Friday, July 31, 2009

The value of a network

Breathless reports of a speech by the new ICANN chief in which he has challenged the validity of Metcalfe's Law.

It is stupid to report it as if it is a eevelation since the "Law" has always been based on the simple calculation that the number of links between nodes on a network of n nodes is n*(n-1). From this Metcalfe opined that the value of the network grew in proportion to n squared.

Andrew Odlyzko* has pointed out back in 2006 that this is based on an assumption that each link is equally valuable. Odlyzko proposed an alternative that the network's value increases as n*logn which effectively assumes an exponentially decaying value in each extra link.

I haven't seen the actual paper referred to in the above, but it sounds like it is referring to yet another feature that is the feature of "congestion" effects. In the case of the article Bill Gates found he had so many friends on Facebook none of it was of any value. An alternative version of this was offered by Eli Noam in the introduction to Telecommunications in Europe. In that Eli explained that large corporations had benefitted greatly from network effects in telecommunications but it got to a point where congestion and other factors resulted in them having a higher utility in private not public networks.

That is, just as positive network effects could explain the growth of telecommunications networks and a justification for effectively mandated monopoly (I'd have to digress on a history of ATT), the negative effect also had a role in seeing the pressures build for deregulation and the relaxation of rules prohibitting interconnection of private and public networks.

I think there are two important lessons here. The first is that Metcalfe's Law certainly isn't a law at all and should not be referred to as such - at best it is Metcalfe's Conecture or Hypothesis. The second is that networks do not behave uniformly and are deserving of far more analysis than they receive.

* I see that Joshua Gans has even blogged about Odlyzko. I concur with him on how amazing his output has been. The paper I find most interesting was the one when he pointed out that the capacity of the Internet wasn't doubling every hundred days - just when everyone believed it did!

Warning - politicians thinking!

Lindsay Tanner continues to confound our expectation of Australian politicians with another thoughtful piece in the Oz. He writes of the ideas of Cass Sunstein and the idea of "the nudge" the idea of doing things that might guide behaviour rather than direct it.

It is a delight to read a politician who understands that the influence that can be exerted by Government is more than just legislation, taxation and subsidy. Getting the vast army of public servants who need to become the politcians' allies in the world of nudge will be a greater challenge.

But we are in serious danger between a left-winger advocating nuance not control and the right-wing Mr Abbott advocating constitutional change of actually seeing sustained intellectual engagement by politicians not just reaction from a well worn phrase book. The danger is that we've never seen this before and hence don't know whre it might end.

Thursday, July 30, 2009


I haven't read all of Tony Abbott's book yet. I've been looking forward to it as I knew he was going to discuss the future of the Federation - and I'm not disappointed.

But it was mighty strange that the book was launched in the same week as the National Health Reform Commission reported. This is the report about which the Prime Minister has had to dissemble on his rash promise to have worked with the States to fix the health system or to take it over.

His problem is of course that there is no rational way to take it over.

Here is where Abbott has his bright idea - which is to propose a new section 51A to the constitution that allows the Commonwealth to increase its own powers by the expediency of passing the relevant bill twice eparated by six months.

It is an excellent suggestion. It solves the vexed problem of the fact that no one wants the States but no one can be prepared to suggest that they be abolished - plus the legislation to abolish them needs to come from a State Parliament.

Tony correctly identifies that this is a conservative stance - the men who gathered to draft the constitution did not write a Federal constitution because of a passionate desire to protect the States but as a matter of expedience.

In the 7:30 report interview that touched on the change and Rudd's dilemma. Paul Kelly in the Oz touched on the issue a bit more but seemed to dismiss the chance of the constitutional change getting up out of hand.

Peter van Onselen also in the Oz is equally dismissive of the constitutional change. Greg Craven of ACU is quoted as suggesting that the failure of the republic referendum is a pointer to the success of Abbott's "Change 51" (As I will now call it). This is complete bunk - the people know that the republic issue was all gloss and no substance, "Change 51" has the power to significantly impact on the quality of our Government and hence on our services.

The question - how do we build the "Change 51" movement.

Another view

Forbes has an interesting article with an alternative view of the Great Depression.

The thesis appears to be that the 1920s was a period of massive productivity improvements driven by electrification and the internal combustion engine. This resulted in falling prices, a growth in inequality and an explosion in executive compensation.

The depression in this view was due to the policy response to this;

The policy responses that created the most trouble in the 1920s and 1930s--that made the Depression "great"--were those that tried to undo the inevitable consequences of technological progress: trying to keep prices from falling, trying to keep wages high, and demonizing those who gained great wealth from the revolution in technology.

This view seems to be that the depression became great by the initial response to it, rather than it was great in and of itself. It is an interesting theory, one I probably don't subscribe to. However, the fact of productivity improvement as well as the expansion in capital markets probably does need to factor into any meaningful analysis.

Tuesday, July 28, 2009

The PM takes a break

As we know when our Prime Minister takes a break we get an essay. His latest missive has again come under attack for its supposed gross generalisations of the cause of the current crisis. Given the extent of the criticism it is surprising how little the PM actually wrote about this.

Following a description of the three stage cause being burgeoning debt, an asset price bubble and huge capital flows from East to West, the PM has a short section on "the ideological hypocrisy of the right". Two paragraphs give the flavour of this;

This fundamentalist ideology of self-regulating markets has imploded comprehensively with the current crisis. We have seen spectacular market failure requiring equally spectacular government intervention in the economy to effectively save the system from itself.

Notwithstanding their support for the extreme free-market policies that have underpinned much of the crisis, the neo-liberals of the political right now refuse to accept any form of political responsibility for the fruits of their own ideological handiwork: the current global recession.

This is hardly dramatic stuff really. No one would actually dispute the Rudd description of the cause of the crisis, though one might like to go into a little more detail about how the process of burgeoning debt and asset price inflation fed off each other through a failure in the banking system to correctly analyse risk (or, more technically, by an incorrect belief that securtisation and derivatives had successfully diversified risk).

One might like to go a little more into how this failure reflects the weakness of the efficient market hypothesis and the fact that some of the information traders rely on is not fundamental information but the information they glean from the behaviour of other traders. (My favourite example is from the non-financial markets where the line that the capacity of the internet was doubling every hundred days was believed globally by telco execs even though the data on their own networks did not demonstrate it).

What the PM's thesis amounts to is that the crisis was generated by a belief in the efficiency of markts that was not supported in reality. What he is railing against is the group of economists (and politicians) who cannot release their belief in he market and hence believe that the market will "self correct".

Unfortunately Rudd does so by resorting to what Gerard Henderson identifies as tribal loyalty. While that may be a phrase offered by the sub-editor, Henederson states "his latest essay turns on far more partisanship than any that John Howard and Peter Costello engaged in". This though largely misses the point, Rudd is trying to bell-the-cat of the failings of the market as a reason to not accept the neoliberal prescriptions for the recovery.

Henderson chooses to criticise Rudd for labelling the neoliberal cause the "right", and from twin errors of not identifying that much of this "right" agenda was implemented by "progressive" governments - including those of Hawke, Keating and Clinton, and that much of what has been implemented here by the "right" has been of benefit. I think this criticism is poorly made in the current context. Rudd's intellectual battle now is only with neoliberals who reject the Keynesian response. Rudd is not proposing any fundamental leap back to a socialist nirvana of centrally planned economies - he is merely indicating that the "let the markets rip" school is inadequate.

If Gerard Henderson wants to see the ind of "right" that Rudd is combatting he should see the blog in the Oz that suggested "the Sydney Morning Herald and The Age morphed into something similar to the Pyongyang Post" by running the essay. The blog quotes from Sinclair Davidson arguing that Rudd got history "exactly wrong" in the description of the Australian response to the 1930s depression.

Let's just agree that the evidence on macro-responses to the Great Depressio is mixed at best. But Davidson's glittering nugget of wisdom is about who did better in a public service economics exam. Hmmm. How will we judge - the theorist whose book has been accomodated in some form into every classical theory or the bloke who beat him in his undergraduate exams?

A more measured blog also in the Oz is more focussed on whether Rudd's five pioints for recovery (regulation and competition reform, infrastructure, innovation, skills and tax) is sufficient and if he is turning his back on pro market reforms. This does seem odd since there is nothing other than the rhetorical attack on opponents of deficit spending at the trough of a recesson to suggest that Rudd is any different from his labour predecessors.

The biggest concern for market fans seems to be what is happening in the labour market. As far as I can see we are basically back to where we were in 1996 - reforms that fuelled the Howard decade. They look like the perfect kind of compromise between markets and regulation that Rudd is extolling for the whole economy.

The "right" should not over-react to the Rudd message. To do so will only create the incentive and opportunity to drive a far more centralist flavour in economic policy.

Monday, July 27, 2009

What a great story

It appears that the voice to text service offered by Telstra and some other global carriers is not fully aoutomated.

This creates an interesting challenge. There is nothing wrong technically with the service provider using human agents to do this, heck they've offered human agents doing it in products that we call "call screen". The issue is that neither caller or service subscriber as aware that people might be involved.

A most interesting story.

Thursday, July 23, 2009

"Unreasonable" and legal arguments based on economic principles

I have been wading through the Federal Court's recent decision to reject a number of appeals from Telstra over ULLS and LSS arbitration decisions.

Let me first remind my readers (and myself) that as a lwayer I am strictly of the "bush" variety. Let me follow that by saying I have not been reading the judgement for all its fine detail. One of the interesting things about telco law has been that the absence of significant case law has mant that people like me can be as much use as a lawyer - because the interpretation has rested on the legislative wording.

This decision changes much of this. There are six areas in which Telstra claimed an error had occurred;
Pooling and Allocation Method
ULLS Model Terms
Call Diversion
Weighted Average Cost of Capital (WACC)
Line Costs
2007 LSS Pricing Principles

Each seems to reveal an interesting legal point for future consideration.

Pooling ad Allocation Method

This refers to a feature in the LSS and ULL pricing for which I take personal credit. The argument that the costs Telstra incurs for providing wholesale access to these services (e.g. ordering and provisioning systems) should be recovered across all copper pairs not just the pairs used for the service was first raised in submissions prepared by AAPT. It took me a while between my lawyer and economist to get it into a reasonable shape.

The argument got a life when Telstra stupidly responded to the 2003 indicative prices with an undertaking at those prices but repeating all its old arguments. This the ACCC interpreted as a "set-up" and consequently re-evaluated everything. This was when Optus joined the fray and improved the argument by pointing out that all copper customers in fact benefited from the competition that ensued.

Telstra's claim was that s152CR(1)(d) of the TPA required the Commission to "take into account" the direct costs of providing the service in determining the access price. The court found in this and an earlier case that he Commission did take the direct cost into account. Mosre specifically "taking into account" did not require the access charge to deal with the direct cost in any particular way.

ULLS Model Terms

This claim was somewhat similar in that the legislation required the ACCC to have required to model terms it was required to prepare under lgislation. Telstra claimed that the Commission had erred by not having regard to these terms.

Telstra failed in this claim in a number of ways. The most telling was that the adoption of the Pooling Method above meant that the 2003 model terms were not operative to the extent of any inconsistency. The court also demonstrated that the Commission did have regard to the model terms and explained their reasons for deviating from them.

Call Diversion

The call diversion claim rested on one of the underexplored areas of the access regime, s152CP(2) which enables the Commission determination to deal with any matter relating to acess. The judgement gives a great deal of consideration to the matter, both interegating the specifics of how the call diversion charge relates to the declared service for which the determination is made, and the legislative purposes of the access regime. It concludes that the Commission was entitled to make this determination.

This part of the judgement could be particularly useful were PartXIC to get much more continued future usage.

Weighted Average Cost of Capital

It is in the consideration of the process for determining the WACC that we see some really interesting arguments. There were two grounds claimed - that to a lay person - look the same. The first was that the ACCC made an error of law when determining the WACC as the ACCC based its determination of the WACC on a manifestly erroneous methodology involving economic principle. The second ground is that the ACCC acted so unreasonably and irrationally that no reasonable person could have so exercised the power.

Part of the argument resolved around whether assumptions in the CAPM of a homogeneous investor population were warranted, and Telstra's contention that the reality of a heterogenous investor base means a premium needs to be provided to the WACC. Telstra also identified what it called a "welfare assymetry" in setting the WACC, claiming that there are more dire onsequences from underestimating the WACC than overestimating it.

Telstra's principle claim in support of its contention was that the Commission had assumed a homogeneity of investor preferences in setting the WACC, but a hetergeneity of investor preference in rejecting the welfare asymetry argument.

The court first finds that there is nothing in the Act that actualy requires the ACCC to establish a WACC, and hence an error in determining it would not be an error in law, but an error in the ACCC's reasoning processes. The court also refers to authorities who distinguish between the claims that something is "illogica" and that reasoning can simply be wrong. Wrong reasoning does not become an error in law.

But the line that caught my eye was in relation to Telstra's capital strke argument wherein the court found "[The Commission] was at liberty to consider that in the real world investors do not behave in the way in which the capital strike proposition would have them behave." It continues;

It seems to me that the expression “assumptions” in relation to the CAPM is ambiguous. It may be that, outside the realm of economics, the word “assumption” is not the best word to refer to such things as homogeneity of expectations, no inflation and no personal income taxes. The CAPM does not assume those things in the real world in the sense that the CAPM loses its validity if they do not in fact reflect the real world. The CAPM makes assumptions in the sense of putting certain things to one side. The model can work and be a useful tool for the purpose of addressing only those things with which it deals.

This I think is the ultimte point for any consideration of "economic principles" together with questions of "manifestly erroneous methodology" or "unreasonably or irrationally". Any economic principle theory or model requires "certain things to be put to one side". It hence seems that it is a very high bar to ever argue that the way a decision maker relies on economic principles is unreasonable. More specifically the question of reasonableness actually lies outside the economic principle, not within it.

Line Costs

The line costs argument relates to whether the LSS should contribute a share of the line cost. It is a matter on which I always disagreed with my industry colleagues and argued should be included (on the same basis that the LSS specific costs should be pooled). Telstra however only ran the legal argument that there was no evidence for the finfding and that they Commission had failed to inquire. I personally found both to be too legally esoteric for me.

I would have been far more interested in seeing Telstra mount the claim in the terms attempted for the WACC. That is, that it is "manifestly erroneous methodology" or "unreasonably or irrationally" to pool the LSS specific costs but not "pool" the line costs. Maybe that will be round three.

Pricing Principles

Another esoteric point on whether the Comission could make pricing principles when principles already applied, and how the factof two separate pricing principles played out in the context of an arbitration that covered a period in the middle of which the second set of principles were made. I have not bothered to read the detail of this because I am more interested in the related part - that is - the Commission only has to have regard to the principles.


This judgement provides some interesting insights into what the requirements are for a decision maker to "have regard" to something or taking something "into account". It also provides some interesting guidance on the principle of "relating to". In both cases the conclusions seem to result in outcomes that confirm the very wide discretion of the ACCC. This might not be the loss for Telstra that it might at first seem. Telstra and Henry Ergas have argued that the ACCC has excessive discretion in Part XIC and the judgement only serves to demonstrate how wide that discretion is.

The more damaging element seems to be the conclusion about "manifestly erroneous methodology" or "unreasonably or irrationally" when used in the context of argument on economic principles. Put bluntly the court has really found that as any economic argument sets aside certain tings it can never be found to be manifestly unreasonable. It opens up a question of whether the whole field of competition law has gone up a blind alley by referring to some generic concepts in legislation and leaving it to subsequent economic and legal argument to work out the detail.

It is perhaps the more unfortunate reality that economic thery is not up to the task required of it by legislation. While we have a theory of physical mechanics that can, for example, let us conclude from the position and skid marks of two vehicles after a accident what their velocities were before it, our economic theory comes nowhere near the same level of specificity and continues to rely on theories that "set aside" certain things not because the effect of them might be small (like air resistance would be in the crash model) but because they make the model too hard.

Wednesday, July 22, 2009

One step forward - a thousand steps back

Go for it Democrats. Your big breakthrough is to get an Anti-Clean Feed campaigner to head your technology policy committee...from EFA what's more.

Let's see if that gets you 1000 people!

Ahh the idiot branch of the Democrat family

Down Adelaide way the last surviving Australian Democrat parliamentarian has made a bit of a stink.

He's challenged the Democrats to find 1000 members in four months or else he will resign. This is part of the delusion many of the last remaining Democrats went through that their own election chances were impeded by the "Democrats" brand rather than enhanced by it. It also reflects the incredibly unhappy relationship in the party betwen its parliamentarians and its party officials - a state that became very public through the Meg Lees meltdown. However it is also partly modelled on a very successful strategy used by Arthur Chesterfield-Evans in NSW to generate a large number of party memberships to retain party registration.

However the Dems should find solace in the fact that even the big boys of politics regularly go through this rough and tumble. But the one thing they should all learn is that slagging off at each other is the wrong way.

So - to President Julia Melland I say your better response to Mr Winderlich's "threat" was to embrace it. The response should have been "we are pleased to see that SA MLC DW has embraced the current campaign of party rebuilding being undertaken by the Democrats. As our most public face and influence in South Australia nobody has as much opportunity as David to advance the membership drive is SA. If we don't reach the target it will be a responsibility David will have to share with the party."

As to Natash Stott-Despoja trumpetting the line that the seat "belonged" to the partyu not the individual, this was a line she first tried out when Meg Lees lft the party. It wasn't very effective then.

But it was a line she conveniently forgot once she and Andrew Murray had decided to not contest the 2007 election. The sensible course was to resign and allow the party to replace her with the person who would be the candidate - providing the benefits of incumbency for campaigning and removing the distraction of conflicting voices. She did not - partly on the basis that Andrew Murray would not - but also partly on the claim that "she" had been elected not the party.

Oh dear Kevin

There is one consistent voice out there bagging the NBN - this is Kevin Morgan. He was at it again in yesterday's Age.

Kevin is a former policy officer for the technicians union and has been battling competition reforms and privatisation for years. It does seem somewhat strange that he now seems to come into battle on the side of the privatised Telstra, versus a new Government owned network. Perhaps it is just that defending the network operator has become ingrained.

But he really loses me when he argues that there is an inherent risk in building the network without the incumbent operator being involved. He spins a line about how the strong cash flows and balance sheet can provide security of funding. e however, in this point, also misses the inherent problem incumbents usually have of cannibalisation of that cash flow. Our most recent example was Telstra's reluctance to pursue early versions of ADSL offering sppeds of 256Kbps to "compete" with ISDN delivering speds of 128Kbps.

But that wasn't the first instance. At the 1910 Royal Commissio into the postal service the director-general was questioned about telegram and long distance telephone call rates. He stated that he could drop the price of the telephone calls but it wouldn't make sense given what it would do to telegraph revenues!

Kevin's big call is;

The concept of a wholesale network can only work if access to high-speed broadband is deemed to be a social good, which is not measured by commercial rates of returns. Nevertheless, the Government believes its network can get a commercial rate of return that will attract private-sector investment in the short term and be successful to merit full privatisation five years after it is completed. The Government is deluding itself and squandering millions of dollars on a project that hasn't the remotest chance of commercial success.

In some ways I agree with him about the need to recognise there is a social return here not just a commercial one. I've already written here about part of that issue. There are lots of really easy ways to organise this venture to work.

The only other issue I'd mention is this belief that customers won't swarm to the NBN. Let's just note that a sensible NBN builder will be building in those parts of metropolitan markets where ADSL is not or only barely available. That's quite a bit for the first two years. Then you start building where even ADSL2+ gives you at most 4Mbps. We are now about five years into the build? Will the 40% of premises whose best offer in 2014 is ADSL2+ be clamouring for more...well just ask yourself what people in 2004 were after - that's right just about when ADSL started being challenged by ADSL 2+.

Time we all - including "independent" consultants - took a deep breath.

Use and Abuse of History

This new book by Margaret MacMillan looks like a worthy read on the topic of the use and abuse of history.

Apparently one of her conclusions is;

That history’s ultimate utility does not lie in its predictive or even its explanatory value, but in its ability to teach humility, to nurture an appreciation of the limits on our capacity to see the past clearly or to know fully the historical determinants of our own brief passage in time.

I think I can subscribe to that. If anyone has read it give me a shout!

Lord of the ... card

Having returned to the land of the concious after a sjhort bout of flu (Tamiflu is wonderous stuff - but you need to take it early - so do see your doctor as soon as symptoms develop), I was pleased to find a story on a health related matter.

The story relates to a paper by Jennifer Doggett for the Centre for Policy Development. In a Tolkien-esque kind of way the paper calls for "one card to rule them all" - it is a health payment card that works as both an access to the underlying funds (e.g. Medicare and any private health fund) as well as creating acess to a kind of Health Loan system (like HECS) and to a single Safety Net regime to limit payments.

Actually it all sounds tremendously sensible. We could do with some other changes too though. These include eliminating the idea that the Medicare rebate amount is the "scheduled fee" and noting instead is simply the amount that Medicare has agreed to pay, removing the idiotic logic that "bulk-billing" meant the doctor had to take a fee cut (though that goes anyway) and finally requiring doctors to advertise their fees in a "meaningful" way. The last part could be by way of an index across a weighted range of typical consultations and procedures and state that the Doctor charges xxx% of the standard Medicare rebate. It probably needs to be matched with the existing quotation of basic consultation, and perhaps an indication of what the maximum mark-up might be.

But the biggest stumbling block for the innovative idea is the simple IT challenge. As a report in Saturday's SMH made clear, even getting agreement to implement a common health identifier is a challenge!

Finally, how long can it be before we decide the simplest way of dealing with both the health identifier and the credit card idea is to simply microchip us all. It works as a technology perfectly well for pets and livestock. What could be simpler for fronting to the receptionist at your doctor or arriving on a slab in an ambulance than having a microchip that can be wanded to provide your health ID and then full acess to your health record.

Privacy groups will start howling at this point but, heck, it only improves the ability to identify who I am. The number itself is no use to anyone - plus the chip itself should not contain the number but an encrypted version of it. It could be made relatively secure. If it were a voluntary option to have a microchip with your health ID on it would you have one - my answer is absolutely.

But the biggest problem in all this still remains the supply and demand side economies of scale. The costs become low and the benefits high only once you get a very large base of users of the health ID.

There is a long way to go - but some serious opportunities exist.

Wednesday, July 15, 2009

On science, mathematics and economics

A typically succint and lucid review in this month's Quadrant by David Armstrong of James Franklin's What Science Knows: And How it Knows It. Such a good review of have the book on order and Franjklin's two preceding works.

The idea I gather is that the book provides a riposte to the quartet of philosophers of science who gave postmodernism a big leg up (being Popper, Kuhn, Lakatos and Feyerabend).* The flavour of postmodernism here is that version that suggests any perspective is usful, that all knowledge is relative.

I personally think that the leap between these philosophers and that position is much greater than generally considered. Firstly these philosophers were being positive not normative - describing how they think science DOES operate, not how it ought to. And secondly all of them required that theories have at least some performance as means of "explaining things"...typically of relating historically observed potential causes with historically observed potential consequences.

Franklin's "magic" I think is to make the "explains" part of this stronger. An explanation is not just a "model" that relates the inputs to the outputs but some plausible structure, and observation supports a theory under what is a test of "the inference to the best explanation". One of the current criticisms of string theory is contained in a book called Not Even Wrong but not only does it fail the falsification test it fails an explanation test - there is nothing about current string theory that makes it attractive.

This also leads to some interesting discussion on the relationship between science and maths. The discussion revolves around the idea that maths itself is the study of "structures or patterns". As a consequence it provides an incredibly useful tol set for constructing scientific theories. The interesting part is that this view of mathematics means that there is no ontological commitment inherent in the maths itself. It is noteworthy that almost all modern science has borrowed pre-existing maths. I think the last time the scientist had to build his own maths was Newton building the calculus, and even it was developed at the same time by Leibnitz as a piece of "pure" mathematics.

This all relates to economics in two ways. The first is that it punctures Milton Friedman's conception of the philosophy of economics - his positvist version. Put in more standard philosophical terms Friedman was a straightforward instrumentalist - it doesn't matter what the machinery is in the middle so long as the theory relates the inputs to the outputs in the observed way.

But it also goes to the debate about the use of mathematics in economics. The maths doesn't bring any ontological commitment in and of itself. It is just a way of doing things. The biggest criticism of the use of maths in orthodox economics is the way the theory and facts are forced into the maths. In the same Quadrant issue such a theorist refers to markets saying that "there are differences in the speeds at which markets clear". It is a nonsense in the maths of the theory which assumes instantaneous clearing of the market. Once a lag is admitted between a signal and efect it is almost certain that the market will never actually clear, merely oscillate around a path that reflects something that might have bee an equilibrium point in a hypothetically instantaneously clearing market!

Still I plan to remain a fan of Feyerabend - the importance of his contribution is to the idea that it is okay at any time to try to find another theory - even if the one you are using "seems to work". It is a plea for lateral thinking, it is a plea for creativity, it is a plea for escaping bounded rationality. Real scientists do that says Feyerabend. They are not, however, anti-empirical nor merely relativist. They are, however, inquisitive and deeply suspicious.

* For those who don't know the title of this blog is taken from both a position ascribed generally to Feyerabend, and used by David Stove as the title of a book in response.

DE paper and books

The other event that occurred yesterday was the release by the Productivity Commission of their report on the parallel importation of books. I don't propose to engage directly here with most of that discussion - except to note in passing that David Marr in the SMH misapplies the "jumble of gargle" and should see the nonsense that Crikey sited yesterday written by authors about culture.

The books report is relevant to the discussion of the Digital Economy paper in a number of ways. One is the fact that the DE paper refers to the PC's draft report commentary on online sale of books - this commentary is carried forward into the final PC report. The commentary talks about the relatively low penetration of "on-line" books - with "on-line sales" contributing only 5% of all sales. The purpose of the commentary is to ascribe some purported slowness of Australian business to embrace online retail models.

It is a confused discussion. The world leader in online book sales - Amazon - is unique because it was a purpose built online seller, not a migration from a bricks-and-mortar store to online. It represents a clear example of how both supply and demand side economies of scale favouring market concentration lead to the ability to build strong single firms in global markets. And finally it is a nearly unique remnant of the original boom, it had a business model that worked whereas most other on-line "thingummy's" of the era did not.

What is mildly disappointing is that the e-book did not feature in the DE paper, nor as one of the formats provided for downloading it. I've already suggested that all Government reports should be made available in e-book format.

The PC's report notes hat;
Indeed, the treatment of electronic literary works, as far as parallel importation laws are concerned, is already more liberal than for hard copy works. Section 44E of the Copyright Act 1968 allows the parallel importation of an electronic literary work, when embodied in a physical digital form (such as an e-book on a CD or DVD).

If that interpretation is correct there is no reason why the Kindle eco-system should remain closed to Australians. The oppotunity to create that eco-system becomes immediate if it is not necessary to separately negotiate with every publisher over the copyright of the e-book version.

I suspect that Amazon's current vigorous restriction of e-book sales to North America is (a) that the regimes in many other jurisdictions are not as liberal and they are adopting a lowest common denopminator approach, (b) that negotiating with publishers to e-publish might be harder if Amazon marketed outside the US and hence this is a voluntary restraint and (c) the Kindle model is tied to not only selling the digital book, but the reader (like the iPod strategy) and to the particular connectivity model over the Sprint EVDO (CDMA) network.

So maybe there is hope. But another negative for the vision inherent in the Digital Economy - "online" and "books" is seen as being about purchase and delivery of bound papr rather than purchase and delivery of e-books.

Close but no cigar

Senator Conroy launched his Digital Economy Future Directions report last night. It has already received some positive coverage including from DE blogger Verity Pravda.

Even before its release Mr Negative Nick Minchin decided to have a go at the report over an apparent contradicition of the report referring to the development of the DE as a "market-led phenomenon" while the Government proposes to intercede in the space by building the "transport" infrastructure. However, one could note that agriculture has always been a market-led activity whhile Government has invested in road and rail infrastructure to enable it.

My own concern is that a paper on the "Digital Economy" is still scant on questions of hard economics. I worry that not enough attention is paid to the ways that production economics change, and the speed of transmittal of information change. These fundamentally change assumptions about markets - firstly more industries will be dominated by one or a few firms, and systemic risk can be communicated through the system like a pandemic.

I also think more space could be devoted to understanding "growth" and what is known as "new growth theory" or "endogenous growth theory". This is because the underlying assumption is that the private investment of firms in new capabilities continues to have diminishing returns, but has constant returns across the economy due to "spill-over" efects. This becomes of particular concern because of the modern Australian obsession with "commercialising" R&D outcomes. This desire runs counter to some of the themes of open systems and , in the IP space, the Creative Commons licences.

We need instead to focus more on the concept of "leveraging" R&D outcomes than one model of leverage which is direct "commercialisation". (I may return to this another day).

These things matter because ultimately much of the report still hinges on a simplistic neo-classical model of an economy. Let me site one examle, that I've now started to overuse. The report asserts that resistance by business to taking up some digital solutions (transacting with customers) is a concern with security and reliability and not with whether customers have the technology.

I heard similar objections when we tried to sell call centre solutions to corporates in the late 1980s. However, the practical reality was they could forecast no real saving from alternative channels until they could actually close channels down. That couldn't happen till ALL customers would transact in the new mode.

Whether customers will transact is itself a kind of network effect. It has two elements - the first is needing to have a big enough mass actually with the technology. The second is that people promote it to each other. One way of generating the classical S-curve of technology adoption is to model a population on the assumption that person X will buy the service once enough of his friends do. The shape of that S-curve depends on a parameter that effectively measures "how reliant on others" are you. Australia's oft claimed rapid technology adoption is actually one with slow leadups then very sudden escalation. It is reflective of a society that places a higher value on the assessment of my peers (New Zealand is even more so - they are more like sheep than us).

In the reports discussion of regulatory structures it is a pity to see that the focus remains on classical "content" like media content, and not on the regulatory environment to support transactions. The Reserve Bank of Australia report on the weaknesses of our e-commerce transaction processes doesn't get a mention.

The book The Origins of Wealth distinguishes between Physical Technology (making stuff) and Social Technology (rules), and talks about how each develops (favouring an evolutionary description). Social Technology in this sense includes the capacity to co-operate across the economy. The regulatory structures section could have explored further the ways Government can "regulate" to encourage co-operative behaviour. It somewhere got lost in the mist of "self-regulation".

Finally the section on measurement missed two important points. The first is that we should not be frightened of counting things rather than generating data by sample. My example is we should be able to report a lot better on actual internet speeds and price performance than we do - if only Government was prepared to manipulate twenty million service records. The fact is that data is neither a large transmission task noer a large processing task. The second is that we really culd build our own version of a digital economy index that tried to bring together a number of disparate elements. Instead we get the report talking approvingly of the unbelievably shoddy survey report that AIG put together.

Finally, though there was a great deal of effort to talk of other industries, the report, the presentations and the showcase were all incredibly ICT focussed. We have a long way to go to get everybody to understand that the Digital Economy is more than fast broadband, video downloads, e-health and e-government.

The report should get some good reviews for bringing some structure to the discussion. It should be marked down for being an uneconomic discussion of the Digital Economy.

Monday, July 13, 2009

The Hu case

According to Greg Sheridan "The bottom line is clear - if Hu is not released, our relationship with China is shattered." Is it?

It seems to be escaping most Australia commentators that Mr Hu may be guilty of the charge of paying bribes.

Sheridan continues "Only if the broad Australian civil society demonstrates its shock and anger at China's crude tactics of intimidation is there a chance that cooler heads in Beijing might see the damage these outrageous actions are doing to China's reputation internationally, as well as its interests in Australia." When is it outrageous to arrest a person suspected of espionage?

John Garnaut is at least a bit more measured in his analysis noting "The investigation appears to be part of a big realignment of how China manages its economy, with spy and security agencies promoted to top strategy-making bodies." This focuses more on the question of whether paying bribes should be considered as espionage rather than merely a commercial crime.

In reality a lot of this will depend on whatever facts are revealed. I can consider circumstances wherein Australian citizens would consider the bribing of Australian commercial negotiators for information as espionage, given the extent to which we like to claim sovereignty over our commercial interests.

And it isn't that long ago that all our commodity exports did go through Government sanctioned single desks, and one of our last remaining was guilty of a similar crime to Mr Hu. Excatly what would we think if AWB had been the recipient of bribes for information about the national negotiating position.

It is also noteworthy that Garnaut's sources dismiss the idea this is pay-back for the Chinalco deal falling through.

It is also interesting to note that the time-honoured cold war technique of dealing with espionage charges hasn't been used yet - fitting up a Chinese national on an espionage charge. So Rudd has still plenty of room to move.

Friday, July 10, 2009

Words and legislation

Given my spray about a pointless circular definition in a recent Bill, I was interested to note the comments of the Chief Justice of the High Court about the excessive leeway given to the courts to define words like "good faith". In the case in point effectively it is left to the court to define broadband.

Note: My earlier comment was wrong the newly defined term is used in the Bill, but ot in such a way that a definition was required.

NBN Board speculation

The main stream media is now getting right into the NBN Board speculation game, with both the Oz and the SMH joining the fray.

Nothing particularly new or insightful. A great worry from the SMH story is the suggestion that a lawyer might get a start - I have a firm view lawyers are not needed on Boards. Every Board member should be well enough appraised of their own legal responsibilities and it is a failure of governance for the Board as a whole to rely on the legal expertise of one director. In brief, the most use that the director with legal quals can provide is to advise his/her fellow directors is that they should get legal advice from their law firm – but the directors cannot rely on the advice of their legally trained colleague when he/she advises them not to do so. So lawyers add no technical benefit.

Far from their touted belief that legal training provides a disciplined thought process of use in wider fields, in reality their training is very restrictive to a certain kind of linguistic deductive process that is anathema to creative thinking.

This doesn't mean that a lawyer should be excluded, just that they shouldn't be chosen so there is a lawyer. The suggestion that the author of the Australian competition law "bible" would be the lawyer is particularly odd, given that we'd hope the structural separation of the NBN means it is not embroiled in competition issues.

I'm finding the speculation numbing. I made my contribution on who should be appointed. Speculating on who will be is just column inches for bored journalists.

Thursday, July 09, 2009

Public service and external consultants

Is the defence to complaints about the expenditure on consultants by the Australian Government that they inherited a broken public service?

Concern over "probity" reaches new levels of absurdity

An item in today's Age suggests there is a problem with a Ministerial adviser meeting with representatives of a successful tenderer two months before tenders were called.

Are they serious? In the matter there is evidently a Senate committee concern with the probit surrounding the award of the contract (raised by the displaced firms).

But please, does meeting with Ministers prohibit a firm from winning a contract? Do we really want our politicians living in a bubble?

My own experience is that the nature of probity advice to Government does not reflect the avice of ANAO. That advice is complete transparency, in practice it becomes absolute secrecy and attempts to remove Government completely. The current probity rules effectively prohibit a person with information that could suggest the tender is representative of poor policy and should be stopped from providing that information to the relevant decision makers.

We need to encourage communication between Ministers their advisers and Departments with industry, not discourage it. By all means provide some extra rules on transparency. But let's stop the nonsense that talking = corruption.

Wednesday, July 08, 2009

Banking in Oz

Under the breathless headline the SMH today reported on a joint call by Joshua Gans, John Quiggin and four others for a new financial systems enquiry.

It appears that the idea of a "People's Bank" is people gleaning from the submission's suggestion of a Government institution with a stabilisation function in finance, particularly mortgage finance. This is based on the economists apparent concern about the instability created for the institutions of having an unmatched balance sheet, that is long term loans financed by short term deposits.

I can assure the economists that this is not a problem for banks in a world without derivatives. The "credit risk" or "market risk" can be calculated and managed. The risk comes if lending practices veer out of control, such as increasing exposure to assets undergoing rapid price increases.

The economists talk approvingly of the wonders of competition that swept through the Australian mortgage market with the development of the residential mortgage-based securities market and how supposedly this funding greatly advanced the regional banks. Actually, this market largely destroyed the economics of Australia's co-operative banking sector (at the same time as their long running income tax exemption was removed).

This market has been, of course, the real false dawn. This was a money market with no effective controls. The securities were traded by banks operating under Basel II rules, so the capital adequacy was measured on credit rating agency terms, and as the underlying assets were houses ... well they all got AAA. Meantime the move of so much housing lending "off balance sheet" means that prudential regulators couldn't use other devices, like changing the risk weighting of residential mortgages, to allow for the greater lending risk inherent in lending in a market with rapid asset price inflation.

By all means we should probably have the enquiry. But can we perhaps focus on how many of the problems we now confront have been created by economists peddling the snake oil of the efficiency of markets. Can we also recognise that a small dose of regulation might be better than a big dose of government guarantees.

On search costs in politics

Read Ross Gittins.

More on religion

In keeping with my policy of (mostly) alerting peole of when I blog about them I got a nice note back from Carmen Lawrence on my comments about Church and State. In brief she notes that an op-ed piece is necessarily truncated, and hence did not traverse some of the ground on the doctrine. She also noted that she did not think there was no place for moral philosophy, and that one of her biggest concerns had been the selective use by MPs of their religious beliefs - bringing them out on "so-called" conscience votes (as, for example, on abortion or euthenasia) but ignoring them on other acts like refugees, war and torture.

To add to the discussion, Michael Duffy wrote on the topic in the weekend SMH.

He refers to a new book called God is Back which apparently argues that religion is making a return in many places, including states that had tried to outlaw it. He notes;

Outside the West, religion has come back as a matter of sheer numbers, because the many efforts to suppress it during the 20th century have collapsed. The most important of these was communism but many non-communist leaders, in nations such as Turkey and Iran, also believed the path to prosperity lay in a modernisation that could be achieved only by reducing the role of religion.

This is a significant statement. Theses leaders have first realised that there needs to be a separation of church and state, but that this does not need to entail a campaign against religion.

Duffy goes on to hypothesise that the evangelical churches arose in the US because the doctrine of separation meant the churches had to rely upon conviction rather than coersion earlier than other countries. I have two difficulties with this view. The first is that I find the evangelical churches are closer to conmen than christians. The second is that the doctrine has been as real, while not being as written, in the UK as the USA.

Those Democrats Again

While I have left the Australian Democrats (let's not go there) I still get their e-mails. I regard them as public documents.

The latest missive sent under the heading "What do Australian Democrats believe in?" states;

An important part of rebuilding a party is restating what it is you stand for. Often it is hard to condense that down in to something you can communicate quickly and easily.

To get started, we have defined our core beliefs: the central things we believe in that underpin all our actions, objectives and policy:
1. We should all be free to live our lives how we want to
2. Every Australian should have equal rights and opportunities
3. We should care for the world around us to sustain our resources, our economy, and the well-being of future generations
4. Our representatives should put the interests of people first, weighing all perspectives to develop fair, inclusive, and lasting solutions
5. We must take responsibility, individually and collectively, for our nation and its people

This is the start of the conversation. In coming weeks we will expand on these core beliefs to illustrate how they inform and direct all of the other elements that comprise what we stand for.

To join the forums on the Australian Democrats website to discuss how we express these belief and further define our values and objectives, you will need to become a member.

We hope you will join us in this conversation, and talk online and offline about what these beliefs mean to you and why you support the Australian Democrats.

So, talking of offline, principle 1 (the libertarian principle) is in conflict with principle 3 (what could be called the environmental principle) and to a degree principle 5 (the mutual obligation principle).

It is better written in a form in which the social nature of man and the principle of mutual obligation precedes the individual. Hence if I were building an amalgam political/moral philosophy, I'd start by noting that man is a social animal first.

1. Human economic progress has been delivered through co-operative endeavour, treating others as we would like to be treated ourselves. (The principle of mutuality)
2. There are many ways of achieving this co-operation, and we should be all free to live our lives the way we want to without interference if our choices do not infringe the princile of mutuality. (The principle of individual rights)
3. The consideration of the effects of our behaviour on others needs to consider future generations as well as our contemporaries. (The principle of sustainability)
4. The rights of all people are equal, irrespective of wealth, race or any other consideration. (The principle of equality)
5. Representative democracy is the most effective means of achieving these principles, and the principles themselves need to underpin the design of democratic forms. (The principle of democracy)

I could add a fair bit to this. It looks very similar to the Dems list, but is vastly different as it creates one structure and puts mutuality before individuality. Mutuality is NOT the same as collectivism.

Monday, July 06, 2009

Is this the first?

One of John Howard's lesser known achievements was to "rebrand" the Australian Government as ... the Australian Government. All Departments and agencies were required to replace any other brand and logo with a design that was the coat of arms, the words Australian Government above a line and the name of the Department or agency beneath it.

One of his justifications was to save on the expense of all the branding exercises undetaken in Government. The other was to make it clear to the citizenry, who don't always understand constitutional niceties, exactly who was both responsible and accountable for what the agency did.

ACMA has unveiled on its website a new look and feel, with a logo and different type face for the agency name. Apart from the fact this is the first agency I've seen break from the Howard edict, it is also one of the hideous blob logos that has emerged following the bold move of BHP Billiton. One of my former Unis (Macquarie) has replaced their lighthouse logo with similar blobs - a rebranding that quite frankly just emphasises that they are what the UK calls a "red brick" university. Sydney or NSW could never contemplate such a move.

I'd be interested in views on both the desirability of the Howard move (I originally thought it dodgy, but got to like it), and the specifics of the ACMA choice.

Gyngell loses it

I think the pressure on David Gyngell at Nine is showing. In the Oz he is talking about his new multi-channel and comparing it to Ten's "One" which is a sports channel. He says;

"One is the red-haired stepchild of sports rights," he said. "It's the stuff that no one wants."

Two things. The first is that Nine "has the stuff people want" - the French Open and Wimbeldon - and doesn't show it live or in full. I could understand that if showing the sport meant they had to disrupt an otherwise strong programming schedule. But they are showing "shyte" that rates accordingly.

Secondly, as the father of a delightful red-haired girl, I find the comment bizarre. I think the implication was meant to be a child who is obviously not genetically one's own, but I don't quite frankly get it.

Maybe some avid reader can explain exactly why a red-haired step-child would be unwanted!

Exactly what are we supporting in Afghanistan

It remains the great concern about the war on terror in Afghanistan, that the government the Australian military is supporting is as arbitrary and theocratic as the Taliban. The only difference is that they don't sponsor international terrorism.

Paul Sheehan has highlighted this in a story in the SMH today, but he incorrectly calls it an issue of "feminism". The equal treatment of women in a democratic sense is really pre-feminist. Feminism is far more about recognising and combatting the systematic discrimination against women in a society that has notional equality; highlighting how the patriarchy keep women "in their place" without formal laws.

The Afghanistan case also covers issues other than the treatment of women. It is still consistently discriminating against Christians.

I do not understand quite why Australian troops are still deployed to defend such a regime.

Minchin off target again

Senator Minchin’s only contribution to discussion on the national broadband network seems to be about why not to do it. In the Parliament he has complained about the cost, today in the SMH he is trying to mount fear and loathing over an aerial deployment.

However, the premise of his criticism is misplaced. The NBN fibre does not need to be additional to the two HFC networks. Instead it can and should replace them both. The technology likely to be deployed (passive optical networking) can provide an additional light wavelength to replace the two HFC networks that today basically carry exactly the same programming (especially since the conclusion of the Telstra/Optus content sharing deals). Unfortunately we haven't seen much discussion of this as the Implementation Study inches forward.

It is perhaps noteworthy that the coalition's political concession to public complaints about the aerial deployment, that is removing the planning exemption, coincided with when those networks stopped their further expansion. I could talk at length about how the campaign against overhead cabling was orchestrated by Telstra as a means to try to stall the Optus deployment, and that when it failed they instead resorted to following Optus up and dow streets "like a kid following an ice-cream truck" (thanks Jon Stretch for that line).

As an all optical cable (unlike the copper coax) it can be hung at the same level as electricity wires. This reduces the risk from contact with items travelling beneath the wires. The aerial component is often only the last run of the network and is only affected by the most local of actions disrupting the powerlines.

The NBN has the possibility of improving the visual amenity in local areas. But it can do a lot more besides. We would be better served by Senator Minchin holding the Government to account on how they run the Implementation Study and how the Government will get outcomes like replacing both HFC networks than his continual negativity about the only plan in Australia to provide the infrastructure we need for the 21st century.

Glen Milne - Coalition Mouthpiece?

Well, well, well. Glen Milne doesn't like it when a politician, in this case, Kevin Rudd, decides he wants to hold the media to account. I guess in the Milne universe the media can hold politicians to account, but the media is only accountable to...Rupert? That has to be the case at the Australian as it wasn't accountable to readers (that is generating enough of them) nor to advertisers in all the years it made a loss.

I make the charge about Milne above based on one particular paragraph;

The alleged existence of the email rested on two substantial pillars. First the sworn testimony of a senior Treasury official, Godwin Grech, earlier that afternoon before a Senate committee. Grech swore, on balance, that an email existed.

As I've previously noted the reference to the Senate evidence as "sworn" evidence is a Turnbullism. The evidence isn't sworn. Turnbull could be excused for not knowing Senate procedure...but Milne?

Milne is at least good enough to note that when Rudd criticeses News Ltd he is going the whole lot, not just The Oz, but also the set of daily tabloids, unlike Andrew Bolt who claimed on Insiders that Rudd was only going the Oz. Milne defends the Steve Lewis story on the e-mails on tightness of deadlines.

As I have noted elsewhere (Crikey comments) Lewis was acting on the leak of a fraudulent e-mail. One hopes and expects that before this is all over he tells us who told him of the e-mail. We know he spoke to Grech a number of times, but the suspicion exists he was tipped off first. As it stands now it seems the e-mail was concocted to support the theory the coalition was running that Rudd's office intervened directly with Treasury officials on behalf of Mr Grant. The issue to be resolved is why and how. Lewis may be able to shed light on that.

Yes Lewis was duped. But at least News as an organisation could come out, take it on the chin and say, "You are right, we were duped. We are going to introduce new editorial procedures to guard against being duped."

As for the claim by Milne that what Rudd is asserting is almost censorship as in;

The new Rudd rules are these: if the Prime Minister declares something to be false then his denials are not simply to be recorded as part of a balanced story. The story itself is to be airbrushed out of history. The media must now take Rudd at his word. And act on that word.

Milne might like to consult his colleagues in the defamation space. It is one thing to publish something without a denial, it is another to publish something one day and the denial the next, it is a completely different activity to publish something that has already been denied. And it doesn't help to rely upon a defence that the issue was raised in the Senate Committee - the transcript clearly shows that Abetz was fishing and that the Treasury official was highly equivocal in his answer.

Milne concludes by stating;

The first principle of the journalists' code of ethics states: "Report and interpret honestly, striving for accuracy, fairness and disclosure of all essential facts. Do not suppress relevant available facts, or give distorting emphasis. Do your utmost to give a fair opportunity for reply." There was nothing in the reporting of the fake email affair that contravened that principle. Indeed the fact it's routinely referred to as the fake email affair makes that self-evident.

Except there was something wrong. The e-mail did NOT exist, there was suficient basis for believing it did not (would the PM really double down the bet of misleading by claiming there was no e-mail when others claimed to have it?). There were alternative ways to report the story - including leading with the denial.

As for my bigger claim about Milne, well I've blogged about him before. It is about time he did some real political reporting rather than just being the victim of those using him as a mouthpiece for their spin.

Friday, July 03, 2009

Curious Release

Minister Conroy has asked for more NBN submissions. The release states;

Issues that interested parties may wish to address include:

The optimal access regime for the National Broadband Network, including, for example:
* the legislative obligations that should be required to ensure the National Broadband Network company operates on a wholesale-only, open access basis,
* the process for identifying services to be offered,
* how the prices and non-price terms and conditions of those services should be set, and for how long, and
* the role of the Australian Competition and Consumer Commission.
The appropriate equivalence obligation for the company and the services it offers, and how this would operate in practice.
The nature of ownership restrictions applied to private sector investors to protect the Government’s equivalence objective for the wholesale-only network.
Arrangements for the Government to sell its stake in the network.
Any other rights and obligations to be conferred on the company.
Interested parties are also welcome to provide their views on other aspects of the legislative framework for the company.

Submissions received will be provided to the Lead Advisor to the National Broadband Network Implementation Study.

Written submissions should be provided by 5:00 pm (AEST) Thursday 30 July 2009, and can be forwarded by email to Submissions may be made publicly available online.

Avid readers of this blog will know that I've addressed many of these already here. As a more formal submission this will require more depth and more alternatives to be considered. But unusually it looks like there is no discussion paper - none, nada, zippo. That could mean one of three things;
* the Government is determined to get the best thoughts available and so has resisted framing the discussion, or
* the Government has found it all too hard to frame a discussion paper, or
* they were expecting the lead advisor to frame the consultation paper but have realised they need to get on with it before they arrive.

Can anyone explain the ambivalence of the reference to the lead adviser? Why did they need to mention that the submission would be provided to the adviser? Did we think they wouldn't, why wouldn't a submission be provided to the lead adviser? What about any non-lead advisers the Government might appoint?

And exactly why did the request need to wait till now? What has changed since the Blue Book was published?

I have been known to be openly critical of the Department of Broadband, Communications and the Digital Economy for a very long time now. I'm sure there are very good reasons in their public service culture of why they give the impression of being unable to engage with the subject matter.

Or maybe it is just me - over recent times I've experienced people in both the private and public sector whose aproach to life is to take the boss's instruction and implement it. Pity is that they don't really understand the boss's instruction or the boss didn't know enough to instruct the right thing. From my earliest days in the workforce I learnt to ask clarifying questions of instructions. No one else seems to - so rubbish piles on rubbish.

I think I forgot to take my pills.....

Cartel criminalisation

In a worrying trend I again find myself in agreement on the conclusions of a CIS publication, this time Jason Soon on criminalisation of cartels.

I will disagree with Jason on whether cartels do or do not have detrimental effects on consumer welfare. I'm actually open to the idea that sometimes they won't. What I will agree on is that criminalisation is poor policy.

Firstly it is unlikely to work effectively as an upfront deterrent. Anyone in business knows that someone already prepared to enter into a cartel under existing law is either foolish (they don't know the law), deluded (they think they are cleverer than regulators) or arrogant (they think the law doesn't apply to them). Increasing the penalty is unlikely to change behaviour before the fact. However, after the fact higher penalties make defectio from the cartel more risky.

As game theorists will tell you, cartels can't exist because the incentive to defect is higher than the incentive to stay. But if defection carries prosecution risks (those you defected on turn whistleblower) then the law against cartels becomes the mechanism to deter defection.

The other issue is that if a cartel has caused consumer detriment, no criminalisation action is effective in recovering the lost welfare.

If business is complaining about these laws they only have themselves to blame. Over the last ten or more years the main business response to concerns about merger activity has been to note that it is not industry concentration that matters, only the collusion between the concentrated players (ignoring completely how tacit collusion occurs more easily in concentrated industries). The claim has in efect been let more mergers through, just focus on collusion.

And that is exactly what we've got. Virtual inactivity in deterring mergeres and criminalisation of cartels.

It is entirely the wrong approach. Industry structure is what counts most. And yes, it is better that the small struggling firm goes broke than gets merged with the bigger firm. Letting mergers happen like this might seem good for shareholders, but it works against the idea of "creative destruction" promoted by the big end of town.

More on e-books

As the proud owner of an iLiad (thanks Grahame) and a compulsive book buyer I am developing an obsession with e-book readers though the bad news is that there is not much happening in Australia.

Google and Sony have announced a tie up but that is no use as Sony doesn't sell theor reader in ustralia (I've asked them why - I'll let you know when they reply).

Meanwhile in the US there are some prepared to call it game over already for Amazon and the Kindle.

My new crusade is going to be in Government publications. Increasingly the only way to obtain them is electronically, but usually formatted for an A4 printed pdf. I can read these on my iLiad, but I need to zoom it to remove the page boarders. Would it be too much to start a campaign that as well as publishing reports in *.pdf and *.doc that they do them in the mobibook format? Then we can save alll those trees (everyone prints them) and also be able to carry less back and forth!!!

The new AGPS - coming to an e-book near you.

PS I've been informed by a reader that my earlier comment about the idiocy of the phrase "published on the Internet" is about a phrase that is itself redundant. My informant wrote;

These ‘must be published on the internet’ clauses are just spin. When something is a legislative instrument, that means it’s an instrument made under the Legislative Instruments Act which implemented a register of instruments (Federal Register of Legislative Instruments – pronounced ‘frilly’ if you hang out with law librarians). Anything on the register is published on the web ie comlaw, so those publication clauses are redundant. The register was created to deal with the problem that instruments were being made all over the place, often without anyone knowing where they all were.

On blogs and the Digital Economy

I've been promising Kate Lundy I'd have a look at her revamped website. I'm extremely impressed. I first commented on politicians web presence back in September 2006. I subsequently took down the links to those sites because Senator Bartlett ceased to be a Senator, and Kate Lundy's site started to fade. I've reinstated the latter now.

The interesting thing about the new Lundy site is that it is "only" a blog. It shows just how effective a blog can be. It made me reflect on the whole concept of a "blog". In the initial incarnation they wre just a tool for recording a sequential list of entries - just literally on online (binary) log. The various popular blogging tools like Blogger and WordPress have been adding more and more features - features which I'm mostly ignoring - I'm attached to my original 2003 blog look and feel.

But blogs now range from the items like Senator Lundy's to my other favourite the simple clean lines of Breakfast Politics. Those of us in corporate land who've been close to company website design will know that the breakthrough on a company site comes when you can move to a "content management system" rather than every page requiring some IT coding. Senator Lundy started out like many of us creating content through the wonders of raw HTML.

Ultimately blog software/services is now offering a really cheap and effective content management system, especially for sites that have got a small number of authors. There are still blogs like mine - much of which is just my own mental note taking.

One recent post of Senator Lundy's I wanted to comment on was her CeBIT speech. This marked a big return by her to the ICT industrt development field, which is marrying up with her championing of Government 2.0.

She has married the two in her call for "clear policy and requirements around open standards and open access, particularly to public data." (I found this interesting given my October 2007 post in which I wondered about the benefit in Government investing in an pen source operating system for households). What I think she could do more of is marrying that with here sentiments on the ICT sector as a whole;

We need to seriously look at the ICT investment opportunities in Australia to help grow and support the local ICT sector. Every company that has to move overseas is a company that is taking smart Australians and smart ideas away from the Australian economy.

I come from a school that believes that you dn't necessarily need the whole sector to profit from it, nor that to aid the sector you necessarily need to invest in it. The growth of the ICT sector in Australia probably relies more on contnuing to train real engineers, physicists and mathematicians rather than the coders who populate IT courses. It also requires some investment in more economists trained in developmental and growth economics rather than the developed economy micro and macro bull that constitutes most economic discussion, and, far worse, economic policy formulation.

But the ay of bringing some of these things together is more direct funding of education or development fellowships that get Australians directly engaged in the standards forums around the world. In short Government investment to turn Australia into a (global) standards maker not taker.

Meanwhile I note that the Digital Economy directions paper will be launched on 14 July. Despite all the efforts to get interest across broader industry in DE issues, I note that the three organisations sponsoring the launch are The Australian Computer Society (ACS), the Internet Industry Association (IIA) and the Australian Information Industries Association (AIIA).

Really we will only progess the DE discussion if we do break out of this club.

Thursday, July 02, 2009

Popular Economics and understanding markets

When I was younger I was entranced by the magazine called Popular Mechanics because it had all these cool projects where you could make mechanical and electrical things. Having the attention span of a gnat, and eight thumbs and two fingers I never did any of them though.

But you could almost run one now called Popular Economics wit the number of books that are addressing some big economic issues in a both academic and poluar way. A couple that fall into that vain are The Origins of Wealth and The Company of Strangers. These two in particular are books with an intened audience outside the academic economics community that both deal with the idea of economic progress as an evolutionary process - and hence the term evolutionary economics.

It is an interesting juncture for the intellectual move this way, given that Darwin got some of the evolution ideas from reading the economist Malthus. There are many i the evolutionary club who will date formal evolutionary views to Alfred Marshall who is more generally seen as the father of the marginalist school that created the familiar mathematical model of equilibrium.

Anyhow, my purpose in this brief post is to try to bring together a number of strands of heterodox economics. By definition heterodox economists are defined by what they are not rather than what they are. What they are not is orthodox - where orthodoxy is defined as the machinary of economics built on the framework of equilibrium between demand and supply.

As a consequence there are many strands of heterodox economics, including the Marxist and the feminists. There are also the variants suc as the New eynseian economists - though there disagreements may be more within the orthodox club than outside it.

There are four elements I want to discuss here, they are institutional, behavioural, evolutionary and complexity. Going through them in order the institutionalists argue that there are many things going on in an economy other than markets and that a proper understanding requires an understanding of these other things - which can be thought of as various unwritten rules. The behavioural have their gripe in the observation that real economic decision makers (consumers) aren't the rational calculators of theory and that they deviate in a number of significant ways. Key among these are that they actually favour fairness, that they value something they have more than something they may get (the endowment effect) and that they value something they can get now more than just the time preference of money more than getting it in the future.

The evolutionary view is built on the idea that the economy isn't just static, nor that it is just trying to find its equilibrium but that it continues to change over time. The term evolutionary is used to refer to the idea that the change occurs through small amounts of continual changes, some of which get reinforced because they work and others die out because they don't. The twop books referred to above focus on this evolutionary process. The first mentioned talks about evolution in both physical technology and social technology. The second book talks about it more ostensibly as institutions, the social rules and norms as well as characteristics like money and banking.

Finally complexity economics says that even if you did have the kind of forces back to an equilibrium described in orthodox theory the actual dynamics of the mathematics indicate that the macro effects of all those forces could be as complex as weather patterns on which the Lorenz equations and butterfly effects are based.

There are a couple of points I wanted to emphasise here. The first is the close relationship between evolutionary and institutional economics. This is because what is evolving is the institutions or social technology.

The second observation to make is that if individuals did behave the way that the orthodox economists believed then this evolution wouldn't have occurred. The Company of Strangers book points out that humans are the only animals that rely upon non-relatives for obtaining our food. For the social institutions that enable that to hapen to evolve out of earliest man we actualy had to have the altruism and trust genes.

Put another way, if individuals only acted in immediate self interest and were ambivalent betwee today and tomorrow there would not have occurred a framework in which sufficient trust could evolve to make exchange happen, and nor would an environment arisen where what we think of as "the accumulation of capital" could have occurred. (Note capitalism in some definitions is identified more by the accumulatuion of capital than by the reliance on markets).

This leads me into a related but different discussion - the idea of a market and what they are good for. In the process I will defend Hayek.

In the conception of the market of both Hayek and Adam Smith the market "works" because the market provides a way for the transmission of massive amounts of information about preferences and production costs, far more than could be handled in a command economy.

This varies dramatically from the actual assumptions of the neoclassical analysis which is based on he assumption that the market works BECAUSE consumers and producers are fully informed.

The interesting point is that these are not in conflict in a stable environment. They are not in conflict because they work together, in an evolutionary way. At teach point the market is informed from the market trades before, each set of market trades provides the information for the next. In very simple dynamic models these get mapped as cobweb diagrams.

What we learn though is that in the face of "discontinuous" change markets WILL fail. They will fail because the market is trading on the old information. Of course, the definition of "dicontinuous" may be circular - we know it was discontinuous because the market failed.

The recent examples are the boom and bust and the sub-prime crisis. The discontinuous changes were the advent of the internet and the advent of new capital adequacy rules incorporated in the change from Basel I to Basel II.

What is the significance of all this? it means that from a public policy standpoint we need to take particular care over what will be the market consequences of big changes. Most importantly we need to be prepred to use every means abvailable to dampen exuberance following a change because it is most likely a consequence of a positive feedback loop in the twin role of the market described above.

Finally a comment. When I was thinking of this earlier and the Company of Strangers book I was thinking that specialisation of labour was the "dual" of a market. You can't get a market without specialisation and there is no point in specialisation without a market. But it isn't the case, because you can also have specialisation in a hierarchy. But it does highlight again why Williamson named his book Markets and Hierarchies and why I need to go get a copy.

Backhaul and all that

The Department of Broadband etc has issued its request for tender (DCON/09/47) for the regional backbone blackspots program. I was promising myself I wouldn't buy into this you all know I can't help myself. In no guise did I make a submission to the discussion paper and I haven't read those that were made (yet).

There are three parts of this program that worry me. The first is the voodoo economics. The second is about (the lack of) public information. The third is ultimate ownership.

Economics from another planet
The RFT says;

In regional areas where there is a lack of competitive backbone services there is little pressure on a wholesale supplier to offer low prices and higher quality services. This can mean that internet service providers and other service providers have limited scope to make new and/or higher quality services available to consumers in those areas at prices that are competitive, when compared to similar locations that have alternative backbone supply options.

This statement is potentially correct. However, the competitive state of backhaul provision is one of only three potential causes of higher backhaul prices.

The first cause is distance. Clearly the cost of building a fibre from point A to point B is a linear function of the distance from A to B. Most of the cost is in the installation of the fibre and bugger all is in the terminal gear. The further you start from where you need to get the traffic (in the first instance a mainland state capital) the higher the cost, and hence price.

The second is traffic density. A fibre can carry a whole lot of data. But the cost per megabit sent is the cost of the whole fibre divided by the total megabits sent. So if the backhaul is going to a small community the "price of backhaul" will be dearer than the going the same distance to a bigger community.

Only the third is the one mentioned in the RFT. That is the established theory that a monopolist will price above marginal cost, while a competitive market will price at marginal cost. There are a some important provisos though. The theory asumes a rising supply curve, but as we know our fibre will have economies of scale over all possible traffic volumes. The average cost curve slopes down and marginal cost is at all times below average cost. Even the competitive market won't price at marginal cost. The theory also assumes full competition and adding only a second provider means we get at best a duopoly. The theory of duopoly pricing is more complex. The Cournot outcome, which is based on the assumption that providers compete on quantity resolves to a point where prices are still marked up over marginal cost but at a rate equal to the sum of the squares of the market shares of the competing firms (the HHI). Bertrand version is competition on price and ultimately suggests that the provider who can achieve the lowest cost will eventually win the entire market. In other words pricing will reach the competitive model but once it does one firm ceases to exist and you get monopoly again.

Far more troubling are the conclusions of both an experimental (from slide 44) model or a more correct mathematical one, that competitive firms don't price at marginal cost. In one description of this tacit collusion is an emergent property of the dyanamic market. Through repeated iterations the two firms realise they can maximise profit by sharing the market at the monopoly level of output.

At this point empirical cases will be raised. That wherever new backhaul has been built the existing backhaul prices drops. Well that might be true - but unfortunately all too often the price drops to short run marginal cost as the incumbent is now prepared to treat fixed cost as sunk. It is a noted failure of competition policy - notably anti-competitive conduct laws - that this pricing behaviour by the incumbent is not drawing any consequence. But the second failure of competition law is that the transmission service is already a declared service. The ACCC has faffed around on pricing but ultimtely the Minister could simply use his determination powers under Part XIC to set a transmission (backhaul) price.

In fact, there is an even simpler version to incent the incumbent to price at long run marginal cost. That is to make a competition law that a monopoly provider cannot drop their price AT ALL once someone else enters the market. To deter efficient entry which would make the incumbent asset redundant the monopolist has to prce to the Chicago School assumption of long run marginal cost pricing for entry deterrence.

So building the additional infrastructure is not waaranted to reduce the monopoly pricing - there are better ways to do that. Building the infrastructure won't otherwise reduce average cost it can only increase it.

Lack of information
The only logical reason for a fibre backhaul program is therefore providing fibre where there is none now. That is the case on some of the proposals - e.g. fibre that goes through Barcaldine shire. However the citizenry whose money s being spent here doesn't know where there is fibre and where there isn't. This is despite the Howard Government's Broadband Blueprint proposal;

Access to efficiently-priced backhaul is important in a competitive market because it allows new carriers to provide a service in places where they do not own their own networks. The more competitive the backhaul networks the lower the prices
that will be paid by consumers. In the past, commercial sensitivities have prevented sharing of the extent of networks across Australia, particularly backhaul. For the benefit of all providers and government these issues need to be resolved as far as possible. For the benefit of all providers, the Australian Government will continue to work with industry to develop an interactive map of backhaul supply.

The theme was repeated in the Framework for the Future report from the Regional Telecommunications Review;

2.5.3: The Australian Government
a. regularly collect and prepare records of backhaul infrastructure for use by other Australian Government agencies for public policy purposes, and
b. assess the costs and benefits of making this information available to relevant market participants.

The Government Response was poor in this regard noting;

The outcome of the National Broadband Network process may have implications for the issues identified by this recommendation. Accordingly, the Government will consider this recommendation once the outcome of the National Broadband Network process is fully known. This will enable outcomes of the process to be factored into the Government’s consideration of this recommendation.

So the Government will decide AFTER the backhaul tendering process whether to obtain and release the data that would be useful BEFORE it. Sounds like sound public policy (not) to me.

Finally we come to the position of ownership. The RFT comments;

The Commonwealth's preferred model is that the Commonwealth will own the fibre and other passive/physical network elements, which may be transferred to the NBN operating company (NBNCo).

This I don't understand. We are investing in "competitive" backhaul but we may transfer that to the new monopoly access company (yes it will be a network level monopoly - I'm cool with that. I don't want two fibres.) The last place this backhaul should wind up is in the hands of NBNCo.

So there we have it, a tender designed to build new backhaul to reuce the cost (huh?) to places that we the public don't know have how much fibre (three fibres leave the NT already - one to Broome, one to Mt Isa and one dwn the guts through the Alice to Adelaide)and to be owned competitivly by the new monopoly. Oh and in the midst of all that the actual price per Mbps or MB on the new fibre is part of the tender process - but it won't be the same as, say, Gosford.

Hopefully more logic will inform the Implementation Study. But as I write that I note that there does not xist anywhere a statement of the scope of the "Implementation Study" - the most we have is the information in the REOI. First the timetable;

The indicative timetable for the NBN implementation study involves:
a) Engagement of Lead Adviser for the implementation study late June 2009;
b) Engagement of further specialist advisers by the Lead Adviser in consultation with the Department in late July 2009;
c) Commencement of the implementation study mid 2009;
d) Interim implementation study report during second half of 2009;
e) The completion of the final implementation study report in early 2010; and
f) Government consideration of the implementation study report following completion of the implementation study in early 2010.

The REOI was still quite vague about the scope of the implementation study;

The Department is seeking to appoint a high calibre recognised expert as Lead Adviser to provide high quality and timely advice throughout the National Broadband Network implementation study and to manage the production of an integrated implementation study report, that ensures that all issues are appropriately covered. It is expected that the implementation study will examine and provide advice on a wide range of commercial, financial, project management and governance and telecommunications issues relevant to the National Broadband Network.

Though the services required went into a bit more detail about the implementation study;

The implementation study will be multi-disciplinary and will need to include analysis and recommendations encompassing:
a) Advice as required in support of proposed legislation relating to the operation and governance of the network company, the regulatory regime, and ownership restrictions for retail telecommunications providers and other investors as required;
b) Advice on the overall funding requirements for the network rollout (quantum and profile) beyond the $4.7 billion initial funding injection;
c) Development of strategies to maximise the scope for private sector investment in the network company, subject to appropriate ownership restrictions and appropriate terms and conditions for participation;
d) Advice on the optimal capital structure for the network company over time;
e) Development of detailed commercial/financial and engineering analysis of the network roll-out and the implications for the network company;
f) Advice on how best to structure NBN Company arrangement from the outset so that the Government’s long term objective of privatisation can be accommodated;
g) Development of plans for the integration of the Tasmanian operation and backhaul network into the overall national broadband network;
h) Network design consistent with the Government’s objectives;
i) Development of strategies to provide procurement opportunities for local businesses;
j) Develop a detailed implementation plan for the roll-out of the National Broadband Network;
k) Development of recommendations as to the appropriateness of any foreign ownership restrictions for the network company;
l) Development of a risk management strategy for the national broadband roll-out; and
m) Stakeholder consultation.

So the Department in charge of the Implementation Study in issuing a request for expressions of interest for a lead adviser successfully communicated that it did not at that time have a fully detailed specification of what the study actually is (and to any extent prioritised network design as the EIGHTH item on the list), a read of the REOI left one unsure as to whether the Study was being conducted by the Department with the assistance of the lead adviser or by the lead adviser as a report to the Department. Maybe the Request for Tender issued to only a shortlist made that clear but I don't think that is public.

Hopefully all will be clear soon though as the REOI indicaed that the services of the Lead Adviser would commence in week commencing 6 July.