The Other School of Economics

in response to Malcolm Turnbull – the Butcher’s own interest

In his op-ed “Why the National Broadband Network (NBN) will fail” Malcolm Turnbull argues that the commercial sector is better placed than the government to deliver the technical infrastructure needed to provide high-quality, reliable and affordable broadband in Australia

His argument follows a fairly logical economic line, with a twist of Australian context:
- it will cost too much to build ($43b over nearly 10 years),
- it will cost too much to users (hundreds of dollar of subscription per month),
- it is decreed by politicians rather than driven by market demand (so assumes inefficient allocation of capital and funding),
- it will be build by Canberra which is notoriously bad at delivering commercial services (remember the insulation programs and school halls?),
- and finally it is potentially taking money away from other government services (why spend money on optic fiber when basic health issues still need fixing?).

In summary Malcolm Turnbull really prosecutes his case along 2 lines:
- the size of the investment is misguided because it is too big
- the commercial sector would be better at delivering this important piece of infrastructure.

When asked to give an argument why the commercial sector would be qualified to deliver to the national interest, Malcolm responded that “he would give the same argument as Adam Smith gave”. i.e.:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

If the considerations on the NBN were not enough, this invocation of Adam Smith is definitively an invitation to try to articulate a response. In 3 points:
1 – why Malcolm’s criticism of the NBN illustrates the “Pensée unique” (“unique/restrictive thinking”) that has been infiltrating every aspect of the public debate for a few decades,
2 – why quoting Adam Smith to assert the obvious supremacy of the commercial sector could actually be slightly misguided as Economics Nobel Prize Amartya Sen shows us,
3 – and finally how looking at examples in the Finance and Banking industry actually shows that the research of profit doesn’t always work to deliver backbone infrastructure. Even businesses have learnt this lesson.

Let’s also make clear here that this post is not about vilifying Malcolm’s piece, but rather an opportunity to open the discussion.  If anyone actually *gets it* on the Liberal side of the Australian political spectrum, he would be the one, as attested by the bi-partisan support he regularly receives. Also being cognisant of the fact that his opposition to the NBN is a political posture, not a technology consideration.

1 – ‘La Pensée unique’ and ‘our National Interest’

The French have coined a name for the ideological entrapment that consists in trying to analyse everything though an economic rationalist lens. They have called it ” La Pensée unique” (the Single/Restrictive/Unique Thinking) since Ignacio Ramonet published his landmark editorial in Le Monde Diplomatique in 1995.

The ‘trap’ is to bring everything back to a pseudo science of numbers, which gives the financiers and other “responsible adults” the upper-hand in buiness matters. A financial-busisness language has become the Lingua Franca to discuss and decide the way things work in our global society. It’s all about “return on investment”, “profit margins”, “cost drivers”, “market share”, etc.

So strong is the Force that it now defines major political orthodoxies and debates. Despite some posturing at the margins, this dogma has been widely accepted by all mainstream parties. This is why it has become *Unique*. The Right was always a clear champion. The Social-democrat-Labour Left has also accepted it, and swallowed the pill.

The media is logically the main vector and victim of this thinking. This economic dogma is now insidiously part of our daily liturgy of news: ‘Business Insider‘ programs serve repackaged corporate strategies for dummies for breakfast on Sundays; daily Nikkei index fluctuations are incantated at every news bulletin. Even respected news and current affairs programs such as ABC’s Lateline have succumbed and now have a ‘Business’ extension (see ‘Lateline Business‘). What is the trouble? Well, the trouble is that instead of being inquisitive pieces of journalism they have turned into a sort of on-going complicit celebration of businesss achievements. A metaphorical allegiance to the ‘great spirit of the market’. The tone of the reports and interviews goes nowhere near the level of investigation expected on politcal or social issues;…
… and also – trust me – the people who really need to know the fluctuations of the Nikkei index, or the latest market briefing from CitiBank to do their job won’t get it from the current affair TV shows!

The consequence of this “Pensée unique” mentality is how decision makers apply an economic rationalist judgment in their dealings. Its core principle is that, in today’s global world, political will is subordinate to economic laws. In other words, the market knows best and should decide the appropriate allocation of capital towards productive assets.

This is how Malcolm Turnbull assesses the NBN. The business case doesn’t stack-up. Therefore this is no good. Politicians should not decide where the money will be allocated. Let the market decide instead.
Given the comments on his social media feeds, people buy this argument. Although most of them have probably never put a business case together and don’t really understand how fudged an exercise this can be.

Just a short side anecdote to illustrate this ‘business case’ view of the world…

I remember going to lecture given by one of the most senior Microsoft executive a few years ago. He was talking about innovation and himself provoked the audience asking if they had ever seen a business case for… the telephone:
“have you ever seen a business case for the Telephone? You know… the telecom system first patented by Alexander Graham Bell in 1876…. No? you have not seen any? Too right. Because there was none.”
And the same goes for the internet, airplanes, modern hospitals, or even the modern public school system…

Yep. Public social infrastructure too:

When the French Minister for Education Jules Ferry established “free mandatory education for all children of both sexes between the ages of six to thirteen years” in the early 1880’s in France, he did not do a business case. Had he done so, he would have probably found that it would make more economic sense to keep those kids working in the mines.

So. Those things happened because at some point in history some decision makers had the vision that it would be better for society, not because it was going to stack up on pseudo short term economic returns.
Regarding the NBN, numbers are in an order of magnitude that Australia can afford and absorb:  1.5% of the Commonwealth total expenses in 2010-11, that is  a quarter of the Defence expenses during that year (1).  So rather than nitpicking on the size of the investment, should we rather focus on understanding and realising the indirect returns that will be generated years after and will flow back into the country’s economy?

2 – Adam Smith has to be one of the most misquoted and misunderstood authors

Modern economists and pro free-marketers invoke him to explain in a Panglossian logic that self-interest ends up creating the greater good. As an echo to Gordon Gekko’s “greed is good” – albeit in a more respectable manner.

However most of the misunderstanding about Adam Smith comes from focusing solely on one paragraph of his writing, resulting in a partial reading of his theories. The famous quote from The Wealth of Nations, which was invoked by Malcolm Turnbull is a classic example:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages”

Quoting this requires prior knowledge and understanding of the hidden literary historic context of the paragraph. Otherwise we run the risk of reducing his work to a bunch of aphorisms.

Economics Nobel Prize Amartya Sen did some work to remind us of the context of the butcher, the brewer, or the baker quotation. (See the enlightening essay in The New Statesman )

Smith dealt in relatives, not absolutes. The ‘butcher, brewer, and baker’ were living under the monopolistic Guild system that had controlled the supply of food and necessaries in most British towns since the 16th century. Workers would be paid more than likely unjust wages. Traders would lie about the quality and origins of their products.
In summary, the bargaining power was skewed in favour of those in position of monopoly; and transparency of information was a pretty alien concept.

In this context the Smithian antidote to monopoly is competition, not as an idealistic model, but as the best known remedy to selfish behaviours emanating from monopoly.

The Acts of Parliament that created state-granted monopolies, which often fostered private cartels and ‘conspiracies’ against the consumers, were often originally awarded with good intentions, and had by mid-18th-century Britain become barriers to commercial growth, jobs and good health.

This is the context in which Adam Smith’s critiques of such government interventions have to be understood. They are enunciated in a severe manner in the Wealth Of Nations. So severely that modern readers often generalise incorrectly his specific remarks about 18th-century government interventions as his supposed opposition to all government interventions. It is far from the case.

I could paraphrase Amartya Sen extensively:

“Smith was convinced of the necessity of a well-functioning market economy, but not of its sufficiency. He argued powerfully against many false diagnoses of the terrible “commissions” of the market economy, and yet nowhere did he deny that the market economy yields important “omissions”. He rejected market-excluding interventions, but not market-including interventions aimed at doing those important things that the market may leave undone.
Smith saw the task of political economy as the pursuit of “two distinct objects”:
- “first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves;
- and second, to supply the state or commonwealth with a revenue sufficient for the public services”.
He defended such public services.
Beyond his attention to the components and responsibilities of a well-functioning market system (such as the role of accountability and trust), he was deeply concerned about the inequality and poverty that might remain in an otherwise successful market economy.

Coming back our NBN story, I am not sure that invoking the need for more competition in the Butchery would really settle the argument for decisive action from the Commonwealth to look after the common national interest and build a much needed public service.
This is the point: it would not be inappropriate for the infrastructure backbone to be public (like our roads). Up to the applications and services transiting through the internet pipes to be private (like our cars).

3 – Finally let’s ponder examples that show that even businesses have come to realise the limitations of pure commercial profit driven models

Let’s even pick an industry that nobody would accuse of flirting with a ‘misguided’ pro-socialist agenda: Banking and Finance.

In Germany and in New-Zealand banks realised that having a functioning payments system was of the highest public interest: we are talking about credit cards, debit cards and EFTPOS terminals that you find at the merchants.

Banks realised that consumers were reluctant to be charged fees at Point-of-Sale (eg. The 2% to 5% surcharge that you pay in some countries if you use your credit card). Reluctant enough to stick to cash (bank notes & coins) or cheques.
On their sides, Central Banks saw systemic risk in a dysfunctional payments system. After all, it is the blood system of our retail economy. Millions of Euros and Dollars get cleared everyday between the merchants and their clients.

Rather than leaving it to commercial interests to engage in destructive competitive behaviours, the German Bundesbank stepped in and coordinated the creation of a Payments Utility whose aim was to run at very low cost, for a very low profit, a solid reliable infrastructure backbone making German debit cards extremely cheap for bank customers.

A very similar scenario happened in New-Zealand where 4 major banks joined forces 20 years ago to create a Utility Company with the support of the regulator, which drove the highest levels of EFTPOS adoption per capita in the world. Over there, you simply pay your coffee with your Debit Card because banks barely charge for it.
For all the talk about electronic money, the Kiwis just did it. Not via a ruthless commercial venture, but by setting up a Utility, not focused on profit making, but with a charter to deliver a cheap robust service to the community.

Conclusion

On the other hand, I could give examples of commercial ventures clearly not working in the public interest when it comes to delivering infrastructure. Just one example of social infrastructure.

In Malcolm Turnbull’s electorate of Wentworth the Bondi Junction Childcare centre is run by a private company – ABC Learning Centres – and charges $110 per day (yup. one-one-zero). The neglect/saturation of the public services is such that parents have little choice not to resolve to abide by the private tariffs. Do the maths. $110 represent $2,200 per month if your go 5 days a week. That is $26,400 per year…. for what is considered in other civilised countries with a decent social contract – such as France – basic social services that you receive ‘for free’ because your taxes are put to good use. This is a fairly shaky invisible hand on that one, isn’t it.

Your correspondent hopes this helps put some perspective on the Butcher’s own interest.

{ leLaissezFaire }

(1): Doing some rough maths on the NBN numbers: $43b over 8 years is around $5.5bn per year. That is 1.5% of the Commonwealth expenses in 2010-11 (total: $354b) (source treasury). As a comparison Defence is 20bn per year.