Innovation Economics

I have a policy that if I blog about someone I'll send them a copy of the blog post just so they know. It is useful to avoid errors and I generally think polite.

After my comment on Robert Atkinson's critique of Progressive Economics I did so and received a nice reply. In it he did two things. The first was to say he is a big fan of institutional economics and the second was a defence of "corporations". I want to comment on both.

Rob pointed me to another website for Innovation Economics. That site has a nice call to arms up front that reads;

While the U.S. economy has been transformed by the forces of technology, globalization, and entrepreneurship, the doctrines guiding economic policymakers have not kept pace and continue to be informed by 20th century conceptualizations, models and theories. Without an economic theory and doctrine that matches the new realities, it will be harder for policymakers to take the steps that will most effectively foster growth.

Fortunately within the last decade a new theory and narrative of economic growth grounded in innovation has emerged. Known by a range of terms – “ institutional economics,” “new growth economics,” “evolutionary economics,” “neo-Schumpertarian economics,” or just plain “innovation economics”: – collectively, this new economics reformulates the traditional economic growth model so that knowledge, technology, entrepreneurship, and innovation and are now positioned at the center, rather than seen as forces that operate independently.

But up to now, innovation economics, and innovation policy, has not fully been appreciated by policymakers, in large part because the dominant economic policy models advocated by most economic advisors and implicitly held by most policymakers largely ignore innovation and technology-led growth, in favor of macroeconomic issues, such as tax cuts on individuals, budget surpluses, or social spending, which at the end of the day pale in significance to innovation in driving economic growth.

In contrast, “innovation economics” recognizes the reality that a global, knowledge-based economy requires a new approach to national economic policy based less on capital accumulation, budget surpluses, or social spending and more on smart support for the building blocks of private sector growth and innovation.

Rather than focus on ensuring that prices accurately reflect costs to drive what conventional economists call allocative efficiency, innovation economists argue that the lion’s share of economic growth is determined by productivity and innovation.

Rather than focus principally on markets assumed to be in equilibrium and individuals assumed to be acting rationally in response to price signals along supply and demand curves, innovation economics recognizes that innovation and productivity growth take place in the context of institutions. In this sense it is based on the notion that it is only through actions taken by workers, companies, entrepreneurs, research institutions, and governments that an economy’s productive and innovative power is enhanced.

The neo-Schumpterian view and embrace of evolutionary economics means that we are talking far more about neo-institutional economics rather than New Institutional Economics. The former focuses on the dynamic effects of institutions while the latter identifies the role of institutions in shaping the preferences of economic actors.

The dynamic side takes us far more to the complexity issues identified by Ormerod as discussed here yesterday.

Rob and I diverged over the role of corporations. Responding to my line "Most large corporations are the opposite of innovation." To this he has replied that corporations are actually more productive than SME's and that no nation can be indifferent to the health of its large enterprises.

The productivity of a corporation and innovation are vastly different things. I discussed the concept of innovation and large IT firms some weeks ago, noting the surprising survival of IBM.

As another example of non-innovation by big firms I take the case of News Corp. Back in the 90s News was highly focussed on the issues of "convergence", as a simple read of the Shawcross biography will show. But News failed with investments in online services through Delphi and now the retreat from Myspace.

News Corp is a growing, productive, profitable firm - but it can't innovate.

In particular Myspace - a place for personal site building - got surpassed by Facebook - a place for connecting.

The innovation space is now a battle between Google and Facebook, each of which is now a big corporation. That battle has moved on with the launch of Google +. But Google is doing catch-up in creating a social dimension - though possibly adding the value of defining multiple friendship circles. But ut isn't innovation.

In general my thesis is that the policy focus needs to be on how competition and the market works, not as a device to ensure "that prices accurately reflect costs" but that they work to transmit information. I have a belief that the focus on intellectual property needs to maximise its spillovers not its private capture.

These are things that happen by focussing on "smaller" corportations - not SME's, but certainly not established TNCs.




Novae Meridianae Demetae Dexter delenda est

Where is Australia's FuturICT?

I established my DigEcon Research brand as a place to undertake policy research on the implications of the Digital Economy. One of the issues I have in my frame is that the neoclassical model of economics simply doesn't cut it.

There are a couple of reasons. The first is that it can't cope with the fact that there are no longer real restraints to the size of firms. The second is it doesn't account for "network effects" - or generally demand side economies of scale and scope.

FuturICT is a proposed European "flagship" project - looks like what we'd call a Co-operative Research Centre. Their pitch is;

The ultimate goal of the FuturICT flagship project is to understand and manage complex, global, socially interactive systems, with a focus on sustainability and resilience. Revealing the hidden laws and processes underlying societies probably constitutes the most pressing scientific grand challenge of our century and is equally important for the development of novel robust, trustworthy and adaptive information and communication technologies (ICT), based on socially inspired paradigms.

We think that integrating ICT, Complexity Science and the Social Sciences will create a paradigm shift, facilitating a symbiotic co-evolution of ICT and society. Data from our complex globe-spanning ICT system will be leveraged to develop models of techno-socio-economic systems. In turn, insights from these models will inform the development of a new generation of socially adaptive, self-organized ICT systems.

Paul Ormerod has provided a take on what that means in economics and posed four hard problems. Anyone familiar with his books Butterfly Economics and The Death of Economics will know that he comes from the school of mathematically aware heterodox economists.

A possible weakness in the Ormerod style is that the straw-man of neoclassicism he presents is one that can be rebuffed by economists who argue that it is all in the simplifying assumptions and that the neo-classical model can deal with the specific issues when it needs to.

A better place to start is a paper by Arnsperger and Varoufakis that identifies the three axioms of neo-classical economics. They are;

1. Methodological individualism. All agents are treated as individuals, and structures are the creation of agents never the other way around. verything worth knowing can be found by studying individuals.
2. Methodological instrumentalism. All behaviour is preference-driven, and preference is given, current and fully-determined. This doesn't permit a decision on emotion or any other basis. It is philosophically the equivalent of determinism versus free-will - just not determined by God.
3. Methodological equilibriation. The assumption that an economic system starts at or will reach an equilibrium.

Each of these is challenged by a model that sees economic agents as being influenced continually by other agents, their preferences being shaped by the networks they are part of and demand and supply "functions" that are always massively auto-correlated and hence more likely to have unstable than stable, and multiple rather than singular, "equilibria".

But we don't research that stuff here.

Novae Meridianae Demetae Dexter delenda est

For the "reform" obsessed

Since the stunning "success" of a series of micro-economic reforms (mostly competition policy) under Hawke and Keating, and some IR reforms under Keating and Howard (the first lot)a vast array of commentators keeps braying for more "reform".

But they are never very clear about what they want. Marisse Payne writing in The Punch has at least been clear about the value of what could be called "second order Federation reforms". These are the things like national registration of the professions that reflect a twenty-first century single market in services.

Elsewhere a section of the coalition pushes with a certain zeal IR "reform". In Crikey today Bernard Keane has done a stunning job of explaining why there is simply no case for further IR reform - there is no economic upside.

Meanwhile real reform is being pursued by the Gillard Government. Reform to the fundamentals of our economy through the adoption of ICT to a Digital Economy is driven by the NBN and the Digital Economy Strategy - though incredibly under-represented in the budget papers. Reform of our energy security and the creation of new energy industries will occur through the development of a climate change policy that prices carbon.



Novae Meridianae Demetae Dexter delenda est

Let's blame the lawyers

Electricity price rises are much discussed in Australia, but the underlying causes aren't.

Tom Parry in the Oz today is prepared to lay part of the blame on lawyers.

In an informative article he takes us on a journey through the introduction of regulated pricing (rather than prices being set politically)in NSW. The regime started as light touch and incentive based, where firms could benefit by "outperforming" the regulatory allowance for efficiency improvements.

The system now is still "building block" based but is now about the regulator "second guessing" the business. The lawyers get the blame for increasing resort to appeal processes primarily to argue "arcane elements of the cost of capital (the angels on pinheads of regulation) that are increasingly accounting for large increases in network charges."

We should care about this because the ACCC has been moving to use energy style building block and Rate of Return regulation for telecommunications pricing.

Two particular features are worth noting. The first is Parry's observation that "businesses are being accused of gold-plating." The second is the relevance of cost of capital.

"Gold-plating" in a regulatory sense is really about building to a higher standard than is prudent. Regulated firms may have an incentive for doing so because all costs are recovered and so may indulge in inefficient design. There is, however, a more specific version of inefficiency called the Averch-Johnson effect. This effect, named after a 1962 paper, is that a firm under Rate of Return regulation can increase its profit by (inefficiently) changing the mix of capital and labour (or capital and expenses).

A particular example is the approach taken by energy firms to metering. The efficient way to use comms is to buy services from a dedicated comms supplier achieving economies of scale. But the profit can be maximised by investing capital in a bespoke communications network. As the cost of smart metering is one of the drivers of increasing energy prices the significance of the A-J effect is large and growing.

The cost of capital is the second area of dispute. Regulatory lawyers have an interest in arguing up the cost of capital - despite, as Parry notes, "that a business will drive all of its costs, including efficient financing costs, so that customers can share in those benefits." In fact, this is a paradox in the theory of managerial capitalism - an efficient firm drives down all costs including financing costs, yet we are to believe it exists to "create shareholder value" - that is to maximise funding costs.

The saving grace in telecommunications might be that the firm that used to be the industry's biggest access provider (Telstra) is about to be its biggest access seeker. If they can marshal their impressive intellectual power to the problem we might find a better outcome. Unfortunately they too have allowed regulatory processes to be captured by lawyers rather than economists.

A good strategy for them would be to split their regulatory teams into "old world" and "new world" teams. They can mount arguments that the old world treatment is to be grandfathered and new rules apply for the new world. The challenge is to have the "new world" team focussed on strategy, economics and markets rather than the law.


Note: modified to make clear that the AJ effect is not a case of gold-plating but an inefficient mix of capital and expenditure.


Novae Meridianae Demetae Dexter delenda est

The economics of growth and innovation

There is an outfit in the US called the The Information Technology and Innovation Foundation. They are best described by a quote from a job ad;

ITIF is a growing non-profit, non-partisan public policy think tank committed to articulating and advancing a pro-productivity and pro-innovation public policy agenda. We believe that innovation is central to spurring economic growth and addressing key societal challenges and that public policies should actively work to support innovation, productivity and economic competitiveness. ITIF works to help policy makers understand the critical importance of innovation and innovation policy. We produce publications, hold events, meet with policy makers, speak at forums and engage in other activities to shape innovation policy.

Their policy settings put them somewhere generally into the "free market" camp, with a bit of sectoral special pleading.

The President of the ITIF Dr Robert Atkinson has just published an interesting article The Trouble with Progressive Economics in the new Breakthrough Journal. It is worth a read.

Atkinson starts by asserting that progressives are "flummoxed" by economic policy, saying;

Most can't fathom why the neoclassical economic consensus shows no sign of being overthrown despite its role in causing the greatest economic crisis since the Great Depression. Compounding their befuddlement is the fact that the era of bipartisan Keynesianism (mid-1940s to mid-1970s) out-performed the era of bipartisan neoliberalism (mid-1970s to today) along virtually every metric, including unemployment rates, GDP growth, income equality, and the trade deficit.

He suggests that progressives therefore struggle with the reality that neoclassical economics remain the north star of most economic policy makers, including many in the Obama administration.

Atkinson first defines for himself "progressive economics" and then suggests that neither it nor neo-classical is fit for the task, writing;

What passes for progressive economic doctrine today is a haphazardly updated version of mid-century Keynesianism that has largely failed to come to terms with the realities of the globalized, innovation­-powered, 21st century economy in which we live. Just as classical liberal economics was unable to respond to the challenges of the Great Depression, and Keynesianism was unable to respond to stagflation in the 1970s, neither anti-government neoliberalism, nor anti-corporate Keynesianism are fit to deal with America's present economic predicament.

I suggest Atkinson needs to get out a bit more - for heterodox economics is made up of a much wider variety than simply New Keynesians. (see note)

That said it is his general critique that is of interest, a critique that can apply equally well to neoclassical and New Keynesians.

Firstly neither has a real explanation for growth. Neoclassical growth theory refers to some outside force of technological progress whereas the Keynesian view has Government expenditure as the engine of growth. The latter can be, as it was in the sixties and seventies, when it funds R&D and knowledge. He rightly notes that progressive economics has "focused less on promoting growth and more on fairly distributing its fruits" so "what passes for a progressive growth agenda mostly remains a redistribution agenda."

I wouldn't back away from the need for the progressives to point out how inequitable neoclassical theory is, in particular its definition and pursuit of efficiency. I also wouldn't back a Green agenda of labelling "growth" per se "bad", growth is the only way to make the less well off better off without doing a Robin Hood.

And so Atkinson concludes;

the progressive canon still lacks a coherent or credible theory for how to spur productivity, innovation, and competitiveness. Little wonder that many voters find the neoclassical story, flawed as it is, more appealing: it at least claims to produce a larger pie. ...

Developing a credible growth agenda will require progressives to fully embrace efforts to accelerate technological innovation and productivity growth. The best scholarship today identifies knowledge, technology, entrepreneurship, and innovation as the primary drivers of long-term economic growth. Over the long-term, innovation (the development of new products, services, processes, and business models) creates jobs and enables higher wages and lower prices. Moreover, sustained increases in rates of innovation and productivity growth likely represent the only long-term path to equitable growth and a sustained social welfare state in an increasingly competitive and globalized economy.

But innovation does not simply materialize out of thin market air. In fact, sustained government investment was required to produce many of the big innovations we take for granted, from the steam engine to the Internet to the iPhone. Unfortunately, progressive Keynesians, like neoclassical economists and a large swath of the American political elite, tend to ignore the government's role in proactively spurring innovation. Neoclassical economists have an excuse: they believe the market drives innovation and that governments need not get involved since government interference in markets only makes matters worse.

With this I agree. I part company with Atkinson when he says;

Supporting innovation and productivity will, by necessity, require progressives to support corporations. The vast majority of jobs and economic activity are in the private sector. In fact, most small business jobs, especially the "Main Street" jobs progressives claim to love, are fundamentally dependent upon the health of corporate manufacturing and the technology sector. As such, improving the productivity and growth rate of the US economy requires helping private firms, including corporations, become more productive and innovative. Unfortunately, progressives today overwhelmingly view businesses, especially large multinational corporations, as part of the problem, not the solution.

Most large corporations are the opposite of innovation.

There are three strands that need to be developed for an Atkinson style "progressive economics".

1. An understanding of "managerial capitalism"
Capitalism as a theory is founded in the concept of a unitary producer who accumulates capital. The reality is firms which are an agglomeration of "capital" and the issue of the principal/agent problem occurs - do managers do what shareholders want. This has been very poorly resolved by defining a purpose of the firm to "create shareholder value" and managers to manage to the share price. Firms need to exist for a market purpose and the thing shareholders want from managers is entrepreneurship to perform that purpose better.

2. An understanding of the source of profit
Basic economics talks of production functions that convert labour, capital, entrepreneurship and land (or resources) into goods. But all modelling tends to be focussed on just two dimensions of capital and labour. This conveniently enables two dimensional diagrams, but is more driven by the apparent ease of measuring quantities of labour and capital compared with the other two inputs. In reality "capital" isn't as simply quantified as it might seem, and labour has an annoying problem of being not of a uniform quality.
Indeed land can be treated as a special kind of capital and entrepreneurship as a special kind of labour, but both make the elegant mathematical models of the neo-classicist impossible to construct.

3. An understanding of the benefit of "spill-overs".
To the extent there is a growth theory that accounts for innovation it is Romer's New Economic Growth Theory. This explicitly allows for the fact that an innovation by a firm has some "public good" characteristics - others benefit from it. This runs counter to corporate thinking which is about their right to fully retain the benefit of innovation.
This issue is worse when it is added to the university sector and the desire for "commercialisation".

New Keynesians might struggle, but Neo-institutionalists (not New Institutionalists) wouldn't. This lot are also known as evolutionary economics and study the dynamics of markets and industries.

That would lead to an understanding of the need for a competition policy that focusses on externalising transactions, an intellectual property regime that does not grant excessive rights and an R&D policy that does not try to commercialise public investments.

Note: Interested readers may find out more at the website for the Association for Heterodox Economics. Their forthcoming conference features Australia's own Lynne Chester on regulation. There is one paper I'd really like to hear Dennis Badeen, Ontology and Pluralism: A cognitive map of ontologies in economics and the critique of neoclassical economics


Novae Meridianae Demetae Dexter delenda est

More on markets and property rights - tobacco

Ever since Ronald Coase created the foundations of the New Institutional Economics with his papers on the theory of the firm and social cost, a body of work has developed that has equated economic growth and progress with the creation of "property rights".

Douglass C. North is probably the foremost exponent of the application of the concept in economic history and development.

Many of the economists of the "new right" championed the importance of "property rights", none more so than Milton Friedman in his Capitalism and Freedom, which linked the economic theory of competition/choice to the political idea of freedom.

But the important point to be drawn from the Inquisitional view is that property rights are, in fact, a social construction. This is less easy to see with tangible goods, but even there the "right" to exclusive ownership is a relatively recent creation (England's enclosure happened between 1760 and 1820).

It is more obviously a social construction with respect to intellectual property. The creation of both copyright and patent protection are political acts. The inexact nature of both is legendary, and the facility with which the law has been changed equally so. The infamous "Mickey Mouse" clauses that extend the period for which copyright endures after the creators death are the best example.

This brings us to the extraordinary campaign by Big Tobacco against plain packaging legislation. Firstly there is the ad campaign trying to push the "Nanny State" line. As this ABC news report shows the companies are wise to care - after all the US is now implementing the Australian graphic images approach and the UK is following the take the product off display approach.

But there has also been the big threat of legal action, notably under section 51(xxxi) of the constitution - the infamous "vibe of the thing" clause as celebrated in the movie The Castle.

But now Phillip Morris is evidently going early using a clause in a trade agreement with Hong Kong to argue a case that the proposed law infringes their intellectual property. The reality is these clauses are inserted in trade agreements to protect against software piracy and brand name faking.

But the appeal of their case is that people interpret it as a "battle for commercial freedom". And hence we see the link back to the idea created by Friedman.

So let's get this clear from a theory and policy point of view. Property rights are social constructions. The clear allocation of property rights facilitates trade, markets and economic activity.


But clarity of property rights does not equate to a presumption of unrestrained property rights. When you buy land you do so subject to the planning laws about what you can build on it.

Let's imagine the case where the government decided to make tobacco an illegal drug. Would the tobacco companies make the same claim about the infringement of their property rights in the brand.

Let's try something simpler. A drug company invests in the IP of R&D from a drug, they invest in the clinical trials and then they invest in branding it. Let's call the drug Thalidomide. The company then markets the drug only to discover that the drug is directly responsible for birth defects.

The Government bans the drug. Does the drug company have a case for the loss of all that IP?

You may rightly point out that the drug company is at risk from a legal action - I think it is a tort - for the damage the drug caused so it removed the product itself. But that doesn't change the logic.

The property right in a brand is a social construction that it is the gift of the "polity" to restrain, so long as that is an action taken for a public not a commercial purpose.


Novae Meridianae Demetae Dexter delenda est

Basel III

At last something decent from The Conversation. Today Imad Moosa provides an explanation of why Basel III will not protect us from a future financial crisis.

In simple summary, Moosa reminds us of the "procyclicality" of the banking and finance system. Something is procyclical when it correlates with the underlying driver. In finance the issue is usually noted that in recessions banks have to tighten lending (due to declining value of assets) which fuels the recession.

But the same is true in booms - and was a particular feature of asset valuation policy called "mark to market". If asset prices are increasing, then the bank can increase lending without any fundamentals changing. This is particularly true when they hold a derivative asset rather than the asset being an actual loan.

The issue of procyclical effects is ultimately at the source of all bubbles. People value assets in two ways. The first is on the value they can get returned from it - the income stream. The second is the future resale value. If the asset is investment real estate the income value is the net value of rental income, the future resale value is what you expect to sell it for.

Australian real estate is currently valued at about twice as much as the value of rental income. This is because expectation of capital gain has dominated the pricing model.

To make banking regulation less procyclical in the boom phase banking regulation needs to find a way to further load the risk weighting of assets if asset prices are increasing. Hence the standard Basel 1 model applied a 100% weight to owner occupied housing - the full value of the asset was assumed to be as good as cash. That value needs to be weighted to decline if house prices are accelerating faster than wages growth (or CPI) as that is the best proxy for affordable rental streams.

The second important point is that assets to be valued need open informed markets to ascribe those values. This is a market-design question (under my simple thesis the function of Government is market design). A failure of the derivatives "market" was the absence of an open "regulated" exchange.

There is a lot that can and should be done to improve the stability of the financial system, and it requires active Government involvement. Does anyone seriously believe that the banking and finance system developed to the point it has because the "free market" works. No it evolved as well as it has by good market design - including the role of Government in establishing fiat money.



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The NBN and Telstra

Hopefully my views on the Telstra/NBN deal will appear in iTnews today. So I won't repeat them here.

But the NBN as a whole is a continual exercise in different policy challenges and options.

Peter Gerrand outlined his view that the ACCC decision on POIs "saved Telstra" allowing it to "re-emerge as the dominant national wholesale and retail telecommunications carrier."

This and other issues will be aired at an ACS-TSA NBN Policy Forum next week. The link is to the Sydney Forum on 30 June, there is also a Melbourne one on 28 June.



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Data retention

Ben Grubb when writing for ZDnet broke the story of the AGs Department's plans for wide ranging data retention requirements on telcos, that at one stage seemed to require all data be kept for 2 years or more.

The Government today announced that it was introducing the Cybecrime Legislation Amendment Bill 2011 to enable Australia’s accession to the Council of Europe Convention on Cybercrime.

This includes the provision for data retention, but it is now based on requiring data to be retained only once a notice is issued that specifies an individual or a service.

That looks like a good compromise. The carriers and service providers are not being required to keep data beyond what is required for operational purposes, and hence preserving privacy, but enabling enforcement agencies to specify something be retained for subsequent warrant.

I'll be interested in seeing general reaction.


Novae Meridianae Demetae Dexter delenda est

More on convergence

I noted recently the references to convergence between computers and communications dating from 1972. I was wondering what the earliest sources are on convergence and media.

The first identified source according to many authors is Nicholas Neproponte. In the International Handbook of Internet Research Anders Fagerjord notes in a footnote that "Stuart Brand reports that Negroponte used it in 1973" citing (I think) Brand's book The Media Lab. (I haven't seen the book to be able to check).

Negroponte's provenance is also asserted by Rich Gordon's Convergence Defined in USC Annenburg Online Journalism Review of 2003. He writes;

And as early as 1979, Nicholas Negroponte of the Massachusetts Institute of Technology (MIT) was using three overlapping circles in discussions with business executives he hoped would fund his research. His three circles were labeled "Broadcast and Motion Picture Industry," "Computer Industry" and "Print and Publishing Industry." He predicted that the overlap between the three circles would become almost total by 2000. The executives he addressed found it a compelling vision. He won millions of dollars in financial support from them, enabling MIT to open its celebrated Media Lab in 1985.

Rich also credits Ithiel de Sola Pool with the term "convergence of modes" in his 1983 book The Technologies of Freedom.

Writing a World Newspaper Association report Convergence: Fact or Fiction in 2001, Martha Stone also credited Negroponte for the use of the term.

Since the concept of media convergence was introduced in the early 1990s by Nicholas Neproponte, author of the 1995 digital revolution forecast Being Digital convergence has taken on a variety of of meanings: convergence of media types, of media company departments, and of content. For Negroponte, convergence starts with "bits", or the digital DNA of information. Converged bits become multimedia. The digitization of information has created the convergence revolution.

Negroponte is better known by some for the "Negroponte Switch" which states "that wired technologies such as telephones will ultimately become unwired by using airwaves instead of wires or fiber optics, and that unwired technologies such as televisions will become wired" Perhaps worthwhile for review by those talking about new access technologies. (Evidently Negroponte called it "trading places", George Gilder gave it its current title)

So I think we now have a claim of 1973 in the name of Negroponte. Any advance on that?

Novae Meridianae Demetae Dexter delenda est

Copper thieves

One of the great tragedies of the 2005 (and ongoing) war in Iraq was the break-down in the power systems. The cause of the break-down was unrestrained theft of copper transmission lines following the collapse of any kind of civil authority.

It is the kind of thing you'd think wouldn't happen here, but apparently it does. The NSW Government is reported by iTnews to be preparing rules that will require the presentation of identity documents for certain sales of recovered copper.

This is entirely consistent with the kind of rules that apply to pawn brokers.

This case is more interesting because one of the direct beneficiaries is the telco sector. Though most of the nicked copper is electricity distribution the report included a case of a man allegedly he posing as a telephone technician to steal $110,000 worth of Telstra's old and active copper lines in December 2010, causing "major breaks in telecommunications for businesses and private residences" in the Newcastle and Lake Macquarie areas.

These are, of course, the self same telcos who think that any imposition on them as ISPs to participate in a scheme to identify theft of copyright material is an unreasonable burden.

There is a moral in this tale, we all have an obligation to support the principles of property rights, and enforcement may require us to create business practices that facilitate that.



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The NBN and the ACCC

In an iTnews column in March I commented on the NBN PoI decision and the fact that ACCC acceptance of the NBN Co special access undertaking shouldn't be considered a foregone conclusion.

Today new ACCC Chair Rod Sims has been reported as saying the NBN is not something to be regulated "in a light-handed way", noting;

I'm someone who thinks that if you have a monopoly you have to regulate it. If it's a monopoly -- and I don't mean a duopoly -- a straight-out monopoly, you have to regulate it. Any monopoly needs regulations, whether it is in communications, electricity, gas or whatever.

There is a whole essay potentially inherent in this and it is a subject to which I will return both here and in the working papers I publish on the DigEcon Research site. The observation to make here is the three step process Australia has taken to traditional "utility regulation" of telecommunications.

Up until 1988 the PMG and Telecom were under direct Government control on prices, resulting in prices that were variously perceived as being excessively high to achieve dividends (or reduce capital costs) or excessively low to curry political favour in the regions. The reality was a bit of both - high metro prices and low regional - at least when compared to cost.

Ultimately the call for competition was driven by two things. The first was the general idea that prices should be "cost reflective" to generate "efficiency" (using the flawed economic definition). The second was the tension between telcos and computer companies as convergence was first discussed.

The second phase followed corporatisation in 1988 and was based on the then new idea (from Littlechild I believe) of "incentive based" regulation. This was a concept designed to replace pre-existing Rate of Return regulation as was current in the US at the time. The idea was a global cap on a weighted index of retail prices, the cap being CPI - X where X was a forward estimate of Total Factor Productivity (whereas CPI was the actual CPI).

This was still the main element of price control up to 1997 - while there were infrastructure access prices from 1991 to 1997 the model in the fixed duopoloy/mobile triopoly really was based on infrastructure competition - a probably naive expectation that competition could develop this way.

The 1997 reforms signalled an even greater faith, they were premised on the idea that there were sufficient competing networks that there was potential for a market to develop in interconnection services, and hence the "negotiate/arbitrate" model was introduced. The model failed for a host of reasons, not least the fact that there was an asymmetry between the regulation of the fixed and mobile networks so that interconnection negotiations between these networks never looked like a two-way access negotiation. More generally access pricing didn't distinguish between one-way access (where a long distance provider buys both PSTN originating and terminating access from the fixed network operator) and two-way access in which two networks of directly connected customers interconnect. The latter was the market of PSTN termination on non-Telstra networks and of mobile-fixed interconnection both ways.

Ultimately the policy makers have recognised the failure of the theory of infrastructure based competition for the fixed network, a failure that is not only clear in the pseudo facilities based model of naked DSL, but was also apparent in the contending views on FttN.

What this has been matched with is really a version of "rate of return" regulation. This is how the new mandated pricing structure for access to the Telstra network works, and will be the basis for NBN Co regulation. It is, however, a forward looking version of RoR regulation.

The weakness is that such price calculation becomes incredibly sensitive to the demand forecasts in the pricing model.

I happen to believe that there are other market mimicking ways to price that generate the kind of information exchange for which we really should value markets.

I just don't think I can convince the policy makers, the regulators or the commercial firms.





Novae Meridianae Demetae Dexter delenda est

Telcos - get your act in gear

In the SMH on the weekend it was reported that the rest of the telco industry had declined an invitation to get together with David Thodey "in good faith to meet together to discuss the challenges and opportunities we face as an industry at a time of unprecedented change."

His colleagues decided to interpret the invitation entirely through the lens of "access seekers" and reject the discussion on the basis they want serious regulation, and this image is potentially reinforced by the fact that when others declined the head of Wholesale chose to interpret the act as indicating that his customers had no areas of concern.

However, Thodey was really returning to a proposition he advanced in his Comms Day Summit speech (though the speech is not on the Telstra speech site).

In that speech Thodey said;

If – as an industry – we want to get the policy settings right we must have a stronger voice. With that in mind, let me come back to the question of how our industry can play a wider role and be a catalyst for change and growth.
o If we accept that technology is changing the way we live and work …
o If we accept that – thanks to next generation networks and technologies – our industry is now at the heart of an increasingly digital nation …
o If we accept all that as a given what, as an industry, are we doing about it?

Are we – as a group – stepping up and taking a leadership position on matters of national importance?
o Do we speak with a united voice when it matters?
o Are we seriously tackling endemic issues – such as our industry’s reputation on customer service and accountability?
o Or are we still thinking like a peripheral – rather than a national – industry?

I believe we are not stepping up to this challenge well enough … The failure to use our social, economic and political capital means that we don’t receive the credit or the influence we deserve.

Ah well. At least he tried. He went on in the speech to say "One of the first areas where, as an industry, we need to start leading is customer service. Poor service undermines our public credibility." In this he is echoing the Minister who was quoted in the Sunday Age again putting the industry on notice, saying;

I sympathise with customers who have suffered poor service at the hands of the telecommunications companies. It is simply not good enough and now they are effectively on notice that if they don't improve their practices themselves, the government will step in to ensure consumers get quality customer service.

One could, of course, question whether the meeting needs to take place given that Communications Alliance exists as the voice of industry (though I can never win the argument that it is not a "peak" body, because peak bodies are made up of other bodies). It is rewarding to see that, after a period of decline, the seniority of the people who make up the CA Board is now mostly direct reports to Chief Executives. David to his credit helped us in a critical phase at AMTA by agreeing to serve on its Board after it too went through a brief period languishing under insufficient representation on the Board.

Perhaps Thodey's mistake was to not ask CA to facilitate the meal. It is a little known fact that we did try in meetings hosted by ACIFs (CAs predecessor) Anne Hurley between Phil Burgess, Paul Fletcher and myself (representing AAPT) in 2006 try to close the gap between Telstra and the G9 - an initiative I originally put to Phil in November 2005. However, Phil could never really bring any movement from Sol to the table, and Optus was always convinced everything from Telstra was a con (see Fletcher's book).

There is an old adage - if what you are doing isn't working try anything else. Thodey's idea is good as a "do anything else". If the direct invitation hasn't worked, then see if someone else can organise it.

Novae Meridianae Demetae Dexter delenda est

Digital Economy Round-Up - Issue 1

This will be an occasional series on the blog - starting now. It should be considered a contribution under my DigEcon Research brand. It picks up the fact that Digital Economy thinking and strategising has been revived throughout the (developed) world - not just Australia.

I'm going to start with two pieces from national regulators on convergence. "Convergence" has re-entered the policy discussion in conjunction with Digital Economy thinking because the regulation of telcos, media and ICT plays an important part in how successfully these services can be (positively) deployed for economic change.

Konrad von Fickenstein, Chair of Canada's CRTC gave an address last week which could have been from here - starting as it did with digital switchover and 700MHz and 2.5 GHz auction news.

We are in a new digital world now [in which] the Commission's ability to regulate through control of access is very much reduced.

I believe we need a conceptual rethink of the whole regulatory system....to be embodied in a single comprehensive Act to govern all communications.

The aim of the new legislation would be to create a structure for optimal regulation of the transportation of bits, whether by wireline or wireless technology, and whether they are carrying voice, video or data. This structure would support the development of a flexible, competitive and innovative system providing access for all Canadians to their choice of fast and efficient digital resources.

Here are some of the key points that might be included:
* A statement of objectives for the system—economic, social and cultural.
* A clear distinction between the broad policy choices to be made by the government and the powers to be assigned to an independent regulator in all areas of communication, including broadcasting, telecom and spectrum management.
Specific provisions on timelines and on regulatory tools, such as AMPs (Administrative Monetary Penalties), mandatory adoption of codes, and the power to impose arbitration.
* A coherent scheme for the support of Canadian content. This could include subsidies, or incentives in the form of regulatory exemptions and exceptions, or a mix of all of these methods.
* The responsibilities and governance of the public broadcaster, defining its special role in reflecting Canada's unique culture and values.

We should also consider a rationalization of our institutional framework. ... Should the powers of ex ante regulation be curtailed, while ex post powers of enforcement are increased? The aim should be to favour competition, with intervention limited to cases of market failure.

Should the relationship between the CRTC and the Competition Bureau be more clearly defined? What about the CRTC and the Copyright Board?

The industry must act

...

The kind of fundamental reform I'm talking about can only be realized through action by the government. The government, however, is unlikely to take action unless the industry itself is pushing for it. It is therefore up to you to organize yourselves and make sure the message gets out loud and clear.

Earlier in his speech he'd referred to an interesting initiative on "terms of trade" between increasingly large and powerful producers and broadcasters - an interesting initiative that he claims "will bring clarity and certainty to broadcasters and producers. They will also help to bring Canadians a steady supply of high-quality Canadian programming available on a variety of platforms."

The four dot points could work very well as framing points for our own Convergence Review, and the institutional question is equally valid.

On the industry point the Chair was particularly addressing the broadcasters. In Australia a similar position can be advanced about the telcos (but that is another topic).

The Chair of our own regulator, Chris Chapman, addressed CAMLA on the topic of convergence from a regulator's perspective a few weeks ago.

He noted;

Put simply, convergence is an everyday issue … the indisputable fact [is] that developments in communications technology are outpacing what was thought of as possible just five years ago, let alone what legislative frameworks considered would be required more than 10 years ago. Many of the controls on content and the provision of telecommunications services will need revision and adaptation for today’s reality and for the emerging digital economy.

He looked at the issues through separate timelines on devices, content, networks and services, usefully highlighting that "convergence" is an issue across each of these domains. Added to this he introduced the issues affecting consumers and citizens. He did not in this address highlight the important difference between the two words and the need to focus policy on the impact on individuals as both consumers and citizens.

Turning to regulation he noted;

As a result, in our view the Australian communications legislative landscape now resembles a patchwork quilt. It is fragmented and characterised by legislative ‘band-aid’ solutions that lack an overarching strategy, narrative or coordinated approach to regulating communications and media in a digital economy. Regulatory pressure has bitten into core legislative concepts and definitions, creating these strained or ‘broken concepts’. Ultimately, their ‘elasticity’ will expire at which time they will no longer function efficiently or effectively in a converged environment.

We at the ACMA have consistently documented and indicated our preparedness to grapple with the regulatory implications of convergence. ‘Broken concepts’ is a reasonably provocative phrase we have used to highlight the notion that legacy legislation, the rules for the communications sector that used to work nicely 20 years ago, now don’t entirely fit the circumstances we have to embrace now, let alone over the next 20 years.

Unfortunately he seemed good on diagnosis but limited in solutions;

The ACMA maintains an active review program to effectively and efficiently manage our response to convergence impacts on regulatory and co-regulatory arrangements for communications and media services. In this program, my staff have examined the convergence status of 40 or so key concepts in Australian communications legislation, and found that many of these are broken or straining in relevance. I will go into a little detail below on some specific examples to highlight the depth of the issue.

For convenience, will do so under the headings of the ‘four worlds’ that the ACMA regulates—telecommunications, broadcasting, radiocommunications, and the internet. Each of these ‘worlds’ had its genesis in a traditional, often physically defined analogue world, but they are all now trending towards that converging centre point. A common denominator across all of these is an evident need for much greater consistency in approach to definitions, concepts, regulatory policy, structures and approaches as well as compliance measures, available enforcement powers and actions.

What followed was a sample of his list of 40 broken concepts. He offered some further diagnosis of what is broken.

As I see it, there are actually three problems, which can be synthesised into an overarching meta-problem, which is what faces this Convergence Review:

1) Digitalisation broke the nexus between the shape of content and the container which carried it – ...This meant that regulation constructed on the premise that content could be controlled by how it is delivered has increasingly lost its force, both in logic and in practice. This problem began to be recognised as one of ‘convergence’ as far back as the end of the 1980s9; however, legislative response has been sporadic.

2) Based on digital content and carriage, IP networks have come to play an ever more important role. This has meant content has become increasingly non-linear, interlinked and ‘uncontained’ while people increasingly expect to connect and communicate seamlessly – anywhere, anyhow, anytime.

3) But here’s a curve-ball for you: the playing out of virtualization. maybe even then it’s not safe to go back into the water because, looking into the next decade and towards 2025 it seems plausible that we are moving towards a communications world of ‘virtualisation’, where network elements can and will be emulated in software, which will lead to an ever more intricate and subtle interconnection between networks, services and content as those very layers themselves become diffused as a consequence. So my initial provocation is this: even legislation and regulation possibly based on that radical horizontal (i.e. the layers model), and not based on the vertical, is itself likely to be challenged in a future environment.

The last point is indeed the one worth playing with - the horizontal model is one I favour but each element of the stack can emulate another raising the question of what's what.

He went on with some useful discussion about regulatory tools but these should wait for a different discussion (let me just say I disagree).

The final interesting development is an initiative in Coffs Harbour. As a second release site for the NBN they have advertised a series of workshops designed to ensure the region gets the most of its opportunity. Hopefully every LGA in a second release site will do this and not wait for the Feds "Digital Communities"and "Digital Enterprise" initiatives from the DE strategy.


Novae Meridianae Demetae Dexter delenda est

Balance or what?

Mainstream media regularly gets a bagging for its mono-voice - be that criticism from Gerard Henderson about the left leaning Age and ABC, or the rest of the commentariat about the "conservative" agenda of the Oz.

So it was pretty intriguing to see "balance" from on-line media site iTWire. It carried two pieces by renai Le May that bagged the opposition's approach to attacking Quigley. It then had editor Stan Beer's own column defending the coalition's approach. He writes, in part;

It is both proper and desirable for Coalition members of the Senate Estimates committee to subject Mr Quigley to an intense and thorough grilling.

Mr Quigley is a big boy and there is no doubt he can defend himself in Senate Estimates. He doesn't need the media jumping to his defence. In fact, a supposedly impartial media should be asking many of the same questions as the questions being raised in Estimates. In a free country that's what the media and the Opposition are supposed to do.

Problem is that at least one commentator, me, has been saying that it is right to subject the NBN to intense scrutiny - but the scrutiny needs to be focussed on what NBN Co is doing now, not on the recruitment process for the CEO.

But full credit at least to Stan for running the syndicated column from Renai...unless they were just to give credibility to his own column.

Novae Meridianae Demetae Dexter delenda est

Question on Gerard Henderson

Gerard has the most extraordinary exchange with Robert Manne in his Media Watch Dog today. The substance of it is itself laughable - from the outside it just looks like two old codgers squabbling over who was the better *something-or-other* in their youth. The reality is its about whether one did or did not say something about the other at some undefined point in the past - somewhere between 1993 and 1999.

It really is quite pathetic from both of them.

But Gerard has recently got a real bee in his bonnet about what people do in their taxpayer funded jobs - be that the ABC, the bureaucracy, a parliamentary pension or academe. At the same time he thinks a different standard applies to him because he "works in the private sector."

I have news for him, he actually works in the community or not-for-profit sector - the Sydney Institute website says it is "a privately funded not-for-profit current affairs forum encouraging debate and discussion." Gerard's life is funded by donations, and what he can generate through memberships.

Now I know that what he is getting at is that his ongoing future is determined by how well he pursues his craft, it is not enough to hold the position, he has to do it well.

But the same is true of all those people funded by the taxpayer, except perhaps the retiree in Mark Latham. But he had to do the far more challenging thing of winning a few elections (yes I know it was a safe Labor seat, but that means the task of winning pre-selection is not exactly simple).

Most academics are no longer tenured, and even if they are they are still measured on their research output or the fee income their courses produce. The ABC hires and fires presenters on much the same criteria as the commercials - does anyone listen to them?

I like Gerard, I like what he has done with the Institute, I generally like the intellectual rigour he applies to the topics he addresses. But I'm getting very tired of his false dichotomy between himself as "private sector" and all he likes to oppose as "taxpayer funded".

Novae Meridianae Demetae Dexter delenda est

Call centre queues

I want to give some praise to my web-hosting supplier NetRegistry. I had cause to ring their support centre today. The IVR did encourage me to try self-serve on the web (but I'd already done it), but it also told me my position in the queue and gave me the option of requesting a call back without losing my place in the queue.

What's more it worked! My only quibble was they asked me to key in my number rather than giving me the option of choosing the number I was calling from (and I don't block it). It was particularly good given I was calling from my mobile!

If call centres want to help their customers, this is a great option - especially for the great 1300/1800 calls from mobiles rip-off.

I'll have to tell NumberWoman.

Novae Meridianae Demetae Dexter delenda est

Memo to Kevin Rudd

Should Kevin hold aspirations to again lead the ALP, and even be PM? The answer is clearly yes. But the ongoing speculation won't help.

His current position is incredibly reminiscent of John Howard after his first stint at leadership. Howard was dumped because of his insular style. To plan for his return he engaged with all his parliamentary colleagues.

A contrast is Peter Costello. As Howard makes clear in his memoirs he didn't step aside for Costello because Costello never won the support of his colleagues.

The problem for a Rudd return ever remains that they haven't forgotten the insular leadership. He won the leadership the first time by campaigning directly to the public (through Sunrise amongst other ways), but he won't win it back that way.

I've already given my gratuitous advice to the ALP, and in particular the need for a refresh on the front-bench and to move Swan on.

My advice to Kevin Rudd is that he can be an agent for this change. He can be the bloke who goes and visits all his colleagues, one by one, and explains to them the need to support the PM. In doing so he will show them the PM he can be.

Rudd's best chance of a return to leadership is by helping Julia Gillard over her current troubles and secure a smooth transition next term. If they lose an election the party will turn to Combet or Shorten.

Novae Meridianae Demetae Dexter delenda est

Convergence - nearly forty years old and counting

Many thanks to Michael Gordon-Smith who responded to my tweeting of my blog post on convergence.

In my tweet I asked for earlier references to "convergence" than 1977. He offered me two.

The first is from New Scientist 15 November 1973 P. 471. It reads in part;

After six years of steady sniping by the computer specialists at the telecommunications engineers over their failure to rise to the challenge of computing, the counter-attack by the telecommunications engineers has started. The computermen have long alleged that the telecommunications designers were incapable of providing the needs for communicating between computers, and that the role of the computer within the telecommunications system itself was being belittled. However, times are changing. Recently the Chairman's address to the electronics division of the Institution of Electrical Engineers tackled the subject. His address to a London audience was entitled: "Computers and Communications - convergence or conflict?"

The speech is reported to have defended the highly standardised telco industry against the then highly chaotic computing industry. The speaker argued the conflict between the two camps stemmed from the fact "that the injudicious injection of computer technology into telecommunications may also inject the incompatibility which is so much a feature of many present-day computers."

The article itself goes on to describe current circumstances (in 1973) saying;

For several years many UK computer users have used packet switching as a hefty stick with which to beat the Post Office. The technique uses intermediate storage of data travelling between two computers. .... Endless papers have been written about the virtues of packet switching and the Post Office will shortly set up an experimental service.

The most lauded example of packet switching in use is the ARPA network which serves research computers across the United States and in a few places in Europe.

The article went on with a bit of discussion of the telco engineering side denigrating packet switching as a long term solution. (The conflict side of this resulted in the great coalitions for changes in regulation of telecommunications - but that is another story.)

Of course we now know that the packet switching brigade won, and the ARPAnet evolved into the Internet.

The second example was a book from 1972, Government Regulation of the Computer Industry which at four places between pages 70 and 82 refers to the "growing convergence of computing and communications."

This is interesting as it explicitly in a policy setting. They are, of course, only references to part of the convergence discussion, and don't otherwise address the telecommunications/media convergence that is more the focus of our "convergence review".


Novae Meridianae Demetae Dexter delenda est

The beginning, as we think of it now, is unlikely to have been the beginning.

Finally something worth reading at The Conversation.

Astrophysicist Geraint Lewis has written a piece which neatly points out that the Big Bang is a singularity. In this case a gravitational singularity at which the gravitational field becomes infinite.

The article notes;

But science is replete with singularities ... and all physicists know the presence of singularities means one thing above all else: you have pushed your scientific theory too far, and something has gone horribly wrong.

In other words the Big Bang isn't so much a theory as a mental note that we need a new theory. Hence the conclusion of the article;

The beginning, as we think of it now, is unlikely to have been the beginning.

There is another singularity in popular science - the so-called technological singularity at which machine "intelligence" (or processing capability) exceeds that of man. The term singularity has been chosen to reflect the idea that it is impossible to predict what happens at that point.

But that singularity is growing in its mythic status - and to those who intone this singularity as if it really presages some new disaster I say "The end as you think of it now is unlikely to be the end."

Note:

I introduced this piece with a throw away line about The Conversation. It trumpets itself as;

A New Approach to Journalism

Launched in March 2011, The Conversation is an independent source of information, analysis and commentary from the university and research sector. The site is in development and we welcome your feedback.

The first observation to make is it has NOTHING to do with "journalism", it is not reporting on the who, what, where and when. It is just one section of a newspaper - the opinion page.

In that it is really just the same as On-Line Opinion.

Both are reactions to the increasingly narrow range of views that are being invited to contribute to the Fairfax and News opinion pages. But neither is journalism.

The difference is that The Conversation restricts itself to a set of "privileged voices" from within academe - described as the "university and research sector". I guess I could claim - under my DigEcon Research hat - to fit that profile. But I doubt it.



Novae Meridianae Demetae Dexter delenda est

The OECD guidance on regulation

The OECD has published a draft recommendation on Regulatory Policy and Governance. They are seeking public comments by 1 July.

These documents become quite "dangerous", as in future domestic policy discussions the document will be cited as some kind of extra-territorial authority.

The document lists twelve recommendations. A flavour of them can be garnered from a sample;

1. Commit at the highest political level to an explicit whole-of-government policy for regulatory quality, with clear objectives and frameworks for implementation to ensure that, if regulation is used, the economic, social and environmental benefits justify the costs, distributional effects are considered and that the net benefits are maximised.

The Australian Government would argue that this is done through the deregulation function in the Department of Finance and the Office of Best Practice Regulation.

But let's unpack the OECD statement. It is no longer a simple CBA we are being asked to do before regulating. We are explicitly invited to consider social and environmental benefits as well as economic. We are invited to consider distributional impacts and that "net benefits" be maximised. Ultimately there is no "calculus" on which the three kinds of benefits can be computed and combined (short of the economic technique of determining the public's willingness to pay for the social or environmental benefit), and there is certainly no calculus to balance the net benefits against distributional effects.

The way we balance these things is actually called politics.

7. Develop a consistent policy covering the role and functions of regulatory agencies in order to provide greater confidence that regulatory decisions are made on an objective, impartial and consistent basis, and avoid the risks of conflict of interest, bias or improper influence.

This recommendation is very appropriate for Australia where we have a proliferation of "regulators" (e.g. ACCC, ACMA, APRA, ASIC, TGA) and no meaningful over-arching defining law to define "regulators". It does introduce the prospect that a new act be introduced, the Regulatory Agency Act, that would cover the formal parts covered by the CAC and FMA Acts, but could include generic rules of process. Individual regulators could be created under the provisions of that Act - in the process reducing a lot of duplicated pages in current enabling legislation.

I haven't yet read the OECD document in detail. I probably should - but my reading will be tinged by anger at the underlying principle that regulation is equated with economic loss.


Novae Meridianae Demetae Dexter delenda est

NBN Ad - misleading?

A big issue identified in the ACMA's Reconnecting the Customer draft report is that a lot of the customer service issues in the industry stem from the misleading nature of much of the industry's promotion.

the Government's expenditure on the NBN promotion clip has drawn attention today but the story doesn't analyse the content. Senator Conroy used the clip launching the Digital Economy strategy.

The news report mentions "Gen X and Y doesn't escape being targeted as "Travis" appears playing in a band with other musicians through the NBN" which happens in the clip at 4 minutes 30 seconds.

The issue is that the musicians are shown playing simultaneously using digital television - which doesn't allow for the timing delay from coding. In a video-conference the coding of voice and vision are synched. You'll get less delay if they are unsynchronised - but then you get the effect you get at a conference where the speaker is projected using digital television but the audio is analogue.

I'm quite happy to be corrected on this - but even at the NBN launch in Armidale they had to use slight of hand to co-ordinate two choirs.




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Digital Economy: Promise or problem

Ross Gittins in the SMH today shares some interesting research on why cities play an important role in the history of economic development.

He mostly quotes from a book called Triumph of the City.

The city is explained as a place that allows the social being that is man to magnify the economic benefits from working together - and from specialisation. This works to one of the strands I think is under played in the whole Digital Economy discussion - the consequence of new communication technology is to facilitate centralisation rather than decentralisation.

Gittins cites a study that compared the problem solving ability of a group meeting face-to-face versus only through electronic communication. Indeed the infamous "Silicon Valley" - home of much of the technology innovation that spurs the ongoing Digital Revolution - is cited in the book as an example of how cities facilitate knowledge development.

This is one of the themes I pick up in my recent working paper Digital Economy: Promise or problem?". As Glaeser says in his book;

Statistical evidence also suggests that electronic interactions and face-to-face interactions support one another; in the language of economics they are complements rather than substitutes. Telephone calls are disproportionately made among people who are geographically close, presumably because face-to-face relationships increase the demand for talking over the phone. And when countries become more urban, they engage in more electronic communications.

Establishing a Government policy that just assumes going on-line faster is better is an error. That was part of my comment earlier on bookstores, the sense that Government is just saying "do more" without inquiring into why or how.

(Note: This of course is one of the places where e-books do win hands down. Having read Gittens article I purchased the kindle edition of the book and had it in seconds.)

Novae Meridianae Demetae Dexter delenda est

The future of the bookshop

Nick Sherry got a great deal of coverage for his claim that bookshops faced an "unhappy ending".

The Minister's website doesn't include a transcript of his comments yet so it is hard to know really what he said. The fact is that he was speaking at an on-line retailing forum hosted by eBay subsidiary PayPal. eBay's CEO has been made an NBN Champion by Senator Conroy so to a large extent you'd think Sherry's comment has been scripted for the event.

Josh Gans on his blog has opined that Sherry is basically correct though suggests the timescale he suggests of 5 years is too short. But Gans at least is open to the idea of booksellers "re-inventing" themselves.

I engaged in a bit of Twitter banter suggesting the complete demise of the bricks and mortar bookstore was extreme because I liked thumbing through books - browsing is an important part of the activity. I was challenged as to what my view really is....so here goes.

Firstly, I'll refer to my posts about the demise of Borders. That was not about online, it was about the failure of the "category killer" business model.

Let's list the ways to "access" books.
1. Buy physical book in bookshop.
2. Buy physical book online.
3. Borrow physical book from library.
4. Buy e-book online.
5. Copy e-book online.

The choice between e-book and physical book as the medium of purchase is as much about the reading environment as anything else. The first observation to make is that if I buy the physical book it would be nice to also get the e-book. In non-fiction works for research there are things about spreading books out, multiple mark-up and tagging methods that just "work". but the task of reading it could be made easier by having the book "dual mode;.

The second issue is to do with "finding" books. On-line sources are very good at capturing purchasing details and using it to make suggestions. Dymocks at least has my personal purchase history on my "booklovers" card but has never used it for tailored suggestions (I guess because if I get an e-mail I'm at the alternative source). On-line sources are also good for searching for a book that you know the details of. But on-line sucks as a place to "browse"...even the Amazon "look inside" section doesn't readily give you the feel.

So to me it looks like physical shops and on-line, physical books and e-books are all part of one eco-system, not separate ones. Your financial institution transacts with you on-line and physically - a few specialists have tried to create "on-line" only models but they really are niche.

The problem in books is that my local preferred physical stores (Dymocks and Abbeys) have uninviting online presence, and if I go online I might as well go international. And here is the real issue for Australian distribution - parallel importation. If Sherry and Conroy want to promote the use of on-line retailing by Australian bookstores then they have to be allowed to access the same wholesale market as the overseas competitors. Also sometimes I find in a physical bookstore a book I only want as an e-book...I'd happily transact then and there with the bookshop, but there is no current way for me to "reward" them for helping me to find the book.

The other innovation would be to create portability in "preference" mechanisms. I'd prefer all my purchase history to be available to ALL my preferred bookstores (so add Amazon to that list). The Reading Room is potentially a site that could do that.

The "bookshop" of the future will place more emphasis on the ability to browse for books and less on the need for a large quantity of any specific volume for sale. My bookseller will support my ability to purchase on-line or physically, they will support my e-book platforms - and provide me with the e-book for any physical book I buy.

Finally if Senators Sherry and Conroy are really interested in on-line retailing, perhaps they might like to turn their attention to the question of on-line payment systems and how to "dis-intermediate" them while increasing security. PayPal is in part a response to the identified risk of providing credit card details to every on-line trader you wish to buy from. There is a completely different potential global solution. It is like an international version of B-Pay - but in reverse. Under B-Pay I am provided with a provider number and customer number to authorise a transaction. I want something that works in reverse. I want my bank to be able to give me a number that identifies the institution and then a "transaction code". That transaction code can be authorised so that only the vendor nominated can make a draw down on my account - the vendor never sees my account details - just the transaction number.


Novae Meridianae Demetae Dexter delenda est

ISPs and shaping

Interesting report from the US that reveals work by a third party to measure the extent of traffic "shaping" being undertaken by ISPs.

It raises an important question in the context of the ACMA's Reconnecting the Customer project in particular, and the general idea of "informed markets" in particular.

There is a lot of heat expended on clarity of the "speed" of an Internet link, but speed from your PC to the edge of your ISPs network is one thing but speed through the network is another.

I'm also aware that one major consulting firm has done a thorough study for one wireless provider to validate the statistical basis of their speed claims. The same consultancy has declined to do a report for another provider on the basis that the provider is not prepared to undertake the work necessary to make the claim statistically reliable.


Novae Meridianae Demetae Dexter delenda est

Convergence and the Digital Economy

I managed on Friday to get a submission in to the Convergence Review Framing Paper. The submission only goes to the language of markets, competition and regulation; arguing that now is a good time to get greater clarity and accuracy into terms that have been hollowed out.

The Convergence Review comes as the Government is ramping up its "Digital Economy" rhetoric. Indeed the two pieces of work are technically housed in the same Branch of the Department. This is unsurprising as they are ultimately related.

But they also have equally long histories.

Going through some old papers yesterday (I was only moving them from place A to place B) one caught my eye, titled The convergence of technology: impact on telecommunications, broadcasting and television. The author is listed as an Australian lawyer, who starts;

In introducing this topic - the convergence of technology - one could not do better than quote another Australian [names the Chair of an Australian regulator];

"The lines between historically well defined industries have been blurring as the potential in new computing and communications technologies is exploited globally".

The consequence of this blurring on regulatory regimes ... will be addressed a little later. First I will describe what this convergence is and touch on the plethora of new services which it has brought forth.

After describing the new services he goes on;

The basic policy question which is confronting (or has recently confronted) nations is whether this current building of a more advanced communications network is most effectively done within established regulatory constraints or whether there is a need for restructuring those constraints in order to maximize benefits of the convergence of technology. Internationally, competition is the fashion and every nation will feel its effects. ...

In Australia the regulatory regimes, and the traditional regulatory regime in particular, are being re-affirmed in an effort to deal with the new technologies of telecommunications and computers, and to provide communications services to all Australians equally.

The passages quoted could well describe the current Australian situation. We have the "Convergence Review" grappling with these constructs while the telecommunications policy regime is delivering the NBN and a revamped USO framework to deliver on the goal of services to all Australians.

Yet the author was J. Kench addressing the 1985 World Telecommunications Forum, the regulator was David Jones from the Australian Broadcasting Tribunal who uttered his words addressing the same forum in 1983. The new services catalogued were things like teletext and e-mail (X.400 based), the converging telecommunications technology was the ISDN. The article was really a peon to competition in telecommunications - coming as it did post Davidson and pre the 1988, 1991 and 1997 telco reforms.

The interesting thing is that all the major legislation under consideration by the "Convergence Review" was created after the article. It poses the first question for the review - given that convergence is an ongoing process how do you craft the regulatory structure to sustain the further challenges that will occur over the next twenty-five to thirty years?

The second question is really what do we mean by "convergence". A very good paper by Jonas Lind, Convergence: History of term usage and lessons for firm strategists, from 2004 tracks the use of the word "convergence". He first finds that the usage matches the Gartner group concept of A Hype Cycle, reaching its first peak in 1994 (the Peak of Inflated Expectations) before crashing to the Trough of Disillusionment in about 1997 before going to a Plateau of Productivity since. The second finding is that the term is very indistinct in meaning. Lind's focus is on the use of the term as a motivator of corporate strategy. However the statement is just as true for public policy.

One other service Lind does is trace the history of the term - he credits it to a fascinating article "The Convergence of Computing and Telecommunications Systems" by Farber and Baran from an "Electronics Issue" of Science in March 1977. The issue as a whole is worth a read nearly thirty-five years later.

(Note: Kench's speech was published in the Telecommunications Journal Vol 53 No 8 1986. Interestingly it doesn't appear to exist in an electronic resource. That Journal was published by the ITU, starting as the Telegraph Journal in 1869, becoming the Telecommunications Journal in 1934 and now published as ITU News since 1999.)

(As a complete aside Lind has blogged about telco customer support issues in Sewden. Sounds just the same as Oz - then again the case is a global brand that is present here).


Novae Meridianae Demetae Dexter delenda est

On Cutting Red Tape - Part 2

I blogged recently about a piece of nonsense issued for public comment by DBCDE - an instrument to exempt carriers with revenue under $25M from the Eligible Revenue Return requirements.

At the time of writing the post I couldn't find the original note - labelled "A Note on Bad Policy" that I shared with DBCDE in December 2009 when the idea first appeared in the explanatory memorandum of a Bill.

I since have found it and have published it on the DigEcon Research site.

Novae Meridianae Demetae Dexter delenda est

Transplant rates

The SMH reports today that the Sharelife group has enlisted former GG Michael Jeffrey in a campaign to lift transplant rates. The goal is evidently "80-90 transplants per million population."

We have to ask though if the goal is achievable. Discussion mostly focuses on the "conversion rate" of usable organs to actual donations - driven by the donation registration and family knowledge rates. These are low but don't explain the whole variance.

To get useful transplant organs you need usually younger people to die, and to die by violence or accident not disease.

Success in reducing the road toll has a direct effect on available transplant organs, gun control and the reported decline in gun shot death does the same. Even the incredibly good record on industrial safety has this effect.

I've recently written a paper on the weakness of "ordinal goals" in economics - that paper was based on the conflict between coming first in GDP per capita and being concerned about global equality and the "gains from trade".

The kind of goal here is an ordinal goal - to score the same rate as someone else. As noted that "rate" is achievable through actions that lift the deeath rate through accident and violence - not really a good objective.

Note: at which point we say roll on stem-cell research so we can just grow the organs we need (wink to VicN).




Novae Meridianae Demetae Dexter delenda est

Faulkner on the ALP

The SMH has reported on John Faulkner's Neville Wran Lecture at the NSW Parliament.

The story is reported under the heading "ALP must reform or die".

The perhaps unsurprising fact is that all elements of the ALP probably understand that; where they disagree is in what form this reform should take.

As Faulkner notes;

These days, as Party membership dwindles, ALP strategists talk about ‘reaching out’ to organisations active on particular progressive issues, ‘gaining endorsement’ of our policies.

That idea, with its implications of ‘us’ in Labor and ‘them’ in community organisations, is wrong. The frequency with which it’s raised by hand-wringing apparatchiks makes many wonder if Labor has lost its way.

Progressive, socially aware activists passionate about social and economic reform must never be outsiders to the Labor movement.

Against this he contrasts;

Activism, community engagement, commitment to ideas, policy debate, are not second-rate substitutes for getting into Parliament. Nor are they routine ritual posturing on the way to pre-selection. Committed members with ideals may complicate the lives of careerist Party managers but they are the life-blood of Labor. And the systematic efforts to marginalise and silence them in recent decades has brought us to where we are today.

adding;

Ladies and gentlemen, the principles of caucus unity and consistency with the party platform have historically meant that the decisions of the party, once debated and resolved, are abided by. They have not meant, and ought not to mean, an absence of debate or the appearance of an absence of debate. Labor needs to get better at explaining what solidarity and unity really mean – both to the general public and to those within the Party who have come to interpret it as acquiescence.

These comments made me think of the annual conferences I attended this century and the approach to them. I was extremely disappointed that the Left - as then represented by John Watkins and Luke Foley - was as pleased as the Right was to avoid any meaningful debate on a position of policy. The eagerness for a deal saw one conference adopt completely opposite resolutions about nuclear power under different parts of the program - both moved as amendments from the floor and neither being debated (instead being incorporated by the mover of the motion).

Faulkner's prescription, building on the national review, is;

In my opinion, and I believe in the opinion of many other members and supporters of our Labor Party, whatever specific changes are adopted, they must be guided by five key principles:
* Labor must be a Party of values and ideas;
* We must have a growing, not a declining Party;
* Labor must return real power to its members;
* We must engage and involve our supporters in the community; and
* Labor must have a culture of inclusion and innovation, not exclusion and unbridled factionalism.

I agree for the most part. However, all this introspection made me look wider and I found a document from the UK Fabian Society called Facing Out. It contains many of the ideas of wider engagement, online policy forums, differential grades of membership, that would seem to accord with a re-activated party.

But when you visit the ALP national website you will find under the tab "Get Involved" a whole slew of these activities.

The distinction is that these activities look like the "us" and "them" model that Faulkner talks about. These programs need to be at the heart of the party, not add ons to it.

But ultimately there are two big simple reforms necessary.

The first is the one Rod Cavalier has championed for about forty years...the complete end to any block union vote. The party needs to be a democratic party of individuals.

The second is to return to what I think the NSW Left under the rubric of the "Steering Committee" originally held dear - the prosecution of the objective;

The Australian Labor Party is a democratic socialist party and has the objective of the democratic socialisation of industry, production, distribution and exchange, to the extent necessary to eliminate exploitation and other anti-social features in these fields.

What needs to be defined is what "democratic socialisation" means in the context of an embrace of a market economy.

I have two distinct views on this. The first is to recognise that the goal of economic efficiency as taught in market theory is anti-egalitarian. Markets work for some things, but they don't advance equity.

The second is to understand that "socialisation" means to work to social not private goals, not necessarily social rather than private ownership. A consequence of that is that the objective is the restraint of power.

Great speech by Faulkner - but will it have an effect.

By the way a reminder - the Latin text at the bottom says "The NSW Right must be destroyed". By that I mean the version of the right that believes the purpose is to gain power, that through power you can exercise patronage, and through patronage you can gain future power.

There is a strong argument that the ALP as a party of ideas was as effective in opposition as it was in Government .... until 1996.

Novae Meridianae Demetae Dexter delenda est