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The irredeemable in pursuit of the insatiable

By Nicholas Gruen - posted Monday, 3 September 2018


This fecklessness is reinforced by academia's disciplinary values. There's a vast literature on the economics of information. But it's nigh-on impossible to get these issues into the obligatory formal mathematical models required in academic publishing without ruthless abstraction down to ideal types. This is an unpromising hunting ground for new hybrid institutions in which competition and collaboration would be structured in some new and promising way. Recall that none of the ideas I cited from the Chicago School came from formal modelling. Rather, they came from empirical investigation, helpful reframing of problems or institutions, and pragmatic insights, or what a software coder would call "hacks."

Note that in our discussion of the travesties of regulating financial advisers, we've not even got to the main game, which must surely involve surfacing which advisers are providing the best advice and structuring a market that helps consumers find them. One likely prospect would be improving the transparency with which professional reputations are made. But if we simply impose this from the outside, as we've done with NAPLAN testing for instance, what's made transparent will probably be the wrong thing, and even if it isn't, it will still be vitiated by gaming and buck-passing. Professions and industries must be closely involved in, but should not dominate the building of, standards against which they'll be judged, while we ensure that those standards represent the interests of users.

We should be asking how we could build institutions to get important information to people in ways they can use. We already know the recent on-time departure rates for airlines, for instance, and the workers' compensation premiums of firms, which offer a good proxy for workplace safety. What kinds of institutions would build routines to bring this and other relevant information to the attention of those who need it - buyers of airline tickets and prospective employees respectively - when they need it? We could begin without cumbersome regulatory edicts - with groups of industry and user representatives developing disclosure standards - and with governments and other civil society institutions using their convening power to forge greater regard for the collective public good (the standard) so competition between providers is actually in pursuit of something of value. We'd talk and experiment our way to better information flows and better lives. Isn't this better than ideological barracking for "free markets" or "intervention"?

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Wither post-reform renewal?

Meanwhile, the internet is reconfiguring the ecology of public and private goods. Digital artefacts, like language, are potential public goods - available for endless, costless reuse. You've probably heard of the "free-rider problem," which can kill off improvements like new drugs because the scope for using others' ideas without paying undercuts the original incentive to develop them. The problem is real enough in some areas, and it's why governments subsidise research and development and protect intellectual property. But the "free-rider opportunity," where existing cultural artefacts - like words and ideas - spread for everyone's benefit, has always been more important. That we've never heard the expression is a testament to how biased towards private interests our discourse really is. When it comes to sharing, the vested interests driving public debate are vastly more preoccupied with preventing it from undermining private profit than with optimising the immense and increasing opportunities and advantages it offers.

Be that as it may, with the advent of the internet, the free-rider opportunity is burgeoning as a slew of new public goods are privately provided. They include open-source software, blogs and Wikipedia, where people generate digital artefacts to satisfy their own desires and then throw them open for digital sharing to work its magic. And public goods privately provided for profit are also burgeoning. Google and Facebook could have marketed their products behind a paywall to monetise more of the value they generated. But in those cases, as with so many others, the free-rider opportunity afforded by the internet now so overwhelms the free-rider problem that monetising a small fraction of a public good via advertising has made their owners vastly richer than they'd have been if they'd obsessed about free riders, as our policy debate does, and provided their services as private goods for a fee.

The internet has certainly given the entrepreneurs of the world plenty to be getting on with. Government policy-makers not so much. I've suggested a whole class of digital public goods delivered by public–private partnership, and as chair of Innovation Australia I presented them to scores of officers senior and junior from the federal Departments of Innovation, Treasury and Communications. We've had a major innovation statement since then in which I participated at senior levels. No one disagreed with the ideas. Several found them exciting or inspiring. But they never took hold - even to be ultimately rejected further up the line. In the jaded discourse of our post-reform world, they could never be more than innocent entertainment. It's so much easier just turning out the same old, same old.

Back to where we started

Since before the finance industry royal commission was announced, the Productivity Commission has been conducting a major inquiry into intensifying competition in finance. My submission proposed a small "hack" that could make a big difference: a slight gloss on an old idea of "competitive neutrality."

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Indeed, my proposal "completes" the idea of competitive neutrality, putting it on an ideological level playing field, as it were. Since we've taken so seriously the idea that, if they compete with private firms, government enterprises should compete on a "level playing field," shouldn't we also take the converse idea seriously - that where governments have substantial investments in providing services exclusively to some group, they should provide them on an unsubsidised basis to all comers?

This would see governments opening up the superannuation services they provide for their employees to all comers. It would also see the utility banking products central banks provide to commercial banks - products like savings and payment accounts with the government - opened up to the general public online.

The PC's draft report on finance dealt with competitive neutrality in banking with the silence of a holy order. With others taking interest - from Martin Wolf to the Greens (who adopted it, quickly topped and tailed for political consumption) - the PC's final report broke its silence. Not to engage with the issues, but to shoo them away. They think it's a bad idea. And here's the thing. Maybe they're right. Policy is a difficult game with more moving parts than anyone can feel confident about. But if we're to get even a glimmering that we're reasoning our way to a decision rather than having our prejudices do all the work, the PC needs to weigh the pros and cons conscientiously.

But that's not how the game has worked in Australian economic debate for a long while. Instead, the PC points to some untoward possibilities. It doesn't suggest how likely they are, how bad they'd be or what might be done if they happened. Nor does it weigh those concerns against possible benefits. Rather than engage with a new idea that goes (however slightly) against the grain, it simply gainsays it as John Cleese does in Monty Python's classic argument sketch. My proposal got the five-minute argument. But we've been getting the full half hour for decades.

As Thomas Paine once observed, "We have it in our power to begin the world over again." There's certainly lots to be thought about after the good, the bad and the ugly of thirty-odd years of reform and economic and social development in the age of the internet. But when the royal commission hands down its report and the vested interests of finance are at their weakest point, the intellectual work to get us beyond a bit more tinkering won't have been done.

Nothing ventured, nothing gained.

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This article was first published by Inside Story.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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