather than compete. These structures were outlawed in the US by the Sherman Act.

Professor Lino Briguglio from Malta presented a modern day version. His presentation is here. In summary, a group of competitors in road construction and asphalting formed a joint company to tender for government contracts. They did not individually tender and when their joint company won the tender the work was distributed internally. So competition gone and a cozy life for all!

The case highlights two points. First, as Professor Bill Kovacic noted at the workshop, the best place to start looking for collusion for countries introducing new competition laws is often government contracting. This is usually an area ripe with cartels.

And second, the more things change, the more they stay the same!

I am involved in a session at the Australian Conference of Economists in a few weeks looking at this issue. And it has been discussed elsewhere – such as at the Royal Economic Society conference (thanks to Alex Millmow for the link). Here are some preliminary thoughts (feedback very welcome).

Is university level undergraduate education fundamentally flawed?

Unsurprisingly, as someone with a strong vested interest in this area and a well-selling textbook, my answer is ‘no’. But we do teach too much and we teach it superficially. For example, by the end of second year undergraduate studies, all students should know what the economic model of choice is all about. I suspect most don’t, partly because I meet a lot of graduate economists who do not know (my summary of what a second-year student should know about this at a minimum is below). Economics training often seems to ignore the basics and wants to scale new heights before students are ready. Importantly, we often seem to forget to train students to understand economic modelling and what modelling is all about. We do not focus enough on the assumptions so our graduates forget (or never learnt) the limitations of individual models.

Where is the context?

Economics is a public policy discipline. It is useful in many areas but its main role is to provide a set of tools to think about markets. Students need to understand what tools to use where and when. So they need the assumptions. But they also need context. Students need examples of where models work (and where they don’t and why). They need economics linked to current policy debates and to economic history. The discipline has largely abandoned its own history in teaching – which is completely mad. If we teach economics in a vacuum, then that is all we will leave with students – an economics vacuum.

Why did I leave off the ‘post-GFC’ bit?

A lot of discussion seems to focus on the GFC and why it wasn’t predicted. But this is a silly question. Life is uncertain and difference economic models have different predictions. Plenty of economists predicted the GFC – and indeed numerous other crashes that we haven’t had! Other macro models are built on assumptions that a crash like the GFC couldn’t occur. The real question is: Do we understand the limitations of our own models or do we exchange academic rigour for hubris in an attempt to bolster our own view of the world? I suspect that deep down, many economists would have to answer ‘yes’ to this question.

Thoughts comments very welcome – particularly if you think I am wrong!

(Minimum knowledge about the economic model of choice by the end of second year:

First students need to know what the model is and is not about. It is not about greed or being selfish. Rather, it simply says that if your choices satisfy certain consistency properties then your decisions can be modelled as if you are maximizing a utility function. It says nothing about why you make the choices and does not limit those choices to be for things that you ‘like’ or that are ‘self centered’. From this modest base we can make a variety of predictions about the behaviour of individuals as their choice set changes. We can also add other assumptions (e.g. a-dollar-is-a-dollar) and make stronger predictions (e.g. welfare analysis).

Second students need to understand the assumptions behind the model so that they can recognize situations where the model (in its second-year form) doesn’t apply (e.g. where choices are intransitive) and the consequences (the person can be turned into a money pump on the market!). They need to understand the assumptions really well. If they don’t, they will make silly errors when they graduate.)

I was part of a great workshop last week looking at competition laws in really small countries – as in Pacific Island States, such as Vanuatu, the Solomon Islands, Samoa and Tonga. The forum raised a bunch of questions about how to structure competition laws and where they fit in broader economic policy.

For example, in some states there are few ‘companies’ and no consumer protection laws. Rather than starting with US or EU style competition laws, a better starting point might be consumer protection laws together with broader government reform (e.g. removing limits on government purchasing) and pushing for free trade (reducing explicit or implicit import barriers). Competition laws may become an adjunct to these broader reforms, for example, to prevent incumbent monopolists from erecting barriers to keep imports out of the market.

Two participants, Fiji and PNG, already have competition laws, broadly similar to those in Australia. The authorisation provisions of our laws seem to be really useful for small countries. These rules – which allow a competition authority to ‘authorise’ conduct that would otherwise be a breach of competition laws if the (economic) benefits outweigh the costs  - can help create buy-in to the laws and avoid laying waste to business by court delays. By making the authorisation process public it also has an educative role.

Indeed, education about the benefits of competition as an instrument of growth and development, seems to be a critical first step in the process of legal change. While the benefits often seem obvious to economists, they are usually opaque to everyone else! Indeed, there is a clear lesson for Australia. Competition authorities need to both guard against anti-competitive behaviour but also actively promote the benefits of competition. Without a champion, it is too easy for pro-competitive laws and institutions to lose out to vested interests.

Thanks to the Small States Network for Economic Development, and the participants. I hope they learnt as much as I did!

The federal budget has (again) changed the rules of superannuation. The aim of superannuation is to encourage savings and reduce reliance on government pensions in our old age. But fiddling doesn’t help. People wonder if their superannuation is safe from government opportunism.

So perhaps it is time to think more broadly about encouraging savings. One option is a progressive consumption tax. Robert Frank discusses the details here. But there are three key points:

• It encourages savings;
• It is as easy (or easier) to implement as our current income taxes (this doesn’t mean it is simple – neither system is simple); and
• It fits recent research on happiness, spending and ‘relative’ consumption.

I will leave the details to the Frank article – but it is worth thinking about before we fiddle with superannuation again in next year’s budget.

John Durie in the Australian comments on my recent interview with Graeme Samuel and the bank ‘price signalling’ rules. In particular:

In his speech, Sims agreed with his predecessor, Graeme Samuel, on the stupidity of restricting price-signalling rules to banking, but didn’t go so far as to say they were drafted so badly as to be useless.

The key point missed by John is that there are two parts to the price signalling laws – a really good bit and a useless bit.

The laws against private price disclosures are sensible and strong. As I have argued before, it is difficult to think of why competitors should be privately disclosing prices to each other except for anti-competitive purposes. And if there is a legitimate reason, the behaviour can be cleared in advance by the ACCC. These laws should be extended to all business.

The public price disclosure rules are poorly designed and unlikely to ever be used unless a banker has some sort of brain explosion. The recent RBA interest rate change led to lots of public discussion by banks about interest rate changes and strategy – but it is hard to imagine that any broke the law. This part of the law should be revoked.

John mentions that support is growing to broaden the price signalling laws. Good! This should be supported – because broadening the private price signalling laws will help competition and undermine collusion. If the cost of broadening the ‘good’ bit is also broadening the ‘bad’ bit, so be it.

Something I’ve been meaning to do is say something about Mike Spence’s arbitrary firings of tenured academics at the University of Sydney.

The truth is that like many busy academics – and most academics are busy teaching and researching – I basically avoid thinking about what has been happening in Sydney and how it affects the rest of Australia.

It seems obvious from here that the narrow-minded policies of the current Sydney VC are basically a gradual, long-run form of institutional suicide — and that’s bad for all Australian universities.

The nature of the sacking of tenured academics in Sydney means that no up-and-coming academic will want to work in Sydney and that all serious senior academics in Sydney will be looking for new jobs. It could also mean that it will be difficult for any Australian university to attract senior research talent from overseas; especially in areas like Business, Economics, Mathematics, and Physics where tenure is important.

(Indeed, I paraphrase Paul Krugman’s short post, not about Sydney or tenure, in this short post about Sydney)

It looks like years of simplified debate in Australia on macroeconomic policy are about to come back and, in the colloquial, bite us in the bum. The ‘surplus good, deficit bad’ mantra that has been embraced by both sides of politics in Australia has probably been a useful device to control government spending over many years of solid economic growth. It has meant that government spending has been well controlled in the good times and has left Australia with relatively little public debt.

But rhetoric for the good times does not apply to the bad times – or at least the mixed times. As the eastern state capitals sink into economic gloom the Federal government is about to release the Mother Of All Budgets – an attempt to get the Federal budget back into surplus (or at least appear that way) regardless of the economic consequences.

It makes no sense to be having tightening fiscal policy at the same time as we are easing monetary policy. And it makes no sense to try to use monetary policy (a country-wide economic instrument) to deal with a two- or three-speed economy that needs targeted assistance to some areas and not other areas of Australia. Whether you think that Australia is in a period of temporary dislocation as we move to a long-term mining future or you think the mining boom is temporary and the economic shocks need smoothing, it doesn’t matter. Both views would back government policy to ease the short-term pain. A surplus-at-all-costs budget will not do that.

(Footnote – some numbers on public debt to GDP are here. The ‘ordering and relative magnitude’ seem about right compared to other data on the internet but the actual numbers vary greatly depending on what is included and excluded. But any list has Australia close to the bottom of the OECD.)

There is growing move against overpriced refereed academic journals. For example, see Stephen Matchett of the Australian here. And the economics discipline is a great example of both the failure of refereed journals and why their imminent death is exaggerated. 

In economics, refereed journals are a historic archive. The lags between submission and publication are often years. Simultaneous submissions to multiple journals breaches journal rules (so evaluations are sequential) and rounds of revision take many months/years. Rejection and resubmission at another journal (rejection rates at the best journals are well over 90%) means more years of wait. And even after acceptance, official publication may take more months. So researchers publish new research and access new research in public working paper databases, like SSRN. By the time a paper is formally published in a journal it is ‘old news’. So the expensive journals should be easily eliminated, right?

Wrong!

Refereed journal publications are used to judge academic quality. Papers in the twenty-top-journals-who-claim-to-be-in-the-top-ten are the benchmark for tenure at the best universities. Lower level journal publications are needed for jobs at other universities. It is not just publish or perish that reigns. It is where you publish that matters.

Not all of these journals are expensive as some are published by ‘societies’ that keep the price down to more modest levels. But many economics research journals are published by the for-profit presses. And all of the highly ranked economics journals follow similar snail-paced processes for reviewing submitted papers.

The self-reinforcing culture, that places the journals as the measure of quality, is hard to change. It is hard to break because a new journal is automatically ranked middle-to-low. This makes it hard for open-source journals or journals using a different model (e.g. B.E.Press in its original incarnation) to ‘move up’ the rankings. Academics (particularly junior academics) are reluctant to publish in such journals because they are not highly ranked. And they can’t become highly ranked without getting highly cited papers from good researchers.

Existing senior academics in the economics discipline have little reason to alter the system. They have their historic archive of papers in highly ranked journals. They may grumble about the submission fees, the refereeing requests and the publication delays but they are the winners in the current system.

The importance of publishing in ‘highly ranked’ journals is reinforced by universities in Australia who explicitly want to use journal rankings (such as the ERA list) to evaluate academics. So while the universities may complain about the price of the journals, they are part of the problem because they use these same journals as a measure of quality.

Is there a solution? Changing a ‘bad equilibrium’ such as the one in economics can be hard. It usually requires a big coordinated leap to move to a ‘better equilibrium’. The best universities in the world may be able to orchestrate such a shift but they (or their economics departments) would have to act in unison. An alternative to the journals may involve an open source database like SSRN with a ranking system – but the alternative would have to be strong enough to drag along the academics and this means it has to be a credible alternative measure of prestige for those academics.

(cross-posted from Troppo)

Interest rates in Australia have just been reduced by 0.5% in the hope that this will stimulate the economy. Will it work? Uncertain. But will politicians say it will work in the coming federal budget? Almost undoubtedly.

Perhaps displays of optimism are not such a bad thing, even if they are unwarranted.

In a study that just came out, we (myself, David Johnston at Monash and Gigi Foster at UNSW) found that optimistic expectations are key to making  people happy with their lot in life. People are much less affected by regret than previously thought, nor do they tell themselves things will be bad in the future so that the present will be a pleasant surprise: people systematically over-estimate how rosy the future should be and this is crucial for their well-being.

Our study, of which the working paper version is here and the on-line article is here (for those with access) has the following highlights:

1. In a sample of over 10,000 Australians followed for 9 years (the HILDA), it turns out that people’s expected future health has about 1/6^th the effect on current happiness as their actual current health, with any difference between the health that was expected and that eventuated having very little effect.
2. Future imagined health was more important to Australians over 35 and to women than to men and those under 35, for whom future imagined health was not important for happiness.
3. As a result, we concur with the medical literature that has long argued that hope is important in itself for health, as witnessed by the strong placebo effect. In the medical literature hope has now become the default standard for new medicines in that new medicines have to be better than placebos if they are deemed to be of real use. Our advise is also to err on the side of optimism whenever possible.

Now, to classically trained economists, the fact that hope itself is a consumption good quite apart from realised consumption may be surprising, but in the reality of economic policy the big lesson from this kind of finding has been incorporated long ago: always pretend the economy will keep going strong or will soon improve unless there are really strong indications to the contrary. Hang on to see many an overly optimistic statement in the Federal budget next week …. and rightly so.

For more information on the study, see here.

Two stories caught my eye this morning:

Perth expensive – but we enjoy the best standard of living

and

ACT tops nation in standard of living

Hmmm. OK – how does this work? Both newspaper reports are based on the same report from the National Centre for Economic and Social Modelling at the University of Canberra. The solution came from the following quote:

“Only the country’s territory capitals, Canberra and Darwin, enjoy higher living standards,” Ms Esmond said.

Ok – Canberra is not capital of a State (only a country) so it doesn’t count for comparisons with Perth. I have not chased up the Mercury yet but given the ranking from the report here is their likely headline:

Hobart has highest standard of living (of state capital cities located in Tasmania).

An new Parliamentary investigation into price differentials for digital products has been announced. Australians, like every other country other than the US, pay more for all manner of digital products — music, movies, ebooks, games and software. The question is why?

Here are some explanations that don’t hold water:

• Small market size: there are no economies of scale in distributing pure digital goods beyond the first copy so there is no reason why a small market size would matter. Another unit sold is another unit sold and the costs to the distributor are essentially the same.
• Higher incomes in the US: it is common to separate out regions and charge a higher price in the higher income reason not the other way around. The US is the richest economy in the world yet US sellers of digital products act as if it is the smallest.
• Taxes: now it is common for people to forget that US prices are often ex tax whereas Australian prices include tax. In the US, the sales taxes differs by state. However, even removing the GST from the equation, the ex tax prices are higher in Australia. The one exception I could find was Apple products. Buy Pages (for Mac) and the ex tax price in the US is USD19.99 whereas the ex tax price in Australia is $19.08. At today’s exchange rate the US product is 3.3% more expensive. But for all other software that isn’t the case. So that suggests that when Apple has control, it’s pricing makes more sense.
• Poor broadband in Australia: things like download limits constrain incentives to buy digital products. But if that is the case, prices should again be lower in Australia rather than higher.

Here is the thing. What this suggests is that US content providers are losing money by pricing lower in the US. What gives?

I don’t know the answer but here are several candidate explanations. First, suppose that digital piracy is higher in Australia. Then it is possible that this is undertaken most by those who have lower willingnesses to pay for digital goods. The remainder will have higher willingnesses to pay and will be also less price sensitive. Hence, it is profit maximising to charge them higher prices. Of course, this same behaviour could be reinforcing piracy incentives. The end result is that US content providers may have themselves driven a high piracy/high price equilibrium that is difficult to get out of.

Second, suppose that because it is the biggest market and must have a single price, US content providers are concerned about controlling that US price. That means that should another market get a lower price, they worry about arbitrage the other way. That concern drives them to set a lower price in the US and higher price elsewhere to maintain that control and not let an exchange rate fluctuation cause an arbitrage opportunity outside the US. Now this story isn’t quite complete because it must depend on some special characteristics of the US market that simply don’t exist elsewhere. I’m not sure what they are and I’m not sure why Apple itself doesn’t care about it. But that might be a place to look.

Third, with respect to digital products that have current alternative physical distribution or are delivered by broadcasters, it may be that those domestic retailers and broadcasters have insisted on terms that raise the price of pure digital products. This is because of the high cost and/or market power of such domestic entities. An inquiry could surely ask to see the contracts to see if such terms exist or not.

All of these explanations spell bad news for Australian consumers. But here is the point, if we believe in free trade we need to allow our copyright laws to embrace it rather than exclude it as they do now. What if, every copyright holder selling goods in Australia was obliged to allow Australian consumers to purchase at the US price if such a product exists there too? Then Australians would have a choice without having to falsify their location. And whatever the explanation, Australians would be on an equal footing with their US counterparts.

Chris Lloyd has a nice piece on the future of universities and academics on the conversation. The issue of how the internet and, more broadly, the revolution in information communication and delivery, will affect universities has been a significant topic of debate all year. For example, see here and here. However, I don’t think that on-line course delivery will spell the end of our current undergraduate institutions. Rather it will change the way they operate. The reasons are simple:

1. Good students learn from other good students. There will be a role for universities to facilitate interactions between students and to help students interact, both virtually and face-to-face. Problem based learning is an example of this.
2. Undergraduate educators will be more like mentors than lecturers. Their role will be to assist learning and guide students. They will be one of numerous resources available to students.
3. Large lectures, to the degree they exist, will involve feedback to students on material they have worked on (on the internet) before the class (automatically graded with feedback to the Professor), together with real-time questions and feedback in the classroom. Even large classes will need to be interactive. The best undergraduate educators are already doing this. But …
4. Most large classes will disappear to be replaced by smaller tutorials. Any economies of scale in presenting material will be exploited through the internet, not by crowding hundreds of students into a lecture theatre. This means that…
5. Most ‘teaching’ in universities will not be done by research academics. Research academics may hang around undergraduate institutions to add their name and reputation to the institution but they will have little effective role in teaching.

How do we get to this new world? As I have suggested before, a good first step is to break up our existing universities to separate out undergraduate and graduate education. Research goes with the latter. Like Chris, I think there will be a lot fewer research academics and only the best researchers will find a role in the research/graduate universities of the future. Undergraduate education will require professional mentors/educators – not researchers.

A couple of final points. At present our universities survive on foreign students paying high fees. Will this flow of revenue continue if a Chinese or Indian student can get a Stanford or MIT qualification at home? I suspect that many overseas students will still want to spend some time in a western/hybrid country like Australia and will want work experience after they earn their degree. This means that twinning programs and programs that provide overseas students advanced undergraduate education, a ‘western’ experience and work experience, will grow.  And demand at the graduate level for one or two-year professional courses may continue to grow.

Second, many academics will fight these changes because they will not like them. Australian academics get paid to do research – it is about 40% of their salary. In the future, most of these academics will not be paid to do research. And research is fun. So many academics will fight tooth-and-nail to hold on to the current system.

Just a pointer to three jobs for economists at the Grattan Institute. Apply here.

The conversation has the first part of an interview that I had with Graeme Samuel. It includes a cross-reference back to Sam’s post here.

On The Conversation today, an interview of outgoing Australian Research Council chief, Margaret Sheil. In response to a question about her sister organisation the NHMRC requiring funded research to be available for free within 12 months, she responded:

We’re quite comfortable with our current position and we don’t have any plans to change that at the moment, because we serve as a much broader, much more complex research community than the NHMRC. We would not want to move to a position of mandating [open access] until we understood the full range of those complexities: whether [academics] are in a position to comply, whether they can afford to comply.

There are a whole range of cost issues in relation to open access, so we feel that the position that we’ve taken, which is to strongly encourage and [make academics] explain why not, and also the provisions that we’ve put in place to allow for up to 2% of each grant awarded to be used towards publication costs, is a reasonable and considered position.

Complexities? There are no complexities. At the moment, academics have an incentive to publish in established journals that increasingly cost libraries more and more to fund. Today, Harvard University called on its academics to avoid them and basically threatened that it would be cutting those journals if the price didn’t come down. That didn’t seem to complex to them. Harvard were in a prominent position to do something and they look like doing something. Big funding agencies are in the same position.

But for the ARC there is a bigger point. What is the point of research if it is costly to access? Why are they funding it and not someone else? She goes on …

The other issue is that it’s not always appropriate to make research public. Making something publicly available doesn’t necessarily make it accessible. And so there are many, many examples of where protecting intellectual property actually makes it more readily available, because then someone is prepared to commercialise it and make it accessible.

Once again, if that is the point, why is the government funding it? If there is a buck to be made then those making the buck should fund these things. Otherwise, you put it out there and allow others to profit off it cheaply because there is no other way to get the research done. It is Economics 101.

Now the issue Sheil points to is apparently cost. Open access can be costly. The Public Library of Science charges $1500 per paper. Elsevier has an open access option that is more expensive. I suspect both are too high but let’s leave that aside for the moment. Even given those costs, what is the problem with mandating open access? People will build those costs into their grant proposals.

So let’s see how that is likely to pan out. I’ve had many grants from the ARC. Truthfully, my back of the envelope calculation is that they are paying $30,000 a paper for that. If it cost $1500 to have an open access version that would be 5% of the cost of the research cost. So that sounds rather high but it reflects insufficient pressure to get those costs down. Mandate open access and researchers will economise and look for lower cost options of providing access. For instance, each and every one of my papers are available somewhere for free. It cost the government nothing.

My point is that when the ARC raises their hands and says it is all too hard they miss the opportunity to create markets that will drive long-term socially beneficial outcomes.

I have a post over at the conversation on this. I am sceptical to say the least!

When you travel overseas, you don’t want to look at the exchange rate you are getting on your credit card. And because you don’t want to look at it most people don’t. In fact, with most traditional routes you lose a ton exchanging currencies.

OzForex are a great Australian innovation. Basically, they are doing what is surely easy to do: offering currency conversion at a very, very low effective commission. I used it to transfer my vast wealth to Canada because the exchange rates offered were very close to spot and they had incredibly reasonable forward contracting.

Well now, you can take advantage of that as a traveller for smaller transactions with a pre-paid MasterCard. This seems well worth checking out. Sadly, they don’t offer this in Canada so I can’t try it out myself.

Since everyone is talking about it, here is my two cents on the above ‘Golden Balls’ video.

Let’s suppose that the guy on the left is choosing column and the guy on the right is choosing row. (The first payoff in each cell in the following game is the right guy’s payoff).

Here is the original game.

It has three (pure strategy) Nash equilibria: (Steal, Steal), (Split, Steal) and (Steal, Split). So it is not a traditional prisoner’s dilemma which has one unique equilibrium (Steal, Steal).

Now the left guy’s strategy is to change the payoffs. Specifically, he does so by offering a contract in one cell where he plays steal and the other plays split. That generates a new game.

Notice that there are now only one pure strategy Nash equilibrium. It is just that one of these cells a split like solution. This change occurs because, I suspect, the contract is enforceable because it was a clear offer and acceptance. However, it will likely have some details associated with it and so I have reduced the left guy’s payoff by c to account for those transaction costs. If c = 0, then the (Split, Steal) option is a Nash equilibrium again.

The point is that (Split, Split) — the thing that was actually played is not a Nash equilibrium. A real strategic innovation would be to ensure that. But what is more, unless you believe c = 0, then (Split, Steal) isn’t a Nash equilibrium either.

Now the left guy had recognised that (a) there were three Nash equilibria and (b) by committing to steal so openly he may have pushed the other person to take the split choice as it would make them look better. The point is that, if this is a real innovation, then this game show is dead. But it isn’t sustainable so it will live on nicely.

[Updated: due to early morning thinking error]

Politicians seem to be very good at picking booms – at least after they have happened or are on the way down. That appears to be the case with agriculture. The growth of Asia has not only led to a mining boom but has also pushed up world food prices. Together with the end of the decade-long drought in Eastern Australia, increased demand from Asia has been a major benefit to Australian farmers over the last 5 or so years. It also explains why foreign investors have been interested in our agricultural land. With high world food prices, it is a good investment.

Now the politicians appear to be spruiking an agricultural boom. For example, see here. Unfortunately, they may be too late. If we pick one commodity, dairy, it is pretty clear that world dairy prices have peaked and have been on the way down over the past year or so. The 2010/11 farm gate prices in Australia were down about 13% from their 2007/08 high. And prices are predicted to go lower.

This drop is not because Asia has lost its interest in food, although the GFC did put a dent in dairy prices. Rather, it reflects an uncomfortable fact about resources. Supply responds. This has happened in dairy. For example, our cousins across the Tasman seem to have ratcheted up their dairy production. A report is here. Overall, the world supply of dairy products has responded to higher prices, and in so doing have returned the price of dairy products back to more ‘normal’ levels.

I expect to see this same sort of response in most agricultural and resource industries. We have had a great decade in Australia. We have ridden a fantastic resources boom. But it is now quite likely on the way down as supply has responded to meet the increased demand  from Asia.

So what can we do about this? Not much. However we can avoid introducing policies that would have been beneficial on the upside of the boom but are pretty useless (or harmful) on the downside.

A while ago, I related to this forum a “developing story” in the USA (see here) involving the Central Asia Institute and its founder Greg Mortenson; the multiple allegations (of fraud, deceit, breach of contract, racketeering, and unjust enrichment on the part of Mortensen and CAI) were significant and posed, once again, serious questions about the accountability and transparency of the not-for-profit sector in the USA as well as the enforcement mechanisms that are in place over there. I also argued that similar questions could be asked about accountability and transparency of the not-for-profit sector here in Australia. I did so already in earlier contributions (see here and here.)

Last week the Montana Attorney General, Steve Bullock, issued a report of his office’s investigation into CAI and Mortenson. You can find it, in all its depressing glory, here.  It  is likely to become a classic case study of what goes for accountability and transparency and enforcement in some quarters. It poses more questions than it answers.

The AG’s report essentially confirms many of the allegations. Arguing that CAI/Mortensen have accomplished some good, and – given a chance — might do some more, the AG has put in place a “settlement” that allows CAI/Mortenson to get things right in the future. Or at least right enough for the Montana Attorney General not to bother them. Essentially, more than a decade of flaunting accountability and transparency, and more than a decade of questionable spending of literally tens of millions of dollars, will be forgiven as part of the settlement. In the words of the AG:

“We concluded that the board of directors failed to fulfill some of its important responsibilities in governing the nonprofit charity. Further, Mortenson failed to fulfill his responsibilities as executive director and as a member of the board.
Despite policies that committed him to do so, Mortenson failed to make contributions to CAI equal to the royalties he earned on the books the organization purchased. Nor did he and CAI devise an equitable way to split the costs to advertise and promote the book, which was required by his 2008 employment agreement. Mortenson also accepted travel fees from event sponsors at the same time that CAI was paying his travel costs. Moreover, he had significant lapses in judgment resulting in money donated to CAI being spent on personal items such as charter flights for family vacations, clothing and internet downloads.
Despite consistent and repeated warnings about a lack of financial controls for the money CAI spent abroad and here at home, the board of directors failed to close those gaps over a period of nearly ten years.”

This strikes me as way too gentle a way of putting it, given that in 2002 Mortenson essentially forced out three members of the supervisory board that demanded accountability and transparency. And that a couple of years later the CFO resigned in response to Mortenson’s continued refusal to do what ought to be done. Lapses in judgment? Oh, please … Again, in the words of the AG:

“Between 2001 and 2011, CAI had three independent audits of its financials. The audits performed for the 2003, 2009 and 2010 fiscal years revealed material weaknesses in CAI’s financial and internal controls. Rather than address the deficiencies found in the 2003 audit, the board discontinued auditing its finances. The same material weaknesses appeared in the later audits. The CAI board also was expressly told of financial deficiencies and problems with internal controls by its former chief financial officer during the CFO’s employment with the charity. Those problems were further detailed and reiterated in a memorandum supplied to the board when the CFO resigned in 2004.”

It ultimately took The American Institute of Philanthropy, an independent charity watchdog, and a CBS program, “60 minutes”, to raise public and effective concerns about CAI’s lack of accountability and the dubious role that Mortenson played in it all. The “60 Minutes” program, apart from alleging mismanagement of funds, also alleged that Mortenson fabricated some of the stories in his books including “Three Cups of Tea”.

It is noteworthy that these allegations — which continue to stand — were not investigated by the Montana Attorney General, as were issues that are within the domain of the taxing authorities.

Three comments come to mind immediately:

First, why did it take an independent charity watchdog and a CBS program to finally (well, let’ s hope) put a stop to years of mismanagement and material weaknesses in financial and internal controls? And, by all accounts, millions of misappropriated funds on the part of Mortenson? Where was the Montana Attorney General during the past decade?

Second, while it is somewhat understandable that the Montana Attorney General now tries to right things (at the expense of getting things right), it sends a devastating signal to the not-for-profit sector in the USA as a whole. Essentially he invites every not-for-profit, and for-profit-in-disguise to follow the example of CAI/Mortenson. Predictably, the Montana Attorney General’s report, and decision, will become a template for those not-for-profits trying to avoid proper accountability and transparency.

Third, the CAI/Mortenson story is an ideal test case for the Australian Charities and Not-for-Profit Commission (ACNC) Implementation Taskforce (for its website see here)  to understand whether its intended (enforcement) model has bite. It now seems obvious that the ACNC will be little but a variant of the Charity Commission for England and Wales. I have argued elsewhere (see the references above to my earlier CET contributions) why this model is flawed and can, and should be, improved on. I do see nothing in what is currently known about the ACNC that convinces me that something like Mortenson/CAI could not, or is not already, happening here. The recent series of investigative reports of The Daily Telegraph (See here and here and here and here and here) and the responses of advocates (see, for example, here) are not reassuring.

As is a recent submission to the Treasury of the Community Council of Australia (for its website see here). Its ”informing principles for new fundraising regulation” say, among other things, this:

“2. While increasing the transparency of charities is desirable, no evidence has been presented to indicate the Australian public lack trust in charities or are concerned about information asymmetry. The goal of any new regulation should not be seen as addressing a market failure, but of promoting more charitable giving.”

I am not sure in what reality the authors of that principle live. Surely it is a parallel universe to the one described in the Daily Telegraph investigative reports. Or, for that matter this study of fraud in Australian nfps: BDO study.  And, surely, it does not match my own experiences last year when I tried to identify, on a very happy occasion, deserving not-for-profits.

It is discouraging, and from my perspective very short-sighted indeed, for the Community Council of Australia to dismiss the serious lack of accountability and transparency that does afflict the Australian not-for-profit sector, and the lack of public trust that begets.

Apparently the WA and Queensland politicians do not like the current GST carve up, which is  part of Australia’s long term (i.e. since federation) fiscal equalization policies. They complain that they are not getting their ‘fair share’. One example is here. For those of use old enough to have lived through previous mining booms, we have seen this before. Whenever the prices of minerals rise, the mining states complain about ‘subsidising’ the other states. Of course, silence reigns when the boom finishes.

But the federal government is reviewing the GST distribution and the Victorian government has a nice background paper here.  It notes that since federation, Victoria has net paid $66b and NSW has net paid $75b while WA has on net received $36b and Qld has received $11b. Even if we look at just the last 30 years:

the mining states of WA and Queensland have received $106 and $112 per person respectively.

Now the submission does not make it clear exactly how these numbers are calculated, but the direction is correct. Over the long term WA and Qld have gained significantly by federal fiscal equilization. And they will again when the current mining boom fades. So to the people of WA and Qld –  be careful what your politicians try to sell you. You may live to regret it.

(note to self)

For many years now, it has been clear to the insiders that there is no hope in achieving serious reductions to greenhouse gas emission by means of international co-operation: the incentives to free ride on the efforts of others is too great and none of the big players is willing to subjugate themselves to a world police that would enforce a deal. So whilst we have all been happily increasing our consumption of fossil fuels year-on-year, the smart money was always on finding some technological fix to global warming that did not require near-unanimous international agreement, whilst simply adapting to the problem in the meantime. That fix could be geo-engineering or a renewable energy source becoming economically competitive with fossil fuels.

So, where are we currently when it comes to geo-engineering and renewables? In terms of geo-engineering the likes of Bill Gates, Richard Branson, the UK Royal Society, and a whole set of EU-US based institutions have been pouring money and time into looking at what can be done. In terms of renewables, the big movers have been Chinese companies and a glut of new ideas that are leading to much cheaper forms of solar power.

To start with solar power first, according to the Bloomberg New Energy Finance’ Solar Value Chain Index the costs per Kilowatt-hour of solar has reduced around 50% in the last 3 years alone, with various new technologies that have the potential of going down much further. They are talking about printing off solar cells, using iron guns to produce them, making solar panels out of a spray-on paint, and various others ideas. One needs to be an expert at this to judge whether it will actually work, which I am not, but the clear reduction in costs that was achieved recently is there for all to see.

So how close is solar to being competitive to fossil fuels in terms of producing for the electricity grid? As a rule-of-thumb, the life-time costs of the cheapest fossil fuels are currently around US 65 dollars per Megawatt-hour whilst solar was still estimated to minimally cost over 200 dollars per Megawatt-hour in 2010. The cheapest fossil fuels are natural shale gas, natural gas turbines, and some forms of coal. Allowing for a halving of the fixed-cost of solar infrastructure in the next year, solar would still cost above 100 dollars per Megawatt -hour. This is competitive with many currently used forms of electricity generation of fossil fuels, including conventional combustion engines with a cost above 120 dollar per Mwh.

What is important to note is that the current trend of solar prices doesn’t have to continue for long for solar to be the stand-out cheapest form of mass-electricity generation for countries with a lot of sunshine. At the moment solar is hence looking like a real potential long-run replacement for many countries. Even at today’s costs, solar would only be marginally more expensive than fossil fuels.

But what are the inherent disadvantages of solar? Well, for one, you need a lot of solar panels to get a decent electricity flow, so cars or planes with solar cells are nowhere near a realistic prospect in terms of mass-transportation. Hence fossil fuels remain the front-running source of energy for our cars and planes, which on their own are enough to guarantee sufficient demand to keep increasing atmospheric CO2 levels.

Also, it needs to be sunny in order to get electricity, which is a problem for a lot of our economy which is reliant on guaranteed energy flows at any time of the day and where people don’t want to have to reboot their computer after every cloud. Since most of our energy needs are connected to industry or in activities that could run on batteries charged up when the sun shines (like charging up the car and the i-pad), there is some mileage for weening ourselves off this ever-ready energy pattern, but it would seem fair to say that it would be hard for us to adjust to only engaging in major economic activities when the sun shines. Hence a remaining technological hurdle is how to store solar energy easily and in sufficiently huge quantities as to allow for a lack of sun for a few weeks. Given the huge amount of constant electricity demand, this big-battery problem still prevents us from adopting solar as our steady supplier of electricity. If we would have to keep relying on fossil fuel generated electricity when the sun doesn’t shine, which would be the current reality if we’d adopt big solar farms for our electricity base-load, then once again we are guaranteed continued increases in the amount of CO2.

One might object to this by saying that in a large electricity grid one can connect the grids of different countries and thus effectively share sunlight with other regions, but electricity transportation over large distances has a remarkably high loss-rate. As this old Global Energy Network Institute report estimated, every 1,000 kilometers of extra distance increases the costs by around 5-10%, or equivalently that there is about a 5-10% loss in electricity when having to transport it another 1000 kilometers. If one then reflects on the fact that the distance between Sydney and Perth is already close to 4000 kilometers and thus involves a 20-40% loss of electricity, it is clear that it probably is not even cost-effective for Australian states to ‘share’ their sunshine, let alone to share sunlight with other countries.

Hence the problem of energy storage is a serious one for solar and we are still waiting for improvements in battery-efficiency to consider solar as an alternative to the fossil fuel electricity generators which can deliver power whenever we need it. This problem of course also besets wind-energy, for which the prospect of large future reductions in costs is much less rosy.

Furthermore, solar panels need setting up and they have to be kept clean, things that become much cheaper to do if one is setting up many of them in a single spot. Hence solar is unlikely to replace combustion engines as a means of delivering local energy or energy to residential homes: too much hassle and only viable with subsidies or in places where it is hard to get constant supplies of fossil fuels. Some major structures like large boats and sky-scrapers are a different matter though, so one should expect more medium scale uses of solar, although there too the problem of energy storage is a major one.

In short, the price reductions for solar is exceptionally good news for our way of life: given the big price reductions that bring solar close to parity with existing fuels, and given the near inexhaustibly huge supply of solar (the sun sends about 6000 times more solar energy to us than we humans generate from all sources), the future of our industrial modern societies based on cheap energy looks very bright. We might have to adapt to the intermittent nature of the energy flow if we can’t crack the energy storage problem, but at least we now have a liveable alternative. The substitute source of energy to fossil fuels is hence in sight even though it may take a decade or two before its better than what we currently use.

Then the topic of Geo-engineering. Since the landmark 2009 report by the Royal Society (which I extensively reviewed previously), engineers have been dreaming up a lot of new stuff, with particularly hopeful possibilities in the area of Solar Radiation Management (SRM). Front-runners are the ideas of spray-gunning the atmosphere in order to create more clouds, and sending dust particles up into the air.

The spray-gun idea is of a charming simplicity: clouds are white and reflect a lot of sunlight. Hence if you can create yourself more clouds, you cool the earth. How do you create more clouds? Well, clouds are made of water vapour. That vapour arises naturally from the sun heating water, but you can also try to do it yourself by putting water into a plane and delivering the vapour into the atmosphere where you want it (Neukermans A, Cooper G, Foster J, Galbraith L, Ormond B, Johnston D, Wang Qin (2011). Supercritical saltwater spray for marine cloud brightening. Geophysical Research Abstracts, 13, EGU2011-9655-1).

The technology hence has many potential advantages: because one would be in the business of creating thousands of clouds every day, one gets a very sensitive instrument for geo-engineering. You get to decide where you want to cool, just at what temperature you are going to stop cooling, and one can easily experiment with small regions without seriously upsetting the balance of the planet. After all, Nature experiments with clouds all the time and a few more or less wont unbalance the earth. So the technology can be safely tested and experimented with and has great advantages in terms of timing and delivery.

What are the problems? Well, for one, we don’t quite yet seem to be able to produce a fine enough mist quickly enough. After all, you want to be able to do this quickly and thus convert thousands of liters of sea-water into a cloud in a matter of minutes. Yet, sea-water is salty and thus corrosive, and there are all kinds of things in sea water that would clog up any tiny holes. Nature solves this by simply heating the water and thus having salt-free water molecules rising up in the air, but that solution is not open to us because the sun warming the sea water was precisely the problem we are trying to address, not add to. Hence we still need to sort out the problem of quickly filtering sea water and misting it.

A secondary problem is sheer coordination: if we end up with thousands of planes misting the atmosphere then one would be looking at a whole network of airports and cooperating countries. The countries most suited, i.e. close to the North Pole, might actually discover they don’t want to halt warming and thus fail to cooperate.

The bigger problem is that it might not work: aeroplane delivery of water-vapor is an intriguing idea but there are only computer simulations that suggest it is do-able at reasonably low costs. The computer models can easily be off by a magnitude of 10 or more in terms of how much cloud needs to be created to get enough cooling. Just think about it: if we would have to create 10% more clouds in the world, we would be talking about an artificial vapour with the size of America. That’s too much vapour and planes to realistically be able to muster, so one has to hope that it would require no more than a hundredth of this area. I am personally skeptical on this point and would thus not be surprised if some new computer model in the coming years would say it’s a hopeless plan, but we will see.

Then the dust particles, also known as dimming, or ‘aerosols’. I have written about this before and the advantage of this one is that it’s a proven technology. Volcanoes proved it for us. The Mt Pinatubo eruption in 1991 caused a global cooling by belching huge volumes of dust particles into the atmosphere, proving that dust can cool the earth.

Despite some people saying we don’t know how to dust the atmosphere, we humans have also done it. Until about 20 years ago we put a lot of dirty particles into the air by having dirty coal power stations, unfiltered car exhausts, and various other unfiltered industrial emissions. This lead to large-scale dimming to the extent that the amount of sunlight hitting the earth was reducing by up to 4% per decade from 1960-1990.

What happened to dimming? We started to clean up because of concerns over the local environment. People don’t like smog and haziness in their own cities, so governments have mandated industries and electricity generators to clean up and no longer send particles in the air. This has reversed the global dimming trends, such that our days are once more full of gloriously clear sunshine. And quite probably also means global warming is resuming on a faster upward trajectory.

It is not too hard to guess what can be done: by re-adopting our dirtier ways we can resume the dimming process. Furthermore, there are scientists trying to perfect what we stumbled upon by accident. We can make the dust we send up more reflective, more buoyant (so it stays up for longer), less degradable, and less annoying to people.

The big problem with this solution is again one of sheer scale: when we were dimming we were belching up an awful lot of stuff into the atmosphere. We were effectively blocking out an area the size of Australia and we were still warming up the planet! It is even worse: since then we have added a lot of extra Greenhouse gasses, meaning that we’d have to take dimming to an extra level to be of potential help. To make an impact, we’d have to re-designate large areas that we don’t care about, such as, say, the Pacific Ocean, as dimming territories and continuously belch up huge volumes of dust. That in turn requires a massive industrial exercise since it would involve sending huge volumes of resources to tiny island in the middle of distant oceans in order to send it up. It is not at all clear yet that this is affordable in terms of what we are willing to pay to stop global warming (which is not much).

Summarising, geo-engineering is probably do-able though we don’t yet know the true costs. We can safely assume it would be minimally in the order of hundreds of billions of dollars every year. And the uncertainties are such that we are easily 20 years off knowing enough to be able to implement it. During that 20 years, we can safely say that we will keep going through the cheapest energy sources – fossil fuels, whilst solar energy is promising to be the go-to source once the cheapest forms of fossil fuels have run out. If improvements in solar and battery technology are spectacular, it may even muscle out fossil fuels within this decade as the major provider of base-load energy.

In short, there have been very hopeful developments for the sustainability of our current way of life on this planet in the last 2 years.

“Why are we here?”  In December 1988 Life Magazine put this question to 50 people, famous and un-famous.  You can see the other answers here.  Most of the answers are predictably droll.  Richard Nixon gave a surprisingly good answer, given how he lived his life.  Leonard Nimoy fudged his answer.  He replied “I find the question “Why are we here?” typically human. I’d suggest “Are we here?” would be the more logical choice.”  That was good for a laugh, as intended, but Rene Descartes got us past the question “are we here?”.

In the last week there has been more fudging of the question “why are we here”.  It started on the ABC television program Q&A on 9 April when Richard Dawkins, the eminent biologist and outspoken atheist, said that it is a nonsense question akin to asking “what is the colour of envy”.  Philosopher A.C. Grayling made the same assertion, that the question is not well formed, on the same  program one week later.  This is a massive cop out.  It is a well formed and in fact essential question in every life well lived.

I thought that Dawkins was quite good on the Q&A program in which he debated religious belief with George Pell.  I wasn’t going to listen to the program because I didn’t think Dawkins, Pell and the program host Tony Jones would have much of interest to say, but I heard it by accident riding in a taxi from Melbourne Airport to Melbourne Business School, and it was surprisingly interesting.  But I was dismayed to hear Dawkins fudge the question of “why are we here”.  By pretending that it is a not a real question, Dawkins has exposed himself to criticism that will never go away.  He sounds like a weasel worded politician when he wriggles out of that question.  He needs to be honest and address the question directly.

My understanding is that Richard Dawkins is an empiricist and a materialist.  Empiricists believe that knowledge comes only from sensory perception — there is no innate knowledge beyond the knowledge built into the human genome that is needed by the developing human brain to organise all the information that arrives from the senses as a single cell develops into a person.  Immanuel Kant showed in the Critique of Pure Reason that some knowledge must be innate.  Empiricists believe that claims about reality that cannot be demonstrated empirically — by repeated experiment — must be rejected.   Materialism, which goes with empiricism, asserts that there is only energy and matter (therefore, only energy) in the universe.  Materialists hold that the spiritual part of the universe — that beyond the material world — is the empty set.

The problem for Richard Dawkins and like minded persons is the logical answer to the question “why are we here?”  The logical answer for empiricist, materialists must be that we are not here for any reason at all other than to reproduce.  Our bodies and our lives have only one purpose — to carry our genes into the future.  There is no higher purpose.  There is  certainly no collective purpose, save the collective propagation of the genes in our bodies and the bodies of our relatives.  

There is no such thing as love or beauty or honour or sacrifice.  These are just modal brain states induced by chemicals for the purpose of propagating the genes.  There is no such thing as ‘moral law’.  Morality is a purely human construct.  Because there is no purpose in the empiricist, materialist world other than to propagate genes, there is only one criteria on which different moral codes can be assessed — which one is better for propagation of the genes.  Morality is a means to an end — nothing is innately good or bad — it is only good or bad relative to the survival of genes.  The only moral framework that makes sense in an empiricist, materialist world is a utilitarian framework in which propagation of genes creates the objective function.

Empiricist, materialists believe that we are here by pure chance.  Life is simply a higher state of complexity than other matter.  There is no more purpose in your life than in the ‘life’ of a rock save the purpose of propagating the physical-chemical-biological complexity that is a gene.  The essential difference between you and a rock is only complexity and the level of energy that flows through you as a complex, energy consuming entity.

Dawkins and company fudge their answers because they want to convert others to their way of thinking.   Unfortunately, for Richard Dawkins most people don’t want to hear that they don’t really ‘love’ their children, they just have a chemical reaction when they experience them in thought or through the senses.  Most people don’t want to hear that their lives have no meaning.  So, they have to pretend that ‘why are we here’ is meaningless.

It is a pity that Richard Dawkins and others find this demeaning fudge necessary.  I find the beliefs of empiricist, materialists perfectly rational and coherent.  It is not what I believe, but it is unassailable unless it is fudged.  And stating that the question ‘why are we here’ is not a well formed question is a massive fudge.  Why not just be honest?  Dawkins should just answer in a plain and honest way that is true to his beliefs — we are here by accident, and not for any purpose other than to propagate genes.  That is the ineluctable conclusion for empiricist materialists.  They should be proudly defend their beliefs and face up to this difficult question.

On the AM radio program today Samatha Hawley, the interviewer, asked Andrew Robb, the Opposition Finance Spoken, whether ANZ’s 6 basis point increase in its standard variable rate mortgage is “justified”.  The “just” price for money — that is so medieval.  Should we have “usury” laws to go with “just” prices.  Later in the interview Ms Hawley emphasised the questionable justice of the ANZ’s price rise by noting that ANZ had raised its prices despite making a profit last year.  Profits and price rises — how dreadful.

The medieval notion of “just” prices — where just means that the price is righteous in the sight of God — has been replaced in the modern world by “competitive” prices.  The medieval notion of the economy, and all of society, is that each person and each enterprise is part of single community of the faithful acting by God’s law and facing final judgement for their actions on Earth.  In that context a “just” price makes sense — just prices are the result of righteous behaviour by producers and consumers.

The modern notion of prices is that prices are set within an institutional framework.  altruistic behaviour by individuals is not uncommon, but it is much less common than self-interested behaviour, and the equilibrium of prices and quantities in the market, as the determined at margin, arise from self-interested behaviour.  Socially optimal prices arise if the institutional framework of the market is optimal.  Design and control of the market is at the institutional level, not the individual level.  In the interview today, Ms Hawley should be asking “has the banking system in Australia become non-competitive”.  She should be taking a modern, institutional perspective.

The answer would be that the Australian mortgage market has certainly become less competitive since the beginning of the GFC.  The competition that was provided by the securitisation channel and the foreign banks is much diminished.  Most of this reduced competition is beyond the control of the Federal Government, but some of it has been caused by the Government.  For instance, the Government gave Australian commercial banks the right to issue covered bonds that are senior to Government’s claim on the assets of the bank.  This subordination of the Government’s claim has reduced the yields on the bonds of the large banks by 30 or 40 basis points, or more, but the Government asked for nothing in return.  The Government might have insisted that either the banks increase their capital (to reduce the cost to the Government of providing deposit insurance) or, even better, the Government might have asked the banks to reduce the cost to households of switching mortgages, which would lead to a direct improvement in competition in the market.

The hand wringing and moralising that goes on after the banks change their prices is so silly and medieval and doesn’t get us anywhere.  It leads us away from the modern view of institutional arrangements in markets which ultimately determines how socially optimal market outcomes are.

In a century, there has been at least one firmly held belief that was proved false. The Titanic was not unsinkable. But 100 years after that was proven false, another belief has been shattered: that Chris Berg of the IPA would never, ever advocate more government regulation.

But as I was pointed to his piece in no less an esteemed outlet as the Wall Street Journal, that position sank. In the piece, Berg argues that, in contrast to James Cameron’s story, it was not an aesthetic concern that led to too few lifeboats being aboard the Titanic. Instead, it was that the regulatory body, the Board of Trade, had not updated their regulations for decades and did not require more lifeboats. Indeed, the Titanic had been designed to accept them as its owners anticipated that the regulations might be updated.

So the issue was not cost, per se, or aesthetics, but whether the regulator felt it necessary to increase the lifeboat requirements for White Star’s new, larger, class of ship.

This undercuts the convenient morality tale about safety being sacrificed for commercial success that sneaks into most accounts of the Titanic disaster.

The responsibility for lifeboats came “entirely practically under the Board of Trade,” as Carlisle described the industry’s thinking at the time. Nobody seriously thought to second-guess the board’s judgment.

But why didn’t a private operator choose to do something else. The regulator did not cap the number of lifeboats, it imposed a minimum. You can always put in more if you think it is in your customer’s interests.

Now Berg isn’t going to admit that there is such a thing as good regulation, let alone that the Titanic disaster could have been solved by such. Instead, he seems to point out that the existence of the regulation itself caused the problem.

And regulated entities tend to comply with the specifics of the regulations, not with the goal of the regulations themselves. All too often, once government takes over, what was private risk management becomes regulatory compliance.

The idea is that because there is a regulation, private firms throw their own judgment out the window and do something against their own interests when they could have freely chosen otherwise. No, you can’t have that. Chris Berg, don’t you know that once you admit to the world that private firms (or people) don’t freely choose what is good for them when they can that you are down a slippery slope to legitimate roles for government?

Absent the last few sentences, Berg’s piece stands a model for advocacy of good government regulation.

Also, has anyone every wondered whether if we take the movie profits into account, the whole Titanic thing had a positive rate of return?

The federal government has apparently designed a great prisoners’ dilemma to be played by asylum seekers and refugees. According to the ABC television news, all asylum seekers are put into one category (both on-shore and off-shore) with a cap on the number that Australia will accept each year. But if you are in Australia your application is processed first and you will be ‘accepted’ earlier than if you are in an overseas refugee camp.

The result?

Well the optimal outcome is for refugees not to risk life and limb to get to Australia through the use of people smugglers and unseaworthy vessels. But your chance of being accepted as a refugee in Australia rises if you travel to Australia by some means. The more people that do this, the lower your chance of acceptance if you wait in a refugee camp. So the dominant strategy equilibrium is for refugees to pile into leaky boats and try for Australia rather than wait in refugee camps.

This is nuts. A simple policy change will help. Set a generous target for off-shore refugees that is completely independent of the number of on-shore refugees. This will not fix the problem of refugees drowning but at least it will reduce the incentives to try and make it to Australia as a refugee.

Credit where it is due. ANU have started their new Institute of Public Policy. It is long overdue for an Australian University to have a world-class school of public policy that brings together academia and the policy makers in the public service. The Kennedy School (Harvard) and the Woodrow Wilson School (Princeton) are two of the benchmarks and if ANU can get in the same ballpark as those two then we will have a great national asset. Having Ken Henry as the part-time Executive Chair is a brilliant start, and if any university can make it work then ANU – with its proximity to the federal public service – is the place.

Of course a $111m gift helps ….

For me running a good department is all about nurturing a culture of academic tenure. A culture of tenure is a culture of academic freedom coupled with a cooperative attitude in which academics feel that they are partners in the department. Though we don’t have formal tenure contracts in Australia, we do generally have tenure in terms of job security and a tradition that it’s very hard to fire an academic on a continuing contract. But tenure is not just about  job security, it’s also about the stability of the conditions of employment. How many courses does one teach? Limitations on the downside of salary risk. Clarity in promotions criteria. Here are the five things that I think nurture a culture of tenure in a department.

I. Don’t do anything fancy with teaching loads

When I was at Melbourne every academic regardless of research performance had to teach two courses; though professors usually taught the large principles courses and junior faculty got the smaller honours or third year courses. This kind of equity in teaching loads for tenured academics is essential in any good department. It is also an essential part of the culture of tenure that makes for great departments. You simply don’t want to be in an environment where you are compelled to strategically compete for a lower teaching load with your colleagues. It’s a zero sum game that no competent head of department would want to oversee.

By far the best workloads rule that I’ve experienced is the

 Come rain or shine everyone teaches the same number of courses.

You published in Econometrica this year? Good on you buddy, here’s a beer, but you’re still going to teach your two courses. You’ve had six rejections and haven’t published a thing this year, well this is your lucky year: you’re teaching two courses just like the annoying superstar next-door. You’ve got ten PhD students? Two courses! You’re the head of department, that’s one course please.

II. Limit the powers and  tenure of the head of department

Heads of departments can be pretty powerful. The head can affect some of your working conditions almost arbitrarily. Importantly, the head is the first person that a dean-with-ideas calls.  In departments with no culture of tenure the headship can be very attractive to senior faculty who  bitterly compete for years to have a go at this coveted position. In fact, absent a culture of tenure the headship is so attractive that incumbents typically have to be pulled out of that office by their toes.

The best model that I’ve seen is one in which the term of headship is limited to three years. Here I’m talking about three year terms for the head of department that can be renewed twice or even three times. Limited tenure dramatically reduces the opportunity for arbitrary application of executive power. It’s not very attractive to many deans, but I think that most deans can be convinced by the idea that in a good department with a large number of active senior academics three year headships can work–with a supportive senior faculty willing to help out in the day to day running of the department.

I also think that it is absolutely essential that the head teaches. It makes the position less attractive (which is a good thing) and the head needs to be engaged in the core business of the department. Similarly, it is crucial that the head has time to do research, that will make the position more attractive–to the people that you want to be head.

There is nothing that engenders a culture of tenure more than devolving the executive powers of the head to senior faculty who see themselves as partners in the department.

III. Engage the whole department in hiring and hire well

You know that you have a vibrant culture of tenure in your department if you regularly hire people better than the incumbents in a collective process that engages and gives a voice to all academics.

Absent a culture of a tenure you simply do not want to broadly engage faculty in any hiring decision. This is because any academic worried that his or her working conditions may be adversely affected will want to hire people that are worse than themselves in every characteristic: research, teaching, and service. Why would they want to hire a person that is better than themselves if that has the potential of affecting their employment conditions in an adverse way?

Absent a culture of tenure the only reasonable way to hire people is for the head of department to make a short list of candidates for a small committee comprising the head, the dean, the head’s friend and a student representative.  The head calls up a mate who recommends one of his students for service in the colonies.

In a department lacking a culture of tenure collective decision making regarding hiring necessarily means that people hired through a collective process  based on departmental consensus  will be worse than the median incumbent in the department.

IIII. Criterion referenced upside and limited  downside  

We don’t grade on a curve anymore. We don’t determine which class of honours a student gets based on the student’s rank in the class. We now grade, and rightly so, based on clear criteria.

I don’t see any place in a department for competitions or norm referenced rewards; not in terms of  promotions or awards.

An excellent teacher should receive a teaching award regardless of whether his student evaluation scores are the highest or second highest in the department. For teaching awards, set benchmarks: if you get more than 4.4 in student evaluation, then you get a certificate and a red balloon, more than 4.6 a certificate a medal and $2k is research funds. You don’t want to be rewarding people based on the average student evaluation in the department or on the median or max or min.

The only thing worse than races and competitions in a department is using punishment as a policy instrument–If your student evaluations are below 3.5 we will punish you in various horrible ways. Punishment is just so destructive for any sort of academic scholarly culture.  Anything that can be achieved with a stick is better achieved with a carrot; especially given that in all likelihood most academics in your department will be with you for the rest of your career!

IIII It’s About the Teaching, Stupid!

Keep a fixed eye on the core business because only rich departments can in the long run be successful departments. And the core business in Australian departments is teaching; first and second year teaching. These must be taught well and protected. The best departments invest in continually improving the first and second year student experience. Ideally, your top researchers, the most senior members in the department, and your best teachers ought to be engaged at the first and second year levels.

Paul Howes, from the Australian Workers Union, has criticised the RBA for keeping interest rates too high. I have heard this criticism a few times recently – but only from those living in Melbourne or Sydney. Unfortunately, these critics need to get out more and realise that in Australia’s two-speed economy, reducing interest rates will add to inflationary pressures building in the resource states.

Monetary policy is a national instrument that is poorly suited to an economy that is being driven in two different directions by the resources boom. If the residence of new-Athens and new-Lisbon (aka Sydney and Melbourne) want government intervention, then look to fiscal policy.