Wow. It seems like we the taxpayers are meant to begrudge our politicians travel expenditure. Lindsay Tanner has been holding out the hope of videoconferencing, but it seems that is about domestic meetings and the copmplaint is about international meetings.
And little Malcolm Turnbull wants us to compare and contrast the Howard recordof travel with the Rudd record. It might have escaped Malcolm's attention, as so much seems to, that the bulk of the Rudd travel has been to international meetings at head of government level - APEC, Pacific Forum, G20 and the like. A little thing Rudd calls the GFC has seen a lot more of these lately.
Given the choice of whether I want Australia's leaders to engage with the rest of the world or not, I vote for engagement. I know it makes the opposition seem even more irrelevant than it usually is because the opposition leader doesn't get to travel on the same trips (though Brendon Nelso seemed to suggest he should - under a Government in exile mindset).
Even when we solve the problem by hosting the meetings it costs more - just look at the 2007 APEC. It can also be embarassing - think the Chaser. At least that meeting did give the opposition a moment to shine, but I don't think Malcolm speaks Mandarin (though I believe his Latin is very good).
Meanwhile good to see that someone is paying attention to the fact that Kevin Rudd really is trying to keep away from just being a merchant of spin while noting that that is really what Turnbull did in his reply speech.
As well there is commentary focussing on how character building dealing with the deficit will be. It is a great pity that Swan and Rudd have thus far failed to point out that the stiulus could have been faster and more focussed if there had been more infrastructure planning under Howard. We needed more projects through the planning phase and, in that delightful phrase "shovel ready". But Howard and his crowd just fiddled and ponitificated and pointed fingers at unions, at the States, heck at everyone but themselves!
And they don't seem to have the excuse that thy were never in the country. Maybe if they'd travelled more they would have seen some opportunities for governing differently to the Goerge Bush model.
Monday, May 18, 2009
Illegal brothels and adverising
Those wonderful folks at the Daily Telegraph tell us that illegal brothels are blloming across Sydney. In the article they suggest tough new laws are having no impact.
Meanwhile further back in the paper there are one and a half pages of ads for "adult services". This number is matched in all their sister publications in the Cumberland Press stable of local newspapers. This level of advertising suggests this is a very important part of the brothel eco-system. How else do you find a brothel (which, of course, is different to the streert walkers used to add visual colour to the story).
How about the Tele suggests an obvious law change. Make it illegal to advertise "adult services" unless the business has a "licence" - the structure of such licencing needs to be worked out but from my view it is something that would be issued by the State Government and require the endorsement of the relevant local council. To avoid the obvious concerns about the State Government endorsing brothels, rather than merely not prohibitting them, the "licence" need only be a licence to advertise an adult service.
I wonder how the sales and marketing (of ads) department of News Corp would react to that? At least it is good to see a clear separation of editorial content from adverising policy. Pity that the separation occurs in a field of moralising in which the Tele and the rest of News could provide their own moral lead.
Meanwhile further back in the paper there are one and a half pages of ads for "adult services". This number is matched in all their sister publications in the Cumberland Press stable of local newspapers. This level of advertising suggests this is a very important part of the brothel eco-system. How else do you find a brothel (which, of course, is different to the streert walkers used to add visual colour to the story).
How about the Tele suggests an obvious law change. Make it illegal to advertise "adult services" unless the business has a "licence" - the structure of such licencing needs to be worked out but from my view it is something that would be issued by the State Government and require the endorsement of the relevant local council. To avoid the obvious concerns about the State Government endorsing brothels, rather than merely not prohibitting them, the "licence" need only be a licence to advertise an adult service.
I wonder how the sales and marketing (of ads) department of News Corp would react to that? At least it is good to see a clear separation of editorial content from adverising policy. Pity that the separation occurs in a field of moralising in which the Tele and the rest of News could provide their own moral lead.
Friday, May 15, 2009
Andorra was robbed
I've just been told that Andorra is the largest country in the world without an airport. Great shopping, but no fast way out.
I guess there is some way other than walking over the Pyrnees though.
Meanwhile in shocking news Andorra was eliminated from this year's Eurovision song contest in semi-final 1. Maybe it didn't look as good o stage as in the clip - or just maybe people found it a bit repetitive.
Will I live blog the final when it is covered in Australia? No probably not.
Who will win - your finalists are;
01 Lithuania
02 Israel
03 France
04 Sweden
05 Croatia
06 Portugal
07 Iceland
08 Greece
09 Armenia
10 Russia
11 Azerbaijan
12 Bosnia & Herzegovina
13 Moldova
14 Malta
15 Estonia
16 Denmark
17 Germany
18 Turkey
19 Albania
20 Norway
21 Ukraine
22 Romania
23 United Kingdom
24 Finland
25 Spain
Go Moldova!!!!
I guess there is some way other than walking over the Pyrnees though.
Meanwhile in shocking news Andorra was eliminated from this year's Eurovision song contest in semi-final 1. Maybe it didn't look as good o stage as in the clip - or just maybe people found it a bit repetitive.
Will I live blog the final when it is covered in Australia? No probably not.
Who will win - your finalists are;
01 Lithuania
02 Israel
03 France
04 Sweden
05 Croatia
06 Portugal
07 Iceland
08 Greece
09 Armenia
10 Russia
11 Azerbaijan
12 Bosnia & Herzegovina
13 Moldova
14 Malta
15 Estonia
16 Denmark
17 Germany
18 Turkey
19 Albania
20 Norway
21 Ukraine
22 Romania
23 United Kingdom
24 Finland
25 Spain
Go Moldova!!!!
I just learned something
Buried in Annabel Crabb's item in the SMH today was a line that "a search engine and 15 keystrokes (K-E-V-I-N-R-U-D-D-E-A-R-W-A-X) are all it takes to summon a visual reminder of the weird stuff our Prime Minister gets into."
I thought - 15? What about the spaces. So I tried just the string "KEVINRUDDEARWAX" and what do you know - Google figures out you meant to put spaces in. How clever is that?
And that is all I intend to write about the whole matter. Except to ask why the ABC thought it relevant to name one of the participants in the Christchurch incident. Did naming that one player change the weight of the story?
I thought - 15? What about the spaces. So I tried just the string "KEVINRUDDEARWAX" and what do you know - Google figures out you meant to put spaces in. How clever is that?
And that is all I intend to write about the whole matter. Except to ask why the ABC thought it relevant to name one of the participants in the Christchurch incident. Did naming that one player change the weight of the story?
Monday, May 11, 2009
More about Telstra
The news on Telstra and the NBN flows thick and fast. We've seen a former communications minister offer his views on the topic. He's really a bit everywhere in this piece, but still seems to be wedded to an infrastructure competition view of life. He also doesn't get it that an all-fibre network deployed aerially can be run at the same level as the electricity wires and not cause the angst of the HCF roll-out.
What's more worrying is that he doesn't really get the fact that Conroy has as a primary goal the restructuring of the industry. John Durie got this writing in the Oz on the weekend, saying;
Taken at face value, Communications Minister Stephen Conroy has one mission and that is to overturn the mistakes made by a predecessor, Kim Beazley, in giving Telstra control over the wholesale and retail markets.
(though as I note in my forthcoming eview of Paul Fletcher's book that I've previously mentioned, the realit is that it wasn't Beazley's mistake it was Alston and Howard - they are the ones who privatised without separation).
But Durie goes on;
The new broadband network can only be part-owned by Telstra, but it makes sense for it to sell parts of its fibre network into the pool to give it the maximum 20 or 25 per cent stake allowed.
This model seem to be the one preferred by the Australian Government and seemingly acepted by the markets. However, it is a suboptimal outcome for both Telstra and the Australian Government.
It is suboptimal for Telstra because they wind up being a major shareholder in an entity that they have little control of, yet their ownership position will still be seen to be advantaging them so the regulatory battles will not completely go away. It is suboptimal for the Government because ultimately they want to sell down their 51% and the entity left after they sell down will have a controlling shareholder.
The only model that makes sense is for the Telstra Board to do a "One Steel" following the split of BHP's steel assets. All the assets to be sold into the NBNCo are identified and parcelled into a subsidiary company. All the contracts between the Telstra and the NewCo necessary for existing services are entered into. The shareholders in elstra are issued with shares on a 1 for 1 basis in the NewCo. The NewCo is merged into NBN Co so that each share on NBNCo becomes a share in NBNCo, but the total of NewCo shares only equals 20% (or whatever is figured out as the right number) of the total shares in NBNCo. (Another possibility is that NBNCo simply gets formed by the directors of NewCo forming it, and issuing new shares as needs be for capital).
That creates the real split and avoids any ongoing ownership elationship between Telstra and NBNCo. It would be a pity to screw up the chance to get the structure right!
What's more worrying is that he doesn't really get the fact that Conroy has as a primary goal the restructuring of the industry. John Durie got this writing in the Oz on the weekend, saying;
Taken at face value, Communications Minister Stephen Conroy has one mission and that is to overturn the mistakes made by a predecessor, Kim Beazley, in giving Telstra control over the wholesale and retail markets.
(though as I note in my forthcoming eview of Paul Fletcher's book that I've previously mentioned, the realit is that it wasn't Beazley's mistake it was Alston and Howard - they are the ones who privatised without separation).
But Durie goes on;
The new broadband network can only be part-owned by Telstra, but it makes sense for it to sell parts of its fibre network into the pool to give it the maximum 20 or 25 per cent stake allowed.
This model seem to be the one preferred by the Australian Government and seemingly acepted by the markets. However, it is a suboptimal outcome for both Telstra and the Australian Government.
It is suboptimal for Telstra because they wind up being a major shareholder in an entity that they have little control of, yet their ownership position will still be seen to be advantaging them so the regulatory battles will not completely go away. It is suboptimal for the Government because ultimately they want to sell down their 51% and the entity left after they sell down will have a controlling shareholder.
The only model that makes sense is for the Telstra Board to do a "One Steel" following the split of BHP's steel assets. All the assets to be sold into the NBNCo are identified and parcelled into a subsidiary company. All the contracts between the Telstra and the NewCo necessary for existing services are entered into. The shareholders in elstra are issued with shares on a 1 for 1 basis in the NewCo. The NewCo is merged into NBN Co so that each share on NBNCo becomes a share in NBNCo, but the total of NewCo shares only equals 20% (or whatever is figured out as the right number) of the total shares in NBNCo. (Another possibility is that NBNCo simply gets formed by the directors of NewCo forming it, and issuing new shares as needs be for capital).
That creates the real split and avoids any ongoing ownership elationship between Telstra and NBNCo. It would be a pity to screw up the chance to get the structure right!
Is Davos irrelevant? And what would they know about the future anyway?
I've stumbled upon an event happening next week called Future Summit 2009 which is run by an organisation that calls itself The Australian Davos Connection. This body describes itself as;
While ADC was originally founded in 1996 to: (a) promote the World Economic Forum (WEF) within Australia; (b) promote Australia's interest within the broader WEF community; and (c) share the richness of ideas within the WEF community to a wider Australian audience; the organisation's charter has since expanded to include the broader aims of:
* Promoting business excellence by encouraging policy debate on global issues;
* Improving the quality of leadership;
* Enhancing Australia's position in the region and the world;
* Encouraging Australian leaders to help improve the quality of life of all Australians;
* Encouraging Australia to play a responsible, and leadership role where appropriate, within the global community; and
* Exposing Australian leaders to international experts and key international leaders.
The interesting part is that the group doesn't seem to have a formal tie to The World Economic Forum. While the Chair in his newsletter talks about his recent visit to Davos, there is nothing on the ADC site nor the WEF site specifically referring to any formalised link.
So we then focus on the idea of the "Future Summit". It has an interesting draft program and list of speakers but they are not presented so that one can be related to the other.
It is really hard to give the event much credibility. The whole exercise looks a bit like a "big end of town" event - not just corporate Australia, but super-corporate Australia.
We need less of these kinds of events, not more.
While ADC was originally founded in 1996 to: (a) promote the World Economic Forum (WEF) within Australia; (b) promote Australia's interest within the broader WEF community; and (c) share the richness of ideas within the WEF community to a wider Australian audience; the organisation's charter has since expanded to include the broader aims of:
* Promoting business excellence by encouraging policy debate on global issues;
* Improving the quality of leadership;
* Enhancing Australia's position in the region and the world;
* Encouraging Australian leaders to help improve the quality of life of all Australians;
* Encouraging Australia to play a responsible, and leadership role where appropriate, within the global community; and
* Exposing Australian leaders to international experts and key international leaders.
The interesting part is that the group doesn't seem to have a formal tie to The World Economic Forum. While the Chair in his newsletter talks about his recent visit to Davos, there is nothing on the ADC site nor the WEF site specifically referring to any formalised link.
So we then focus on the idea of the "Future Summit". It has an interesting draft program and list of speakers but they are not presented so that one can be related to the other.
It is really hard to give the event much credibility. The whole exercise looks a bit like a "big end of town" event - not just corporate Australia, but super-corporate Australia.
We need less of these kinds of events, not more.
Saturday, May 09, 2009
What do you do with a BA in English
The musical Avenue Q opens in Melbourne in June. One of its songs is What do You Do With a BA in English.
A few years ago I introduced David Thodey at a conference and noted that the answer was "become a GMD at Telstra." That has now become "become CEO of Telstra".
Meanwhile outgoing CEO Sol Trujillo has written his own veledictory for the Smage. He claims "many people forget how Telstra's critics described it before I arrived: timid, bureaucratic, slow-moving, indecisive and siloed." He goes on to claim that his legacy has been "to transform, rewire, and unwire the company with fixed and mobile investments, Telstra has improved growth and boosted productivity while improving network quality and employee engagement." Finally he claims "we have created a New Telstra — one that is competitive, differentiated, innovative and continually enhancing the customer experience."
There is much to dispute in all this. One of the biggest remains how much of the "transformation" really amounts to innovative or market genius versus how much relates to the decision to prosecute the exercise of market power for all its worth. What Sol describes as being "regulatory focussed" was the previous policy of recognising that excessive use of Telstra's incumbent position will merely bring bigger and more severe retribution.
And this is indeed what has come to pass. There is no doubt that underlying the Rudd Government's broadband plans remains a core purpose of dealing with the structural issues in the industry. Stephen Conroy repeated this as recently as last Thursday at a Paull Budde roundtable where he said he wanted to redress the errors of twenty years of policy by both sides of politics.
This was the point the strategies of previous Telstra management had sought to avoid. I am fascinated by the fact I didn't see it would happen. I used to debate with Telecom NZs Teresa Gattung as far back as 2001 how Telstra management would behave once privatised. Theresa said they would go completelt feral, whereas I said that they wouldn't because it would be a short run play at best.
In the end she was right and I was wrong. The process started earlier than the full privatisation though because once the coalition had control of the Senate in 2004 the full sale of Telstra was effectively a "done deal". In the long run though I was right, it has been a flawed short-run strategy. And Theresa herself fell on her own version of brinkmanship with the New Zealand government.
In an article headed Trujillo takes one last swipe at critics Matt O'Sullivan quotes Sol as saying "I'm going to go and spend some time with my parents … and children because I have been gone for six years out of the US. That's my first priority." Given that Matt has pursued Sol endlessly on exactly how little time he actually spent in Australia, I was disappointed that he let that comment go through to the keeper.
A few years ago I introduced David Thodey at a conference and noted that the answer was "become a GMD at Telstra." That has now become "become CEO of Telstra".
Meanwhile outgoing CEO Sol Trujillo has written his own veledictory for the Smage. He claims "many people forget how Telstra's critics described it before I arrived: timid, bureaucratic, slow-moving, indecisive and siloed." He goes on to claim that his legacy has been "to transform, rewire, and unwire the company with fixed and mobile investments, Telstra has improved growth and boosted productivity while improving network quality and employee engagement." Finally he claims "we have created a New Telstra — one that is competitive, differentiated, innovative and continually enhancing the customer experience."
There is much to dispute in all this. One of the biggest remains how much of the "transformation" really amounts to innovative or market genius versus how much relates to the decision to prosecute the exercise of market power for all its worth. What Sol describes as being "regulatory focussed" was the previous policy of recognising that excessive use of Telstra's incumbent position will merely bring bigger and more severe retribution.
And this is indeed what has come to pass. There is no doubt that underlying the Rudd Government's broadband plans remains a core purpose of dealing with the structural issues in the industry. Stephen Conroy repeated this as recently as last Thursday at a Paull Budde roundtable where he said he wanted to redress the errors of twenty years of policy by both sides of politics.
This was the point the strategies of previous Telstra management had sought to avoid. I am fascinated by the fact I didn't see it would happen. I used to debate with Telecom NZs Teresa Gattung as far back as 2001 how Telstra management would behave once privatised. Theresa said they would go completelt feral, whereas I said that they wouldn't because it would be a short run play at best.
In the end she was right and I was wrong. The process started earlier than the full privatisation though because once the coalition had control of the Senate in 2004 the full sale of Telstra was effectively a "done deal". In the long run though I was right, it has been a flawed short-run strategy. And Theresa herself fell on her own version of brinkmanship with the New Zealand government.
In an article headed Trujillo takes one last swipe at critics Matt O'Sullivan quotes Sol as saying "I'm going to go and spend some time with my parents … and children because I have been gone for six years out of the US. That's my first priority." Given that Matt has pursued Sol endlessly on exactly how little time he actually spent in Australia, I was disappointed that he let that comment go through to the keeper.
Friday, May 08, 2009
Telstra
Both the AFR and SMH this morning are declaring that Telstra's Board meeting yesterday endorsed David Thodey as CEO. The AFR goes further to suggest there was a Board row over chairman McGauchie.
The significance of this news isn't the appointment, it is that the discipline around the Board table that has been the hallmark of the McGauchie/Trujillo period seems to have cracked wide open. This was their big problem under Mansfield with at least one director, thought to be Sam Chisholm, leaking.
Meanwhile we know the answer to the Avenue Q question "What do you do with a BA in English?" the answer is become CEO of Telstra.
The significance of this news isn't the appointment, it is that the discipline around the Board table that has been the hallmark of the McGauchie/Trujillo period seems to have cracked wide open. This was their big problem under Mansfield with at least one director, thought to be Sam Chisholm, leaking.
Meanwhile we know the answer to the Avenue Q question "What do you do with a BA in English?" the answer is become CEO of Telstra.
Wednesday, May 06, 2009
RadComms'09 and mobile fantasies
Competing for spectrum
I had an entertaining time at RaComms'09 last week.
I learnt that spectrum management is really very easy, at least according to some. Various presentations had a flavour of “spectrum management is easy, all you have to do is the following things for the telecommunications/radio/mobile/fixed link/satellite/astronomy/regional community”. The challenge being of course that the lists was in direct conflict.
Clearly a lot of the noise is about the future Digital Dividend (700MHz), with both TV and radio still interested as well as the mobile operators. But similar contentions arise between mobiles and news gathering at 2.5GHz, and between WAS operators and satellite operators in 3.6GHz. Even the discussion about 400MHz had disputes between various users and a big concern about "spectrum squatting" by Government users.
A couple of really interesting prersentations by the radio and television sectors on the prospects for further digital radio services and television developments to 3D and super HD. The funy part was that no one mentioned the NBN once and what the implication of fibre everywhere might be to the desirability of wireless based services. However the question is starting to get some coverage in the industry media.
Mobile fantasies
But the biggest bit was the bid by the mobile operators colectively (as AMTA) and individually (as Telstra) trying to argue for both the Digital Dividend (700MHz) and the ENG (2.5GHz) spectrum for mobiles. The latter presentation was written up in both Communications Day and the AFR under the theme that "Australia is at great risk of lagging behind the rest of the world on LTE deployment."
The presentation by Telstra's Dr Tony Warren was funny, but on detailed analysis was also highly fanciful. What amounted to special pleading was masked by some impressive figures that did an excellent job of hiding the fact that this was a biased reconstruction of history and relied on dodgy forecasts.
The selective history came with an attempted comparison between European 3G auctions and those in Australia. The thesis advanced was that the Europeans got it wrong by creating an “artificial scarcity” by having four lots for six bidders whereas Australia got it right so we didn’t bankrupt the industry. It is nonsense because;
• there isn’t enough 2GHz spectrum to create six lots,
• the Australian experience of narrow lots has resulted in some odd allocations,
• the outrageous prices paid for 3G in the UK were actually preceded by the ridiculous prices paid in Australia for the 1.8GHz spectrum in the infamous “One.Tel auction”,
• and the number of bidders in Australia was reduced from five to four by Telecom NZ entering a JV with Hutchison.
As it transpired these four winners of the 2GHz spectrum co-operated to build only two physical networks.
We were entertained by a series of interesting forecasts. These included a reference to an assertion from Telstra’s own Hugh Bradlow that at some point in the future three-quarters of internet access would be by wireless devices. This begs the question of three-quarters of what? If it is just the number of devices I think he is seriously underestimating that – given the already high use of connections through WiFi in public and private spaces. If he means by downloaded data he is seriously mistaken because of the existing and projected price differences.
We were also entertained to some data from Ovum forecasting both connections and dollars of revenue for wireless data into the future. Over at Unwired they remember well the same sets of industry analysts claiming a few years ago that there was no market for wireless data. Dr Warren informed us the chart’s obvious decline in ARPU represented the effect of competition, whereas a more studious approach might conclude that competitive intensity is not increasing over that time, but the combined effects of increasing economies of scale and the experience curve effect in device cost resulted in price declines to attract more marginal consumers. To put it simply, the quantity demanded has increased (and price declined) not because the demand curve shifts up but because the supply curve shifts down.
We were also entertained with a slide that purported to be a projection of future spectrum requirements based on an ITU-R study. However this started with the assumption that the services in 2010 are being supported using the entire available spectrum, including the mobile (850MHz, 900MHz, 1.8GHz and 2GHz) and WAS (2.3GHz, 3.4GHz) spectrum. This ignores the fact that the WAS spectrum is currently lightly used, half the 850 MHz is unused (in metro) and at least two-fifths and probably more of the 1.8 GHz is unused.
But the funniest parts were the sources that Dr Warren relied upon for vindication of his views. The GSMA had written to the G20 leaders to argue the case for co-ordinated action on spectrum, and they were most proud about the endorsement they got from Gordon Brown. Given the state of the British economy this is like a telco relying on an endorsement from Jodee Rich! Later Dr Warren quoted approvingly from Lord Carter’s Digital Britain report, conveniently forgetting that he isn’t as full in his praise of Carter’s earlier work at Ofcom in structurally separating BT. (When challenged on this he did say Lord Carter has got some things right - I agree, but which bits).
But ultimately it is the twin claims that failure to move quickly (or more quickly than the existing plan of 2012) on reallocating the 2.5GHz and of imposing any competition limits will impede LTE deployment that need to b tested. The practical reality is that LTE can and will be deployed in many bands, not just 2.5GHz. Telstra itself is proud of its unusual use of 850MHz for W-CDMA. Lower frequencies like the unused 1.8GHz will actually get better returns.
The issue of competition limits is far wider than just the creation of artificial demand. A big issue with using the 2.5GHz is that out of the 190MHz there may only be 2*60MHz arrangement for LTE. Telstra is right, that is probably best sold as one lot. But should it be sold to the guy who already dominates every other access technology in the market?
The rush to allocate happened in the 2GHz band as well. Australia was about the third market to auction the spectrum. Despite that rush the first network deployment wasn’t till 2003. Despite that rush the leading 3G network actually operates at 850MHz.
A measured approach of making the reallocation together with the Digital Dividend and together with any re-allocation decisions of existing 15 year licences will achieve a far better outcome.
The meaning of words and pictures
Another bit of humour was the need to point out the disclaimer on Telstra’s 21Mbps speed claim because, according to Dr Warren, apparently Australian consumers are stupid. By this I think he means that the ACCC shouldn’t be constraining the Telstra speed claims because no consumer would believe that is the speed they get. I suppose this begs the question of why you would make the speed claim in the first place if consumers didn’t believe it.
It was also interesting to note that this was now a new disclaimer. The original said that typical speeds range from 550Kbps to 8Mbps. I believe the new disclaimer states that these will be typical speeds in regional areas, but 550K to 3Mbps is typical for metro. My apologies to Telstra if I didn’t get that right, but it was small print and I don’t have the best eyesight.
Later Dr Warren presented an impressive chart of 3D columns going through different iterations of technology and describing their peak speeds. He again drew our attention to the disclaimer. The fact that the columns were not drawn to scale belied the impressive gesture he had used to describe the burgeoning capacity. (Admittedly these columns would not have worked in a linear scale, but a logarithmic scale would have allowed them to be drawn to scale).
Concluding impressions
The conference provided both a very practical view of the challenges in spectrum management, but also a very instructive view of the ways various participants frame public policy discussion. This ranged from heavy focus on impacts on national income, to selling the sizzle of new services, through to the benefits of sheer outright perserverence.
I had an entertaining time at RaComms'09 last week.
I learnt that spectrum management is really very easy, at least according to some. Various presentations had a flavour of “spectrum management is easy, all you have to do is the following things for the telecommunications/radio/mobile/fixed link/satellite/astronomy/regional community”. The challenge being of course that the lists was in direct conflict.
Clearly a lot of the noise is about the future Digital Dividend (700MHz), with both TV and radio still interested as well as the mobile operators. But similar contentions arise between mobiles and news gathering at 2.5GHz, and between WAS operators and satellite operators in 3.6GHz. Even the discussion about 400MHz had disputes between various users and a big concern about "spectrum squatting" by Government users.
A couple of really interesting prersentations by the radio and television sectors on the prospects for further digital radio services and television developments to 3D and super HD. The funy part was that no one mentioned the NBN once and what the implication of fibre everywhere might be to the desirability of wireless based services. However the question is starting to get some coverage in the industry media.
Mobile fantasies
But the biggest bit was the bid by the mobile operators colectively (as AMTA) and individually (as Telstra) trying to argue for both the Digital Dividend (700MHz) and the ENG (2.5GHz) spectrum for mobiles. The latter presentation was written up in both Communications Day and the AFR under the theme that "Australia is at great risk of lagging behind the rest of the world on LTE deployment."
The presentation by Telstra's Dr Tony Warren was funny, but on detailed analysis was also highly fanciful. What amounted to special pleading was masked by some impressive figures that did an excellent job of hiding the fact that this was a biased reconstruction of history and relied on dodgy forecasts.
The selective history came with an attempted comparison between European 3G auctions and those in Australia. The thesis advanced was that the Europeans got it wrong by creating an “artificial scarcity” by having four lots for six bidders whereas Australia got it right so we didn’t bankrupt the industry. It is nonsense because;
• there isn’t enough 2GHz spectrum to create six lots,
• the Australian experience of narrow lots has resulted in some odd allocations,
• the outrageous prices paid for 3G in the UK were actually preceded by the ridiculous prices paid in Australia for the 1.8GHz spectrum in the infamous “One.Tel auction”,
• and the number of bidders in Australia was reduced from five to four by Telecom NZ entering a JV with Hutchison.
As it transpired these four winners of the 2GHz spectrum co-operated to build only two physical networks.
We were entertained by a series of interesting forecasts. These included a reference to an assertion from Telstra’s own Hugh Bradlow that at some point in the future three-quarters of internet access would be by wireless devices. This begs the question of three-quarters of what? If it is just the number of devices I think he is seriously underestimating that – given the already high use of connections through WiFi in public and private spaces. If he means by downloaded data he is seriously mistaken because of the existing and projected price differences.
We were also entertained to some data from Ovum forecasting both connections and dollars of revenue for wireless data into the future. Over at Unwired they remember well the same sets of industry analysts claiming a few years ago that there was no market for wireless data. Dr Warren informed us the chart’s obvious decline in ARPU represented the effect of competition, whereas a more studious approach might conclude that competitive intensity is not increasing over that time, but the combined effects of increasing economies of scale and the experience curve effect in device cost resulted in price declines to attract more marginal consumers. To put it simply, the quantity demanded has increased (and price declined) not because the demand curve shifts up but because the supply curve shifts down.
We were also entertained with a slide that purported to be a projection of future spectrum requirements based on an ITU-R study. However this started with the assumption that the services in 2010 are being supported using the entire available spectrum, including the mobile (850MHz, 900MHz, 1.8GHz and 2GHz) and WAS (2.3GHz, 3.4GHz) spectrum. This ignores the fact that the WAS spectrum is currently lightly used, half the 850 MHz is unused (in metro) and at least two-fifths and probably more of the 1.8 GHz is unused.
But the funniest parts were the sources that Dr Warren relied upon for vindication of his views. The GSMA had written to the G20 leaders to argue the case for co-ordinated action on spectrum, and they were most proud about the endorsement they got from Gordon Brown. Given the state of the British economy this is like a telco relying on an endorsement from Jodee Rich! Later Dr Warren quoted approvingly from Lord Carter’s Digital Britain report, conveniently forgetting that he isn’t as full in his praise of Carter’s earlier work at Ofcom in structurally separating BT. (When challenged on this he did say Lord Carter has got some things right - I agree, but which bits).
But ultimately it is the twin claims that failure to move quickly (or more quickly than the existing plan of 2012) on reallocating the 2.5GHz and of imposing any competition limits will impede LTE deployment that need to b tested. The practical reality is that LTE can and will be deployed in many bands, not just 2.5GHz. Telstra itself is proud of its unusual use of 850MHz for W-CDMA. Lower frequencies like the unused 1.8GHz will actually get better returns.
The issue of competition limits is far wider than just the creation of artificial demand. A big issue with using the 2.5GHz is that out of the 190MHz there may only be 2*60MHz arrangement for LTE. Telstra is right, that is probably best sold as one lot. But should it be sold to the guy who already dominates every other access technology in the market?
The rush to allocate happened in the 2GHz band as well. Australia was about the third market to auction the spectrum. Despite that rush the first network deployment wasn’t till 2003. Despite that rush the leading 3G network actually operates at 850MHz.
A measured approach of making the reallocation together with the Digital Dividend and together with any re-allocation decisions of existing 15 year licences will achieve a far better outcome.
The meaning of words and pictures
Another bit of humour was the need to point out the disclaimer on Telstra’s 21Mbps speed claim because, according to Dr Warren, apparently Australian consumers are stupid. By this I think he means that the ACCC shouldn’t be constraining the Telstra speed claims because no consumer would believe that is the speed they get. I suppose this begs the question of why you would make the speed claim in the first place if consumers didn’t believe it.
It was also interesting to note that this was now a new disclaimer. The original said that typical speeds range from 550Kbps to 8Mbps. I believe the new disclaimer states that these will be typical speeds in regional areas, but 550K to 3Mbps is typical for metro. My apologies to Telstra if I didn’t get that right, but it was small print and I don’t have the best eyesight.
Later Dr Warren presented an impressive chart of 3D columns going through different iterations of technology and describing their peak speeds. He again drew our attention to the disclaimer. The fact that the columns were not drawn to scale belied the impressive gesture he had used to describe the burgeoning capacity. (Admittedly these columns would not have worked in a linear scale, but a logarithmic scale would have allowed them to be drawn to scale).
Concluding impressions
The conference provided both a very practical view of the challenges in spectrum management, but also a very instructive view of the ways various participants frame public policy discussion. This ranged from heavy focus on impacts on national income, to selling the sizzle of new services, through to the benefits of sheer outright perserverence.
Friday, May 01, 2009
Sainsbury v Trujillo
The first time I met Michael Sainsbury was on a plane from Canberra to Sydney, he'd been down covering a Senate committee I had appeared before. He had the advantage of me, he knew who I was but at the time I didn't know who he was. Thankfully that got worked out before I blabbed too much!
On that flight Michael put me onto an excellent book, Broadbandits by Om Malik. His liking of that book reflects a keen interest Michael has as a journalist in the human factor in business, how boards and management go about making their decisions. This is an interest he has applied with particular zeal to reporting on Telstra.
He has provided a very fascinating summary of the Trujillo experience, with not only an analysis of the CEO's modus operandi but also (with echoes of Mark Antony's "friends, Romans, countrymen" speech) some conclusions about the sets of decisions the Telstra Board has cumulatively made over the last 4 years.
His summary is a nice match to the Scales piece I have already written about. Both make interesting additions to the ongoing thesis about the conceit of management, and its counterpart, the inadequacy of the relationship between shareholders and companies (and the intermediation of various analysts).
I have a developing theory about the failures of "managerial capitalism", and they relate specifically to the supposed solutions to the supposed principal/agent problem. The problem is that identified by Berle and Means back in the 1920s that firm management pursue goals other than maximising shareholder value, and the presumed solution has been both the rhetoric that "the purpose of the firm is to maximise shareholder value" married with the creation of financial incentives for management in acieving that goal. There are a number of really poor consequences of that approach, including an excessive focus on the asset value of the shares rather than the income stream of dividends, and the sense that strategy is about "outperforming" the market rate of return.
The reality is, however, that in both the history of the development of the common stock firm, and the spcifics of the formation of almost all firms, the "purpose" of the company has been to meet some identified market need at a price that is sufficient to cover operating costs and provide a return to capital. Indeed, the idea that the objective is to "maximise shareholder value" can run counter to this actual purpose as it implies increasing the cost of capital rather than decreasing it (On a more specific point, the cost of capital will be technically lower if the income stream is stable. The objective of the firm to meet its purpose is actually better achieved by focussing on the stability of returns rather than the variability inherent in strategies to maximise value).
This suggests that in the wash up of the GFC we need to dramatically revisit the assumptions of corporate governance. We need to rewrite corporations law to re-elevate the concept of the "purpose" of the company, and to require these to be closely and narrowly written. We need to redefine the fiduciary duty as being the performance against the purpose. There will be much objection from corporations, especially based on the supposed problem of seeking shareholder approval for changes in purpose or on the whole basis of the strategy conversation (are railways in the railways business or the transport business). My responses to these (I have them) need to wait for a longer discursion.
In the meantime, let's hope that Michael Sainsbury continues his forensic examination of the decision making of corporations. I've previously described Michael as the "Shane Warne of journalism" because he successfully builds a false sense of confidence in his subjects, the equivalent of bowling up a stream of innocent leggies. He had Telstra and Sol in this mode, to the point where they invited him to an exclusive interview with Sol. I guess the timing to line up with one of Sol's visits to Australia was tight - because Michael actually abandoned an interview with another industry CEO to immediately respond to the call.
But the story that followed was Sainsbury's wrong'un - completely taing Sol and the Telstra flacks by surprise. This has earned him a place amongst those the "Telstra luvvies" revile over at nowwearetalking. I call it good journalism, and hope that he might find time from China to put more of his investigative skill together to write a small monograph called either "The Sol Experience" or "Telco Icarus; getting too close to Sol".
On that flight Michael put me onto an excellent book, Broadbandits by Om Malik. His liking of that book reflects a keen interest Michael has as a journalist in the human factor in business, how boards and management go about making their decisions. This is an interest he has applied with particular zeal to reporting on Telstra.
He has provided a very fascinating summary of the Trujillo experience, with not only an analysis of the CEO's modus operandi but also (with echoes of Mark Antony's "friends, Romans, countrymen" speech) some conclusions about the sets of decisions the Telstra Board has cumulatively made over the last 4 years.
His summary is a nice match to the Scales piece I have already written about. Both make interesting additions to the ongoing thesis about the conceit of management, and its counterpart, the inadequacy of the relationship between shareholders and companies (and the intermediation of various analysts).
I have a developing theory about the failures of "managerial capitalism", and they relate specifically to the supposed solutions to the supposed principal/agent problem. The problem is that identified by Berle and Means back in the 1920s that firm management pursue goals other than maximising shareholder value, and the presumed solution has been both the rhetoric that "the purpose of the firm is to maximise shareholder value" married with the creation of financial incentives for management in acieving that goal. There are a number of really poor consequences of that approach, including an excessive focus on the asset value of the shares rather than the income stream of dividends, and the sense that strategy is about "outperforming" the market rate of return.
The reality is, however, that in both the history of the development of the common stock firm, and the spcifics of the formation of almost all firms, the "purpose" of the company has been to meet some identified market need at a price that is sufficient to cover operating costs and provide a return to capital. Indeed, the idea that the objective is to "maximise shareholder value" can run counter to this actual purpose as it implies increasing the cost of capital rather than decreasing it (On a more specific point, the cost of capital will be technically lower if the income stream is stable. The objective of the firm to meet its purpose is actually better achieved by focussing on the stability of returns rather than the variability inherent in strategies to maximise value).
This suggests that in the wash up of the GFC we need to dramatically revisit the assumptions of corporate governance. We need to rewrite corporations law to re-elevate the concept of the "purpose" of the company, and to require these to be closely and narrowly written. We need to redefine the fiduciary duty as being the performance against the purpose. There will be much objection from corporations, especially based on the supposed problem of seeking shareholder approval for changes in purpose or on the whole basis of the strategy conversation (are railways in the railways business or the transport business). My responses to these (I have them) need to wait for a longer discursion.
In the meantime, let's hope that Michael Sainsbury continues his forensic examination of the decision making of corporations. I've previously described Michael as the "Shane Warne of journalism" because he successfully builds a false sense of confidence in his subjects, the equivalent of bowling up a stream of innocent leggies. He had Telstra and Sol in this mode, to the point where they invited him to an exclusive interview with Sol. I guess the timing to line up with one of Sol's visits to Australia was tight - because Michael actually abandoned an interview with another industry CEO to immediately respond to the call.
But the story that followed was Sainsbury's wrong'un - completely taing Sol and the Telstra flacks by surprise. This has earned him a place amongst those the "Telstra luvvies" revile over at nowwearetalking. I call it good journalism, and hope that he might find time from China to put more of his investigative skill together to write a small monograph called either "The Sol Experience" or "Telco Icarus; getting too close to Sol".
Friday, April 24, 2009
On pirates, narratives and corporations
An article in the Huffington Post on pirates was forwarded to me lately, and it together with some other reading and thinking present some interesting propositions about how we see the world.
Firstly to the article. It covers two points. The first is the idea that the historical pirate was a kind of revolutionary hero escaping the shackles of repressive commanders in various navies. The second is that the modern Somali pirate similarly is a kind of revolutionary hero, defending his country from the ravages of "Western Europe".
To the first point, this alternative narrative about pirates is just as misleading as the notion of the pirate as disreputable rogue. The bulk of piracy was conducted by the British Government sponsored "privateer", whose mission was the pilferring of Spanish gold. If my facts are right the British Government recognised the benefit of having the gold flow to the economy rather than specifically to the treasury. (Niall Ferguson gives this good treatment in Empire).
The second part is the claim that the Somali pirates started out as a citizen defence force protecting the Somali coastline (not otherwise defended as this was a failed state) from firstly the "Western world" which has been dumping nuclear waste off the Somali coast, and secondly from "European ships" looting the seas of their most important resource, seafood.
Well, at least these "Western Europeans" are taking their waste back in the form of seafood that glows in the dark!
What all of these demonstrate is the natural human desire to convert facts into "narratives". This desire was noted by Nassim Nicholas Taleb in his book The Black Swan (a volume I'm currently only part way through). It is a natural human way to store and manage "facts" to put them into narratives. The problem becomes that the causal links implied in the narratives are presumed to be real rather than the convenience of the "story teller".
One of the common features of the narrative process is to lump groups of people together into singular actors. Hence the pirate story features "Western Europe", while political narratives have references to actors called "the Left" and "the Right". These actors are perceived to act together as one, even though, for example, no one can find the planning meeting by which "the Left" co-ordinates its campaigns to, variously, create education syllabi to further their cause.
I was mindful of this narrative construct when writing a review (forthcoming) for the Telecommunications Journal of Australia. I note in the review that the author would be pleasing his Liberal party colleagues by his use of a narrative form of history, as a reference to at least one strand of the history wars.
What is more telling, however, is the way this fits with the reviewed book also being a piece of policy analysis from the particular view of one corporation. And it set my mind thinking that the typical "conversation" within a corporation is the narrative constructed by the management team to "explain" the events around them.
So in the sector I'm most familiar with there is the narrative that Telstra has about why certain things happen to them because of the way "the ACCC sets prices below costs". On the flip side there are narratives that ascribe sets of motivations to the actions of Telstra that are engaged in by other telcos.
The significance of these narratives is that they form the essential core of the "bounded rationality" of corporations (which I wrote about in part in this TJA article. The significance of this is that firms don't actually conciously pursue genuinely profit maximising strategies, merely the strategy that fits the narrative that is proit maximising. But as Taleb also goes to show, when we look back it looks like firms do pursue profit maximising strategies, but the reality is that this is only because, in the long run, the firms that survive are those that happened to luck onto the best strategy.
This suggests that the really great corporation is the one that can break out of its narrative. Ultimately this is what the scenario planning methodologies try to achieve (see The Art of the Long View. But a shorter route is available from pursuing Barry Nabeloff's strategy as detailed in his book Why Not?.
The warning bells should really sound when you have lots of agreement around the management or board table. That is when you have become embedded in the narrative. The alternative is to pursue the philosophy espoused by Paul Feyerabend (which is both the title of this blog and the title of a critique of the approach by David Stove) "Anything Goes". That is, conciously develop a proliferation of theories that work, and keep using them all. Don't prematurely settle on the one true narrative.
Going back to pirates and Somalia. In the end does it matter why the pirates first started to operate? Is the narrative at all helpful by explaining the cause, or is the only important factor the reality that there are pirates and their actions are now impeding the flow of aid to Somalia?
To put it another way, does the historical basis of Telstra's market power matter, or is the only important issue dealing with it.
After all, does it make sense to both (a) dump heavy metals and radioactive waste in the seas off Somalia and (b) raid the fish stocks from those same seas?
Firstly to the article. It covers two points. The first is the idea that the historical pirate was a kind of revolutionary hero escaping the shackles of repressive commanders in various navies. The second is that the modern Somali pirate similarly is a kind of revolutionary hero, defending his country from the ravages of "Western Europe".
To the first point, this alternative narrative about pirates is just as misleading as the notion of the pirate as disreputable rogue. The bulk of piracy was conducted by the British Government sponsored "privateer", whose mission was the pilferring of Spanish gold. If my facts are right the British Government recognised the benefit of having the gold flow to the economy rather than specifically to the treasury. (Niall Ferguson gives this good treatment in Empire).
The second part is the claim that the Somali pirates started out as a citizen defence force protecting the Somali coastline (not otherwise defended as this was a failed state) from firstly the "Western world" which has been dumping nuclear waste off the Somali coast, and secondly from "European ships" looting the seas of their most important resource, seafood.
Well, at least these "Western Europeans" are taking their waste back in the form of seafood that glows in the dark!
What all of these demonstrate is the natural human desire to convert facts into "narratives". This desire was noted by Nassim Nicholas Taleb in his book The Black Swan (a volume I'm currently only part way through). It is a natural human way to store and manage "facts" to put them into narratives. The problem becomes that the causal links implied in the narratives are presumed to be real rather than the convenience of the "story teller".
One of the common features of the narrative process is to lump groups of people together into singular actors. Hence the pirate story features "Western Europe", while political narratives have references to actors called "the Left" and "the Right". These actors are perceived to act together as one, even though, for example, no one can find the planning meeting by which "the Left" co-ordinates its campaigns to, variously, create education syllabi to further their cause.
I was mindful of this narrative construct when writing a review (forthcoming) for the Telecommunications Journal of Australia. I note in the review that the author would be pleasing his Liberal party colleagues by his use of a narrative form of history, as a reference to at least one strand of the history wars.
What is more telling, however, is the way this fits with the reviewed book also being a piece of policy analysis from the particular view of one corporation. And it set my mind thinking that the typical "conversation" within a corporation is the narrative constructed by the management team to "explain" the events around them.
So in the sector I'm most familiar with there is the narrative that Telstra has about why certain things happen to them because of the way "the ACCC sets prices below costs". On the flip side there are narratives that ascribe sets of motivations to the actions of Telstra that are engaged in by other telcos.
The significance of these narratives is that they form the essential core of the "bounded rationality" of corporations (which I wrote about in part in this TJA article. The significance of this is that firms don't actually conciously pursue genuinely profit maximising strategies, merely the strategy that fits the narrative that is proit maximising. But as Taleb also goes to show, when we look back it looks like firms do pursue profit maximising strategies, but the reality is that this is only because, in the long run, the firms that survive are those that happened to luck onto the best strategy.
This suggests that the really great corporation is the one that can break out of its narrative. Ultimately this is what the scenario planning methodologies try to achieve (see The Art of the Long View. But a shorter route is available from pursuing Barry Nabeloff's strategy as detailed in his book Why Not?.
The warning bells should really sound when you have lots of agreement around the management or board table. That is when you have become embedded in the narrative. The alternative is to pursue the philosophy espoused by Paul Feyerabend (which is both the title of this blog and the title of a critique of the approach by David Stove) "Anything Goes". That is, conciously develop a proliferation of theories that work, and keep using them all. Don't prematurely settle on the one true narrative.
Going back to pirates and Somalia. In the end does it matter why the pirates first started to operate? Is the narrative at all helpful by explaining the cause, or is the only important factor the reality that there are pirates and their actions are now impeding the flow of aid to Somalia?
To put it another way, does the historical basis of Telstra's market power matter, or is the only important issue dealing with it.
After all, does it make sense to both (a) dump heavy metals and radioactive waste in the seas off Somalia and (b) raid the fish stocks from those same seas?
Tuesday, April 21, 2009
The Tanner Thesis - Part III
I'm not the only person to have seen the Tanner blog and commented on it admiringly, as Christian Kerr noted in yesterday's Oz;
Finance Minister Lindsay Tanner, one of the Government's sharpest minds, published a predictably thoughtful essay on the global financial crisis on a Fairfax blog last week. It shows up his boss's effort. By and large it prefers fact and reason to polemic and hyperbole.
I've covered Tanner's thoughtful contributions on economics, but he concluded with a contribution on politics. He asked;
And what does the recovery from economic crisis mean for the ideological contours which frame the political contest in developed countries?
He goes on to claim that politics since the Industrial Revolution has all been about the group versus the individual, with a political cleavage between a collectivist party and an individualist party. A student of party politics would have something to say about the actual migration of the concept of party as something based in philosophy and mass movements to the more modern version of parties motivated by power and replicating the Hotelling ice cream sellers (two ice-cream sellers on a beach will both site themselves in the middle).
There is, however, also something wrong in the depiction that at all times this was a battle between unified collectivists and unified individualists. Indeed at the philosophical and political level it is actually easier to see the history as made up of a very long period whre there was one strong philosophy against which there was an array of opposition, followed by a point at which this switched. In this conception the collectivist philosophy dominated from the late eighteenth century as the one intellectual idea and there was arraigned against it a coalition of philosophies including liberalism and strict conservatism. In the late nineteenth century this resulted in some odd occurrences such as the Tories being the ones who extended the franchise because they had more at risk from a collectivist revolution.
In the Australian context the merger of the Free Traders and Protectionists was motivated by the need to create an anti-Labor position. The early Liberals (Deakin) and the latter Liberals (Menzies) distinguished themselves by how much of the collectivist agenda they actually accepted to ensure stability rather than how much of an individualist agenda they pursued.
But events in the middle of the twentieth century brought about a significant shift. Firstly the ongoing divisions within the collectivists between the revolutionary and democratic wings took their toll on the collectivist position. At the same time the events in Europe inspired a re-examination of the role of the state as documented in Hayek's The Road to Surfdom which was a rejection of state control (both left and right) not an attack of collectivism itself.
However, the fractured position of the collectivists and the set of ideas that became attached to the Hayek warnings led to the development of the modern individualist philosophy. This went far beyong classical liberalism and included elements of Ayn Rand's libertarianism, and picked up a new collection of economic theorists including Alan Greenspan and Milton Friedman.
Most significantly from the mid 1970s on the dominant intellectual position was the individualist position and the rest fell into an anti-individualist camp, but even when that modern left came to power (Hawke/Keating) they distinguished themselves by how much of the individualist agenda they implemented (technically more than the Fraser/Howard and Howard/Costello eras).
In his book The Wrecking Crew Thomas Frank gives a good outline of the positive stance of the new era individualists, and his explanation of the high deficits from the Bush administration is that it is merely an extension of defunding the left.
Tanner thinks the absence of the communist bogey has forced the right to be more populist. It is probably more reasonable to pursue the position of John Rawlston saul that the depth of intellectual discussion on policy has escaped the capacity of the voter to analyse and hence has resulted in campaigning by slogans. But this generalisation seems to be an exercise in romanticising the past. While the early socialists were great pamphlateers the mob in the streets were mostly there to support a slogan.
The only reason why a move from populism seems to be important now is because of the sense of crisis, and people respond more to someone who tyakes a crisis seriously rather than one who takes it glibbly. Aspirational slogans are out, but the message that "we are in a crisis and we are safe hands" is still mrely populist.
Tanner under the funky heading of "Gov 2.0" suggests that;
The script for the new accommodation between governments and markets is yet to be written. The global recession is a crucial turning point. Just as the Great Depression signalled the end of laissez-faire economics in the industrial era, the current crisis will spell the end of its modern equivalent.
If there is a new script it is the one that was mentioned in Part I, the choice isn't between Government or markets it is only about what Governments have to do to make markets work. In the end making markets work also means adjusting for equity affects because without the adjustment you get various kkinds of social collapse if not outright revolution.
This is either Gov about 5.1, or it remains political theory 101. But the defining line in the last great philosophical shift was the war not the depression (though on one reading the war itselfmay not have happened without the depression).
As Tanner himself notes "Nassim Nicholas Taleb convincingly demolishes the modern conceit that we can accurately predict and manipulate the future." We can't really know if this crisis is a defining ine or not...yet.
Finance Minister Lindsay Tanner, one of the Government's sharpest minds, published a predictably thoughtful essay on the global financial crisis on a Fairfax blog last week. It shows up his boss's effort. By and large it prefers fact and reason to polemic and hyperbole.
I've covered Tanner's thoughtful contributions on economics, but he concluded with a contribution on politics. He asked;
And what does the recovery from economic crisis mean for the ideological contours which frame the political contest in developed countries?
He goes on to claim that politics since the Industrial Revolution has all been about the group versus the individual, with a political cleavage between a collectivist party and an individualist party. A student of party politics would have something to say about the actual migration of the concept of party as something based in philosophy and mass movements to the more modern version of parties motivated by power and replicating the Hotelling ice cream sellers (two ice-cream sellers on a beach will both site themselves in the middle).
There is, however, also something wrong in the depiction that at all times this was a battle between unified collectivists and unified individualists. Indeed at the philosophical and political level it is actually easier to see the history as made up of a very long period whre there was one strong philosophy against which there was an array of opposition, followed by a point at which this switched. In this conception the collectivist philosophy dominated from the late eighteenth century as the one intellectual idea and there was arraigned against it a coalition of philosophies including liberalism and strict conservatism. In the late nineteenth century this resulted in some odd occurrences such as the Tories being the ones who extended the franchise because they had more at risk from a collectivist revolution.
In the Australian context the merger of the Free Traders and Protectionists was motivated by the need to create an anti-Labor position. The early Liberals (Deakin) and the latter Liberals (Menzies) distinguished themselves by how much of the collectivist agenda they actually accepted to ensure stability rather than how much of an individualist agenda they pursued.
But events in the middle of the twentieth century brought about a significant shift. Firstly the ongoing divisions within the collectivists between the revolutionary and democratic wings took their toll on the collectivist position. At the same time the events in Europe inspired a re-examination of the role of the state as documented in Hayek's The Road to Surfdom which was a rejection of state control (both left and right) not an attack of collectivism itself.
However, the fractured position of the collectivists and the set of ideas that became attached to the Hayek warnings led to the development of the modern individualist philosophy. This went far beyong classical liberalism and included elements of Ayn Rand's libertarianism, and picked up a new collection of economic theorists including Alan Greenspan and Milton Friedman.
Most significantly from the mid 1970s on the dominant intellectual position was the individualist position and the rest fell into an anti-individualist camp, but even when that modern left came to power (Hawke/Keating) they distinguished themselves by how much of the individualist agenda they implemented (technically more than the Fraser/Howard and Howard/Costello eras).
In his book The Wrecking Crew Thomas Frank gives a good outline of the positive stance of the new era individualists, and his explanation of the high deficits from the Bush administration is that it is merely an extension of defunding the left.
Tanner thinks the absence of the communist bogey has forced the right to be more populist. It is probably more reasonable to pursue the position of John Rawlston saul that the depth of intellectual discussion on policy has escaped the capacity of the voter to analyse and hence has resulted in campaigning by slogans. But this generalisation seems to be an exercise in romanticising the past. While the early socialists were great pamphlateers the mob in the streets were mostly there to support a slogan.
The only reason why a move from populism seems to be important now is because of the sense of crisis, and people respond more to someone who tyakes a crisis seriously rather than one who takes it glibbly. Aspirational slogans are out, but the message that "we are in a crisis and we are safe hands" is still mrely populist.
Tanner under the funky heading of "Gov 2.0" suggests that;
The script for the new accommodation between governments and markets is yet to be written. The global recession is a crucial turning point. Just as the Great Depression signalled the end of laissez-faire economics in the industrial era, the current crisis will spell the end of its modern equivalent.
If there is a new script it is the one that was mentioned in Part I, the choice isn't between Government or markets it is only about what Governments have to do to make markets work. In the end making markets work also means adjusting for equity affects because without the adjustment you get various kkinds of social collapse if not outright revolution.
This is either Gov about 5.1, or it remains political theory 101. But the defining line in the last great philosophical shift was the war not the depression (though on one reading the war itselfmay not have happened without the depression).
As Tanner himself notes "Nassim Nicholas Taleb convincingly demolishes the modern conceit that we can accurately predict and manipulate the future." We can't really know if this crisis is a defining ine or not...yet.
Spectrum valuation
The Department of Broadband, Communications and the Digital Economy has issued a tender for consultants to value the expiring fifteen year spectrum licences. The exact brief is;
The Department requires a Consultant to conduct a desktop analysis to estimate the potential value that could be received by government from re-issue of the 15 year spectrum licences. A range of scenarios will be provided to the successful Tenderer. The scenarios will range from the reallocation of licences through an auction process to the renewal of licences held by incumbents. Associated issues, such as disruption costs that could result from an auction (because of the potential for new licensees and service discontinuity) will also need to be assessed.
The Consultant will review relevant international and/or Australian spectrum valuation practices, including giving consideration to the major services that are likely to use the spectrum. Value means the amount of money buyers may be prepared to pay the government to purchase the spectrum when it becomes available. Tenderers should include a description of their proposed approach and methodology.
I don't envy anyone that task. There is a particular problem inherent in the whole construction of spectrum policy and the idea of value. As the tender document also notes;
Spectrum is a valuable resource. The Radiocommunications Act 1992 aims to provide for management of the radiofrequency spectrum in order to, among other things, maximise the overall public benefit derived from using the radiofrequency spectrum. The Government is required to balance a range of social policy objectives against industry demand to achieve this outcome. .
The question always arises of how the "overall public benefit" from using radiofrequency spectrum is interpretted. In an environment of price based allocation is the "pblic benefit" limited to the income generated by the sale of the spectrum licenc, or is it something greater that would be recognised as the social benefit in a more standatrd cost-benefit analysis.
The issue is mute if the public benefits equate to the private benefits of a firm utilising the spectrum. This is not necessarily the case, as the nature of the services is that they are bedevilled with externalities. Some of these are the well-known externalities attributable to network effects. Where the spectrum is providing general communications services these are highly likely to be the kind of privte investments that produce the "spillovers" that generate growth in Paul Romer's new growth theory. In this regard evaluating the public benefit of spectrum is a task akin to measuring the public benefit of, say, the NBN.
The second problem with equating the public benefit with the private benefit as expressed by a price based allocation is one of imperfect information. If we assume that ever bidderr in an auction has imperfect informatio, we can assume that there will be a range of valuations chosen by participants that reflects the errors in their information. In a auction process the spectrum is allocated to the bidder who was most wrong in their over-valuation. In the best of all possible worlds the bidders will have discounted their bids to reflect this uncertainty, however, in the real world we are more likely to see the outcomes that occured in the second PCS auction and the LMDS auction where the amounts paid were simply unsustainable.
Finally, there is the issue of the interplay between the private and public benefit that could be partially sumarised as a consideration of market power. In its most extreme form this reflects the concept of rent seeking, a firm would be prepared to pay some of its economic rent in a higher spectrum price if it can in this way constrain the market. More generally, if the end market for services is competitive every dollar spent in acquiing spectrum is a dollar less that cen be spent on building network, so the consequence of creating a charge for the spectrum sset is to reduce output and incur a deadweight loss.
Whoever wins this consultancy has some difficult tasks ahead, some of which are dealing with entrenched views in policy areas that have equated the public benefit with the revenue received and ignoring the fact that ultimately any payment received for the spectrum comes from consumers.
The Department requires a Consultant to conduct a desktop analysis to estimate the potential value that could be received by government from re-issue of the 15 year spectrum licences. A range of scenarios will be provided to the successful Tenderer. The scenarios will range from the reallocation of licences through an auction process to the renewal of licences held by incumbents. Associated issues, such as disruption costs that could result from an auction (because of the potential for new licensees and service discontinuity) will also need to be assessed.
The Consultant will review relevant international and/or Australian spectrum valuation practices, including giving consideration to the major services that are likely to use the spectrum. Value means the amount of money buyers may be prepared to pay the government to purchase the spectrum when it becomes available. Tenderers should include a description of their proposed approach and methodology.
I don't envy anyone that task. There is a particular problem inherent in the whole construction of spectrum policy and the idea of value. As the tender document also notes;
Spectrum is a valuable resource. The Radiocommunications Act 1992 aims to provide for management of the radiofrequency spectrum in order to, among other things, maximise the overall public benefit derived from using the radiofrequency spectrum. The Government is required to balance a range of social policy objectives against industry demand to achieve this outcome. .
The question always arises of how the "overall public benefit" from using radiofrequency spectrum is interpretted. In an environment of price based allocation is the "pblic benefit" limited to the income generated by the sale of the spectrum licenc, or is it something greater that would be recognised as the social benefit in a more standatrd cost-benefit analysis.
The issue is mute if the public benefits equate to the private benefits of a firm utilising the spectrum. This is not necessarily the case, as the nature of the services is that they are bedevilled with externalities. Some of these are the well-known externalities attributable to network effects. Where the spectrum is providing general communications services these are highly likely to be the kind of privte investments that produce the "spillovers" that generate growth in Paul Romer's new growth theory. In this regard evaluating the public benefit of spectrum is a task akin to measuring the public benefit of, say, the NBN.
The second problem with equating the public benefit with the private benefit as expressed by a price based allocation is one of imperfect information. If we assume that ever bidderr in an auction has imperfect informatio, we can assume that there will be a range of valuations chosen by participants that reflects the errors in their information. In a auction process the spectrum is allocated to the bidder who was most wrong in their over-valuation. In the best of all possible worlds the bidders will have discounted their bids to reflect this uncertainty, however, in the real world we are more likely to see the outcomes that occured in the second PCS auction and the LMDS auction where the amounts paid were simply unsustainable.
Finally, there is the issue of the interplay between the private and public benefit that could be partially sumarised as a consideration of market power. In its most extreme form this reflects the concept of rent seeking, a firm would be prepared to pay some of its economic rent in a higher spectrum price if it can in this way constrain the market. More generally, if the end market for services is competitive every dollar spent in acquiing spectrum is a dollar less that cen be spent on building network, so the consequence of creating a charge for the spectrum sset is to reduce output and incur a deadweight loss.
Whoever wins this consultancy has some difficult tasks ahead, some of which are dealing with entrenched views in policy areas that have equated the public benefit with the revenue received and ignoring the fact that ultimately any payment received for the spectrum comes from consumers.
Let's change the paradigm
Gerard Henderson in today's SMH would have us believe that the failure of the Government to release information about what happened on the boat that caught fire and sank off Ashmore Reef is in conflict with the statements from John Faulkner about the importance of informing the public and the interests of democracy.
However, the reality is that the events are not clear as Henderson asserts. There are multiple witnesses and specific physical evidence. To provide information to the public rather than mere data will require what Bob Debus described to Lateline as a “forensic reconstruction.” The police are the people with the skils and resources to conduct such an investigation, not the defence force. The Government has taken the appropriate action in ensuring that occurs.
To start making definitive statements about “what happened” before that investigation would be to follow the unfortunate experience of the previous Government. The cases of children overboard and of Private Kovco should not be repeated.
It is time we changed the paradigm and expected Ministers to be fully informed not simply relay the first convenient version they find. This is not only consistent with the principles of full public disclosure, but also with the pursuit of evidence based policy.
However, the reality is that the events are not clear as Henderson asserts. There are multiple witnesses and specific physical evidence. To provide information to the public rather than mere data will require what Bob Debus described to Lateline as a “forensic reconstruction.” The police are the people with the skils and resources to conduct such an investigation, not the defence force. The Government has taken the appropriate action in ensuring that occurs.
To start making definitive statements about “what happened” before that investigation would be to follow the unfortunate experience of the previous Government. The cases of children overboard and of Private Kovco should not be repeated.
It is time we changed the paradigm and expected Ministers to be fully informed not simply relay the first convenient version they find. This is not only consistent with the principles of full public disclosure, but also with the pursuit of evidence based policy.
Friday, April 17, 2009
The Tanner Thesis - Part II
In my first post I forgot to do two things. To defend the use of mathematics and the battle Tanner will have close to his day job in his assault on "traditional economics"
Part III will be reserved for the bit on politics - which could go forever and include references to John Rawlston Saul and a host of writers on the right and left.
There is a lot of guff written about the significance of mathematical formalism in economics. Firstly there are a host of books that focus on the question of "how economics became a mathematical science". One particular thesis notes the coincidence of the development of Maxwell's equations for electromagetism and the marginalist development (Walras et al) of economics.
This coincidence of tools however does not invalidate their utility. We can engage in an endless discussion in the philosophy of science, but it is easiest just to accept the approach of Feyerabend epitomised by (this blog's title) "anything goes". Mathematics as a study itself is a process of abstract formalism. However, mathematics in use provides some powerful tools to develop models that describe the world.
The critique of the use of mathematics in economics reaches its peak in Tony Lawson's work where he asserts that the common unifying theme of heterodox economics is its rejection of ‘mathematical-deductivist methods' (to quote Hodgson who is commenting on a related Lawson paper).
In my view the idea of the rejection of the mathematics is wrong, it is the assumptions of the mathematics that is wrong. Economists have regularly compromised their theory to enable it to fit the mathematical formalism. Hence the obserrvations of behavioural economics usually get ignored because it makes life way too hard mathematically if for example demand curves are always "kinked" at the current market price (endowment effects), or if discount rates need to change over time (valuing more now than in the future). Let alone the real difficulties of the fact that real world supply curves aren't usually monotonically increasing.
But that is not a reason to reject mathematics, it is a reason to find different mathematical tools than the very simple suite of tools from simple differential calculus. The works like that of Beinhocker with discussions of complexity rather than chaos start getting to these options. There is a wealth of mathematics now being applied in biology, as the mathematics of complexity show with simple applications like the generation of leaf and landscape formations with fractals.
The attempt to distinguish between the mathematics of complexity and that of chaos is erroneous, as chaos is only a description of the behaviour of complex systems in certain boundary conditions. The beauty of these approaches is that incredibly complex outcomes can be described in relatively simple mathematical formalisms.
I noted in my post on J.K.Galbraith's death;
In the final analysis it is hard to disagree with the view expressed in the NY Times review (reprinted in the AFR) that "his sweeping ideas, which might have gained even greater traction had he developed disciples willing and able to prove them with mathematical models." It is not too late for this task.
That position I think applies to all the heterodox strands, because to be useful the economic theory ultimately needs to help us mahe quantifiable predictions about the future. To do so requires a mathematics of some kind.
The second point I wanted to make was Tanner's need to deal with behavioural economics sceptics much sloser to home, in fact, in the Productivity Commission. The PC went to the effort of hosting a roundtable on behavioural economics. However, in their Appendix B ('Behavioural economics and
consumer policy") to their Review of Australia's Consumer Policy Framework the Commission concluded;
Many of these considerations evidently apply to all regulation making, indicating that designing policy responses to the issues raised by behavioural economics is not overly different from responding to more traditional problems such as externalities and the abuse of market power.
The inclusion was interesting because at the time of the review the Deputy Chair of the ACCC was Louise Sylvan who in a speech enitled The Interface between Consumer Policy and Competition Policy tried to emphasise that mere reliance on competition policy to promote consumer outcomes may be insufficient due to some of the effects noted by behavioutral economists. Perhaps the views at the PC will change now that she is a Commissioner there instead of at the ACCC.
Certainly the public service and the economics profession continues to be wedded to its simplistic model of markets and their inacurate mathematical descriptions. It will take a lot of work to shift their perceptions.
Part III will be reserved for the bit on politics - which could go forever and include references to John Rawlston Saul and a host of writers on the right and left.
There is a lot of guff written about the significance of mathematical formalism in economics. Firstly there are a host of books that focus on the question of "how economics became a mathematical science". One particular thesis notes the coincidence of the development of Maxwell's equations for electromagetism and the marginalist development (Walras et al) of economics.
This coincidence of tools however does not invalidate their utility. We can engage in an endless discussion in the philosophy of science, but it is easiest just to accept the approach of Feyerabend epitomised by (this blog's title) "anything goes". Mathematics as a study itself is a process of abstract formalism. However, mathematics in use provides some powerful tools to develop models that describe the world.
The critique of the use of mathematics in economics reaches its peak in Tony Lawson's work where he asserts that the common unifying theme of heterodox economics is its rejection of ‘mathematical-deductivist methods' (to quote Hodgson who is commenting on a related Lawson paper).
In my view the idea of the rejection of the mathematics is wrong, it is the assumptions of the mathematics that is wrong. Economists have regularly compromised their theory to enable it to fit the mathematical formalism. Hence the obserrvations of behavioural economics usually get ignored because it makes life way too hard mathematically if for example demand curves are always "kinked" at the current market price (endowment effects), or if discount rates need to change over time (valuing more now than in the future). Let alone the real difficulties of the fact that real world supply curves aren't usually monotonically increasing.
But that is not a reason to reject mathematics, it is a reason to find different mathematical tools than the very simple suite of tools from simple differential calculus. The works like that of Beinhocker with discussions of complexity rather than chaos start getting to these options. There is a wealth of mathematics now being applied in biology, as the mathematics of complexity show with simple applications like the generation of leaf and landscape formations with fractals.
The attempt to distinguish between the mathematics of complexity and that of chaos is erroneous, as chaos is only a description of the behaviour of complex systems in certain boundary conditions. The beauty of these approaches is that incredibly complex outcomes can be described in relatively simple mathematical formalisms.
I noted in my post on J.K.Galbraith's death;
In the final analysis it is hard to disagree with the view expressed in the NY Times review (reprinted in the AFR) that "his sweeping ideas, which might have gained even greater traction had he developed disciples willing and able to prove them with mathematical models." It is not too late for this task.
That position I think applies to all the heterodox strands, because to be useful the economic theory ultimately needs to help us mahe quantifiable predictions about the future. To do so requires a mathematics of some kind.
The second point I wanted to make was Tanner's need to deal with behavioural economics sceptics much sloser to home, in fact, in the Productivity Commission. The PC went to the effort of hosting a roundtable on behavioural economics. However, in their Appendix B ('Behavioural economics and
consumer policy") to their Review of Australia's Consumer Policy Framework the Commission concluded;
Many of these considerations evidently apply to all regulation making, indicating that designing policy responses to the issues raised by behavioural economics is not overly different from responding to more traditional problems such as externalities and the abuse of market power.
The inclusion was interesting because at the time of the review the Deputy Chair of the ACCC was Louise Sylvan who in a speech enitled The Interface between Consumer Policy and Competition Policy tried to emphasise that mere reliance on competition policy to promote consumer outcomes may be insufficient due to some of the effects noted by behavioutral economists. Perhaps the views at the PC will change now that she is a Commissioner there instead of at the ACCC.
Certainly the public service and the economics profession continues to be wedded to its simplistic model of markets and their inacurate mathematical descriptions. It will take a lot of work to shift their perceptions.
Thursday, April 16, 2009
The Tanner Thesis
Lindsay Tanner has outlined a thesis in The Age today (with a longer version in what is claimed to be a blog but to me looks just like on line content).
It is a wide ranging thesis that esentially says that just because we've had a crash following globalisation doesn't mean we should try to turn back from globalisation. Instead we need to look forward to ways to make the global economy work better. There is a sense at times that Tanner wishes it could be otherwise, rather than recognising there really is no alternative to globalisation and the changes to financial markets and trade followed the developments in transportation (the container and the jet airline) and communications (most importantly fibre optic submarine cable and IP networks).
In one sense Tanner is pointing out the fallacy known as post hoc ergo proctor hoc, just because one event follows another event does not mean the first event caused the second.
Tanner claims that "mainstream economics is in crisis", and extols behavioural economics and notes that Eric Beinhocker in The Origin of Wealth promtes the idea that the economy is better framed through a biological rather than a mathematical frame.
These are perhaps valid insights, but the attack on mathematics needs to be tempered. Let's look to the valid parts. I haven't read the Beinhocker book yet, but judging by the contents (I own it) it does exactly what Tanner describes, with one chapter in particular noting that the economy is a complex system but not chaotic.
The underlying issues, the real challenges for classical (or neo-classical) economics, are three-fold. The first is the insights of behavioural economics (for an good review see Advances in Behavioural Economics), these insights are that individuals aren't the rational models of behaviour we expect. Particular deviations are that people prefer something sooner rather than deferred, they act on impulse, they value fairness, and they value something they have more than something they don't have.
The other area, not mentioned by Tanner, is the area of institutional economics which focusses on the social norms and rules that exist to underpin the economy. There are three separate strands of these, the oriinal institutional economists (Veblen and Galbraith) and then there are both the new institutional economists and the neo-institutional economists. The former (I think) are the group who following Douglas North identify the importance of property rights and the rule of law in the development of the economy, a very useful theory in development economics but attracts some strange fellow travellrs. The other group pursues a sub-strand of industrial organisation focussing on the theory of the firm and transaction cost theory.
The final area is the one that is generally called evolutionary economics and is often a fellow traveller of institutional economics. This area takes as its focus the idea that economic systems have the same evolutionary mechanism as biological systems, including the idea of a generation process and a selection process. At the level of the economy as a whole it has a link to institutional economics because the institutions are recognised as having primarily evolved rather than having been designed. At the level of the firm this gets married with the observations of Joseph Schumpeter of the process of creative destruction, that some firms succeed and others fail. In this way it has a strong link to behavioural economics because the observation is that the successful firms don't necessarily make the rational profit maximising decisions, but as a consequence of the selection process those firms that did make profit maximising decisions were successful (survived).
(That is the assumption that firms are conciously profit maximising is an example of our earlier fallacy, the fact that successful firms are the ones who make the most profit doesn't mean they are the firms who acted most rationally to do so. Indeed there is a very strong strand in strategy theory that emphasises the impossibility of being correct about the prediction of the future and hence developing strategies that optimise outcomes across the range of possible futures).
Evolution is a bit more advanced than simple trial and error but it does acknowledge the importance of chance.
The ultimate conclusion of all these alternative theories is, as Tanner states, that "markets are imperfect human artifices". More importantly markets can take many different forms, (see Reinventing the Bazaar: a natural history of markets), the rules of the markets usually evolve to meet the needs of market participants.
A good example of this is stock exchanges. When there were multiple stock exchanges in a typical country the exchanges determined their own rules. The exchanges that developed rules that built confidence in buyers and sellers attracted more custom, more custom meant more funds in the market and so more new listings on the market. The evolutionary process works so that the exchanges that survive are those with the market rules (institutions) to meet customer needs. One of the rules that evolved was about market disclosure and the need to provide reports to investors.
Over time the consolidation of the exchanges (to often one) means the competition between markets dissipates and the rules become included in legislation. Many of the major institutions evolved before legislative approaches, one particular example being the whole law of contract.
The current economic crisis has its genesis in a particular market, the market for money. Tanner rightly points out the number of international structures in place to make this market work. One of these is a thing known as the Basel convention which specified a means for determiing the capital adequacy of financial institutions. Capital adequacy refers to how much capital (equity and retained earnings) a bank (or more generally a deposit taking institution) has in relation to the loans it has made, to measure how resiliant the institution would be to the default on all those loans.
In the calculation different assets are assigned different weights reflecting the position the bank would be in if the loan did default. Because mortagage backed housing loans are - well - "as safe as houses" they are rated at 50%, the bank doesn't need to have much capital to back the loan because the assumption is that the bank gets the house and can sell it. Basel II changed the ratio of capital to risk weighted loan portfolio depending on market and operational risks, whereas the original Basel agreement specifed a single ratio of 8%. Basel II also introduced the ability to assess the risk weighting of assets, one of which was according to ratings agencies. For a full non-technical explanation see this article. (Note these are all rules to do with capital adequacy, not with liquidity. They were designed to ensure that depositors money was protected. But ultimately if the bank did have to shut its doors due to a liquidity crisis at least its net position should be positive.)
But we then face the problem of an asset price bubble as was recently seen in the US (and the rest of the world) for houses, or as was seen in the US in 1929 with equities. The central bankers can't choke off the bubble by raising interest rates generally because that prices productive investments out of the market. One solution that would be available under Basel I was to vary the risk-weighting of individual asset classes based on excessive price movements - that is, if asset values are rapidly increasing then the risk-weighting should be increased.
This isn't possible under Basel II. It also isn't possible for some securities which were taken off balance sheet, that is not included in capital adequacy calculations. That was what happened with the securitisation of mortgages. Mortgage originators were no longer DTIs (or banks) so they wouldn't have been directly affected by a decision to change capital adequacy rules. The assets that entered the banking system were the securities issued against a group of mortgages, and here the Basel II rules were seen to fail as ultimatel the ratings agencies got it wrong.
But the really important lesson is how the sophisticated financial markets actually work. A good read is A House of Cards which in its opening chapter details the ten days of the collapse of Bear Stearns. he reality is that this sophisticated market works just the same as a group of mum and dad investors at a suburban bank. In reality the supposedly knowledgable investors have no knowledge at all, so they followed a market up and rushed out when it failed.
This is encompassed well in the book Animal Spirits (which I haven't read yet) but this precis. Ultimately these markets depend on simple human factors like rust, as Shiller says "The trust in the innovative lending practices was excessive; now that trust is replaced by deep mistrust."
The first step in fixing this mess is to get everyone to agree that all markets have rules, that "laissez-faire" never really applies. It is not whether there are or aren't rules, it is how those rules are designed and what the forces are for their enforcement that count.
This would be an appropriate segue into Tanner's conclusion about the new political battle and the distinction between the left and the right - but that is another blog post.
It is a wide ranging thesis that esentially says that just because we've had a crash following globalisation doesn't mean we should try to turn back from globalisation. Instead we need to look forward to ways to make the global economy work better. There is a sense at times that Tanner wishes it could be otherwise, rather than recognising there really is no alternative to globalisation and the changes to financial markets and trade followed the developments in transportation (the container and the jet airline) and communications (most importantly fibre optic submarine cable and IP networks).
In one sense Tanner is pointing out the fallacy known as post hoc ergo proctor hoc, just because one event follows another event does not mean the first event caused the second.
Tanner claims that "mainstream economics is in crisis", and extols behavioural economics and notes that Eric Beinhocker in The Origin of Wealth promtes the idea that the economy is better framed through a biological rather than a mathematical frame.
These are perhaps valid insights, but the attack on mathematics needs to be tempered. Let's look to the valid parts. I haven't read the Beinhocker book yet, but judging by the contents (I own it) it does exactly what Tanner describes, with one chapter in particular noting that the economy is a complex system but not chaotic.
The underlying issues, the real challenges for classical (or neo-classical) economics, are three-fold. The first is the insights of behavioural economics (for an good review see Advances in Behavioural Economics), these insights are that individuals aren't the rational models of behaviour we expect. Particular deviations are that people prefer something sooner rather than deferred, they act on impulse, they value fairness, and they value something they have more than something they don't have.
The other area, not mentioned by Tanner, is the area of institutional economics which focusses on the social norms and rules that exist to underpin the economy. There are three separate strands of these, the oriinal institutional economists (Veblen and Galbraith) and then there are both the new institutional economists and the neo-institutional economists. The former (I think) are the group who following Douglas North identify the importance of property rights and the rule of law in the development of the economy, a very useful theory in development economics but attracts some strange fellow travellrs. The other group pursues a sub-strand of industrial organisation focussing on the theory of the firm and transaction cost theory.
The final area is the one that is generally called evolutionary economics and is often a fellow traveller of institutional economics. This area takes as its focus the idea that economic systems have the same evolutionary mechanism as biological systems, including the idea of a generation process and a selection process. At the level of the economy as a whole it has a link to institutional economics because the institutions are recognised as having primarily evolved rather than having been designed. At the level of the firm this gets married with the observations of Joseph Schumpeter of the process of creative destruction, that some firms succeed and others fail. In this way it has a strong link to behavioural economics because the observation is that the successful firms don't necessarily make the rational profit maximising decisions, but as a consequence of the selection process those firms that did make profit maximising decisions were successful (survived).
(That is the assumption that firms are conciously profit maximising is an example of our earlier fallacy, the fact that successful firms are the ones who make the most profit doesn't mean they are the firms who acted most rationally to do so. Indeed there is a very strong strand in strategy theory that emphasises the impossibility of being correct about the prediction of the future and hence developing strategies that optimise outcomes across the range of possible futures).
Evolution is a bit more advanced than simple trial and error but it does acknowledge the importance of chance.
The ultimate conclusion of all these alternative theories is, as Tanner states, that "markets are imperfect human artifices". More importantly markets can take many different forms, (see Reinventing the Bazaar: a natural history of markets), the rules of the markets usually evolve to meet the needs of market participants.
A good example of this is stock exchanges. When there were multiple stock exchanges in a typical country the exchanges determined their own rules. The exchanges that developed rules that built confidence in buyers and sellers attracted more custom, more custom meant more funds in the market and so more new listings on the market. The evolutionary process works so that the exchanges that survive are those with the market rules (institutions) to meet customer needs. One of the rules that evolved was about market disclosure and the need to provide reports to investors.
Over time the consolidation of the exchanges (to often one) means the competition between markets dissipates and the rules become included in legislation. Many of the major institutions evolved before legislative approaches, one particular example being the whole law of contract.
The current economic crisis has its genesis in a particular market, the market for money. Tanner rightly points out the number of international structures in place to make this market work. One of these is a thing known as the Basel convention which specified a means for determiing the capital adequacy of financial institutions. Capital adequacy refers to how much capital (equity and retained earnings) a bank (or more generally a deposit taking institution) has in relation to the loans it has made, to measure how resiliant the institution would be to the default on all those loans.
In the calculation different assets are assigned different weights reflecting the position the bank would be in if the loan did default. Because mortagage backed housing loans are - well - "as safe as houses" they are rated at 50%, the bank doesn't need to have much capital to back the loan because the assumption is that the bank gets the house and can sell it. Basel II changed the ratio of capital to risk weighted loan portfolio depending on market and operational risks, whereas the original Basel agreement specifed a single ratio of 8%. Basel II also introduced the ability to assess the risk weighting of assets, one of which was according to ratings agencies. For a full non-technical explanation see this article. (Note these are all rules to do with capital adequacy, not with liquidity. They were designed to ensure that depositors money was protected. But ultimately if the bank did have to shut its doors due to a liquidity crisis at least its net position should be positive.)
But we then face the problem of an asset price bubble as was recently seen in the US (and the rest of the world) for houses, or as was seen in the US in 1929 with equities. The central bankers can't choke off the bubble by raising interest rates generally because that prices productive investments out of the market. One solution that would be available under Basel I was to vary the risk-weighting of individual asset classes based on excessive price movements - that is, if asset values are rapidly increasing then the risk-weighting should be increased.
This isn't possible under Basel II. It also isn't possible for some securities which were taken off balance sheet, that is not included in capital adequacy calculations. That was what happened with the securitisation of mortgages. Mortgage originators were no longer DTIs (or banks) so they wouldn't have been directly affected by a decision to change capital adequacy rules. The assets that entered the banking system were the securities issued against a group of mortgages, and here the Basel II rules were seen to fail as ultimatel the ratings agencies got it wrong.
But the really important lesson is how the sophisticated financial markets actually work. A good read is A House of Cards which in its opening chapter details the ten days of the collapse of Bear Stearns. he reality is that this sophisticated market works just the same as a group of mum and dad investors at a suburban bank. In reality the supposedly knowledgable investors have no knowledge at all, so they followed a market up and rushed out when it failed.
This is encompassed well in the book Animal Spirits (which I haven't read yet) but this precis. Ultimately these markets depend on simple human factors like rust, as Shiller says "The trust in the innovative lending practices was excessive; now that trust is replaced by deep mistrust."
The first step in fixing this mess is to get everyone to agree that all markets have rules, that "laissez-faire" never really applies. It is not whether there are or aren't rules, it is how those rules are designed and what the forces are for their enforcement that count.
This would be an appropriate segue into Tanner's conclusion about the new political battle and the distinction between the left and the right - but that is another blog post.
Wednesday, April 15, 2009
Telstra and management
A great article in the AFR today by Bill Scales. Unfortunately it is behind the paywall. Bill was the former head regulatory honcho at Telstra and in this piece he speculates on what the assessment of Telstra's experiment of "outsourcing management" will be.
In large measure this is a critique of the Telstra Board because ultimately it doesn't appear that this was what the Telstra Board thought they were doing. More interestingly is the question of whether there has been any enduring change. I guess the answer is we will see.
But in the context of writing a review of Paul Fletcher's new book I was noting that in the "great man" approach to history it is often forgotten that it is the events that make the man as much as the man makes the events. How much of the last 4 years were really the culmination of events, the reaction of a fully privatised Telstra to a regulatory regime that's intent remains to confiscate rents?
I ell recall that during the benign Ziggy years the management team at Telecom New Zealand regularly told me that the fully privatised Telstra would not be as compliant. They were right. I'd argued that no sensible management team would behave the way the Telecom team said they expected Telstra to do, because it wouldn't work against Government. I was right about its futility, but not about whether it would be attempted or not.
The approach that Telecom New Zealand favoured cost them their own jobs too. They have been under new management being trying to fix the relationship with Government.
Now we see reports that Telstra is strategising on how to mend its own fractured relationship. The report also highlights just how extensive the risk to Telstra now is. Reports in the press noted that Telstra Chair Donald McGauchie was briefed on the NBN proposals and regulatory paper by Treasury secretary Ken Henry, but this was because they were together at the RBA Board meeting.
The press reported that the rest of the directors were briefed by PM&C head Terry Moran, but it appears he was joined by two other Secretaries, Patricia Scott (DBCDE) and Ian Watt (Finance). It appears the message has sunk through.
I do recall under the last Government one Minister saying to me "how many inister's does it take to counsel the chair of Telstra" as the stinging attacks mounted. It appears the answer is 4, it can be their officials, but it has to be together.
In large measure this is a critique of the Telstra Board because ultimately it doesn't appear that this was what the Telstra Board thought they were doing. More interestingly is the question of whether there has been any enduring change. I guess the answer is we will see.
But in the context of writing a review of Paul Fletcher's new book I was noting that in the "great man" approach to history it is often forgotten that it is the events that make the man as much as the man makes the events. How much of the last 4 years were really the culmination of events, the reaction of a fully privatised Telstra to a regulatory regime that's intent remains to confiscate rents?
I ell recall that during the benign Ziggy years the management team at Telecom New Zealand regularly told me that the fully privatised Telstra would not be as compliant. They were right. I'd argued that no sensible management team would behave the way the Telecom team said they expected Telstra to do, because it wouldn't work against Government. I was right about its futility, but not about whether it would be attempted or not.
The approach that Telecom New Zealand favoured cost them their own jobs too. They have been under new management being trying to fix the relationship with Government.
Now we see reports that Telstra is strategising on how to mend its own fractured relationship. The report also highlights just how extensive the risk to Telstra now is. Reports in the press noted that Telstra Chair Donald McGauchie was briefed on the NBN proposals and regulatory paper by Treasury secretary Ken Henry, but this was because they were together at the RBA Board meeting.
The press reported that the rest of the directors were briefed by PM&C head Terry Moran, but it appears he was joined by two other Secretaries, Patricia Scott (DBCDE) and Ian Watt (Finance). It appears the message has sunk through.
I do recall under the last Government one Minister saying to me "how many inister's does it take to counsel the chair of Telstra" as the stinging attacks mounted. It appears the answer is 4, it can be their officials, but it has to be together.
Oh for a palace!
There has been a bit of reporting today about the PM's gifts. All gifts to the PM over $500 in value to Minister's including the Prime Minister are handed over to the state. But all that happens is they sit in a cupboard somewhere.
The process of gift giving like this has gone on for a long time. A memorable display of it appears at Windsor Castle in the State rooms that are open for public visits. This rather ostentatious display also includes a collection of weaponry as would have graced an earlier medieval castle.
We don't have the equivalent, though maybe all these gifts could be housed at Yarralumla. But that is perhaps still not imposing enough and definitely not acessible. I don' know what Old Parliament House is used for now we have a new National Portrait Gallery - but maybe we could start a permanent display in there.
The process of gift giving like this has gone on for a long time. A memorable display of it appears at Windsor Castle in the State rooms that are open for public visits. This rather ostentatious display also includes a collection of weaponry as would have graced an earlier medieval castle.
We don't have the equivalent, though maybe all these gifts could be housed at Yarralumla. But that is perhaps still not imposing enough and definitely not acessible. I don' know what Old Parliament House is used for now we have a new National Portrait Gallery - but maybe we could start a permanent display in there.
Wednesday, April 08, 2009
A study in contrast
Two videos to compare and contrast. The first is a British Post Office video that was Crikey's video of the day today.
The second is the presentation from Pattie Maes on the "sixth sense"
The intent of this is not to make fun of the 1960s presentation, but instead to demonstrate how slow change in telecommunications really is. Yes the 1960s piece looks daggy, but doesn't the current wearable tech look daggy? Ignoring the dagginess, what part of the wideband from the 60s presentation doesn't sound like a 1990s pitch for broadband internet.
In fact the British Post Office piece (which I suspect is really 70s - it was Crikey that dated it 60s) is highly reminicent of what the Telecom Australia "Telecom 2000" report forecast in 1975. What they both missed was the PC - the realisation of the processing power that would make it into the home.
The second is the presentation from Pattie Maes on the "sixth sense"
The intent of this is not to make fun of the 1960s presentation, but instead to demonstrate how slow change in telecommunications really is. Yes the 1960s piece looks daggy, but doesn't the current wearable tech look daggy? Ignoring the dagginess, what part of the wideband from the 60s presentation doesn't sound like a 1990s pitch for broadband internet.
In fact the British Post Office piece (which I suspect is really 70s - it was Crikey that dated it 60s) is highly reminicent of what the Telecom Australia "Telecom 2000" report forecast in 1975. What they both missed was the PC - the realisation of the processing power that would make it into the home.
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