What economic reform thinking might have looked like – if we’d bothered to do it

I have posted this talk previously, but can now post the transcript, worked up from a YouTube transcript with thanks to Shruti Sekar for editing it. You can download the slides to which I was speaking from this link. Continue reading

Posted in Best From Elsewhere, Economics and public policy, Philosophy, Political theory, Politics - international, Public and Private Goods | 1 Comment

How Social Science could be taught. A vision for the future.

[note to self]

Economics, sociology, anthropology, history, psychology, and the other social sciences are currently taught in an unorganised manner. The undergraduate degree in any of these disciplines consists of about 20 separate courses that each differ markedly from the other 19 and that are unrecogniseable of those of the other disciplines. The language used in each course is different, the perspective on the same events differs, and there are deep contradictions in any course with what is said in the other courses.

The ways things are taught are usually also very old-fashioned and dull, with little use made of the possibilities of virtual reality and field trips. Pontificating teachers dominate the courses, with little of the knowledge truly reaching the students.

It can be done much better. I think it is possible to teach students the actual content of all the regular social science undergrad courses in one curriculum in a manner that they understand the material and see the interconnections. It can certainly be done for the relatively bright students, say the top 30% of the usual students found in the West.

The biggest change needed is to teach the material in terms of basic patterns, with more complex arguments taught later as combinations of basic patterns. Another change needed is to enforce a single language on the entire curriculum. Finally, what is needed is far more use of virtual reality-teaching and field trips so that students experience the phenomena they are meant to understand, unlocking their visual acuity and emotional skills as learning tools. Students should learn with their whole being, not merely with their abstractive capacities.

What do I mean by basic patterns and how would one mobilise more of the mental faculties of students? Let me give three examples from different disciplines to illustrate the immense similarities between them and how it can be presented.

A basic sociological pattern (eg Durkheim) is that of comparative advantage: a group of individuals can produce more if they each specialise in what they are relatively best at. One does not need to introduce exchange or prices to make that point, because those are other patterns. The basic pattern of comparative advantage is that there exist different productivities across entities.

This pattern should be taught in a layered manner, from exceptionally simple to incredibly complex. In the simplest form, one would have two people with comparative advantages. Students can learn to recognise it in a game, where the only object is to maximise some notion of joint production via the allocation of time. Once students have experienced this possibility, one can expand the pattern to talk about comparative advantages between countries, between the countryside and the city, between rulers and the ruled, between parents and their children, between partners in a marriage. The various forms of comparative advantage in various realms can be experienced in a virtual reality game, as well as by students re-interpreting their experiences as social beings.

Once students ‘get’ the point, both at a cognitive and emotional level, one can then put this into maths and statistics (which can become incredibly complex very quickly). By doing it this way round, mathematics is put in its proper place in social science: as a codification of what one knows by more basic means, not as the original source of the knowledge. The next step is to then combine the comparative advantage pattern with other patterns, like exchange and prices, or the notion of prior investments that create comparative advantages over time. Continue reading

Posted in Economics and public policy, Education, History, Political theory, Religion, Science, Social, Society | 27 Comments

Paul Krugman’s incredible invisibility trick

Image result for invisibility trickIt’s impossible to avoid misjudgements in life or to get all one’s predictions right. But should economists get caught out quite so often?

Paul Krugman is honest and self-critical. So he’s up for identifying what economists missed about globalisation – including himself.

Of course, everyone’s wise in hindsight. Still, Krugman keeps reporting that economists ignored things that were … kind of obvious.

For one person to miss something is a misfortune.

But a whole profession doing it, again and again, seems like carelessness.

I’ve previously locked horns with Krugman regarding his own tolerance of economists ignoring things that were staring them in the face — about which more shortly.

In any event, Krugman was in Melbourne recently to give an informative and enjoyable lecture in Max Corden’s honour (watch below).

One of his central points was to defend trade theory against ignorant critics.

As he pointed out, although some critics accuse economists of arguing that free trade is good for everyone, that’s not economics speaking, but certain economic zealots pushing a barrow.

Standard trade theory suggests that freer trade will generate winners and losers. If imports decimate an industry, investors and workers in that industry will suffer harm. This is inter-industry trade expansion such as we’ve seen in Australia recently with increased imports of cars wiping out Australian car manufacturing, paid for by increased exports — mostly of iron ore and other primary commodities.

This was the trade that was implicit in economists’ models. But as Krugman points out, economists started realising that something else was going on from around the 1960s on.

The fog of clear thinking

Turns out Krugman blames clear thinking. Continue reading

Posted in Economics and public policy, Political theory, Politics - international, Politics - national | Comments Off on Paul Krugman’s incredible invisibility trick

What is a ‘policy hack’?

Cross-posted from The Mandarin.


Since I used the term ‘policy hack’ in my presentation “What economic reform thinking might look like if we’d bothered to do it”, I’ve had a number of exchanges with Martin Wolf, my discussant that evening, about what I mean. Here’s how I defined the term when I first used it in the essay I ran up to support the presentation:

I use the term ‘hack’ here to mean “a tip, trick, or efficient method for doing or managing something” (Dictionary.com). Though the term is sometimes taken to imply inelegant effectiveness, the policy ‘hacks’ covered here are often simple, but, because they typically work by some clear distinction being made (for instance between funding and provision or property rights and externalities) they are often also elegant.

The point is best made by example. Speaking of the wave of economic reform from the 1970s on I suggested that, while its political impetus was declining economic performance in the wake of the 1970s oil shocks, its intellectual underpinnings went back to a cluster of ideas originating from the 1950s on. Moreover, I distinguished between ‘ideas’ and ‘hacks’. Friedman’s ‘idea’ was unbundling delivery from funding leading to the ‘hacks’ of vouchers and income-contingent loans, for instance. Coase’s ‘idea’ was to think about externalities as an artefact of the definition and assignment of property rights, the corresponding ‘hacks’ being such things as pollution permits and spectrum auctions.

By contrast, I pointed to George Stigler’s research into utility regulation in the 1950s which documented the results of ‘regulatory capture’. This provides us with an ‘idea’ (price regulation isn’t all it’s cracked up to be.) It also leads us to ask if we could change things to improve this – change regulatory governance or whatever. But where, in the cases above, the hacks arise as ‘aha’ moments from the analysis (even if such aha moments turn out to be a dead end or require lots more development), Stigler’s critique, his ‘idea’ tells us something’s wrong but doesn’t lead directly to any ‘aha’ moment as to how to fix it.1


My point in all this was to put the ideas leading to policy hacks high in the hierarchy of contributions economists can make to their species. The things I’ve done in economics that have been most useful, conform to my definition of ‘hack’. In each of these cases, some new way of looking at things produces an array of policy tricks or hacks. And there’s preferably some elegance to the way the ‘hack’ flows from some idea.2

Robert Shiller’s ideas for new markets in risk are all hacks, all stemming from the ‘idea’ that the way the financial products that do exist are defined is some relatively arbitrary product of history. That means numerous potentially very useful markets don’t exist. Or, since all the suggestions are ‘why don’t we create a market in that’, perhaps one could say they’re a single hack in a litany of guises.

Peter Martin’s recent list of a Magnificent Seven new policy ideas forces me to further distinctions. Are they all hacks? Well if I make them all hacks, then my new term ‘hack’ doesn’t say anything distinctive. It seems to me that most of the proposals could be described as hacks, though not surprisingly, some of the best proposals are not original. Another, proposing that we tax super to fund aged care is a hack in the sense that it’s coupled with a reasonable idea (taxes on super earnings are both progressive and fall more heavily on those closer to needing aged care because older super beneficiaries have larger portfolios), but I don’t think the match between the idea and the hack is particularly elegant or pleasing.

I think one of the best policy ideas which is better targeting of welfare isn’t really a hack. It’s the solution of an optimisation problem that the researchers gave themselves – with some fancy new modelling they’ve managed to do. Good on them. Still, I could find ways to disagree with this conclusion. One could argue that the ‘idea’ from which the hack arises is that of ‘optimising’ welfare payments to minimise poverty.


Is a policy hack just what philosopher Karl Popper called “piecemeal reform”? Well yes. But no.

Continue reading

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We’re giving people Australia Day honours for doing their jobs

Verily this is a very nice looking AC. Made of gold I believe and sitting on maroon velvet. It’s got wattle on the ribbon, is inlaid with semi-precious stones with the crown sitting at the top. Lucky we got rid of calling people Sir so and so and brought in something much more sensible. Lapel pins that people can wear in business class departure lounges.

The column below generated more engagement than any column I’ve written before – in Australia at least. Thanks to Peter Martin for chasing me up on writing the piece and suggesting major improvements to it. The research was done months ago and it was quite likely I’d have forgotten to wheel it out for this year’s Australia Day which was the obvious day to publish.

It was published in The Conversation and Peter got the Age, the SMH and the ABC website to run it all with Conversation credits. At the time of sending this out it had garnered over 150 comments on the Conversation almost all supportive and was being picked up on various other sites.

We’re awarding the Order of Australia to the wrong people

More than 800 of us are in line for an Order of Australia on Australia Day.

Sadly, as Lateral Economics research reveals, many will get it for little more than doing their job. And the higher the job’s status, the higher the award.

Governors General, High Court Justices and Vice Chancellors of major universities would hope for the highest Companion of the Order (AC). Professors, public service departmental heads, senior business people should hope for the next one down – an Officer of the Order (AO). School Principals would generally slot in next for Members of the Order (AM).

If you’re lucky, or you’ve done your job extraordinarily well, you’ll be promoted one rank, but that’s pretty much it.

We reward most the already rewarded

Continue reading

Posted in Cultural Critique, Democracy, History, Inequality, Society | 4 Comments

The logic of the inevitable (nuclear) apocalypse. Can the Gods save us?

The probability of a massive nuclear war the next 10 years between any of the 8 current nuclear powers (US, UK, France, Russia, India, Pakistan, NK, Israel) seems low. The bluster of the leaders is supposed to make the threat look a bit bigger than it is in order to get negotiation advantages, but bluster is usually just bluster without consequences because no elite wants to destroy itself or the population it feeds off.

Yet, whilst the threat may be minimal in a 10 year period, it is bigger if we consider a 100 year period. And what about the next 10,000 years, a mere blip when you consider the age of the world? I would guess the odds are about 50-50% that there is no major nuclear war the next 100 years, but I have to say that with our current technology, the odds of a major nuclear conflict the next 10,000 years is close to 100%. Somewhere, somehow, at current trajectory there will be a major f-up leading to a huge conflict that kills the vast majority of us.

Just think of how close humanity has already been the last century. Starting from 1900 AD, we have had 2 world wars, a near-nuclear war (the Cuban missile crisis), several periods of heightened nuclear-threats between two nuclear powers (India/Pakistan, Israel/Iran, NK/US), and rapid further arms development such that more nuclear destruction can be delivered quicker and further than before.

Other devastating technology has also emerged, including biological weapons and automated systems. In the near future we can expect automated weapons systems run by artificial intelligence that will make moves faster than humans can think in order to counter threats by artificial systems that move faster than humans can think. Most of us might be killed in a second for reasons only known to AI systems that perish themselves in the conflicts they start. Not a happy thought.

The odds that human conflict will go seriously wrong seem near-certain in the long run and there doesn’t seem all that much we can do about this either: if the current enemy builds something that can destroy us in 0.0001 seconds, we too must have something that can destroy them in 0.0001 seconds, complete with detection systems that can be fooled faster than any human can correct them.

Also, if we can get a small benefit from appearing truly ready and capable of destroying them unless we get our way, we are certain to do so time and time again. Leaders who gain from playing chicken with our mutual destruction get kudos (just think of JFK!). That is the nature of humanity and of human conflict: we look for small advantages in the here and now, and we reward our leaders for it. We simply do not live only to serve the long-run health of our species. Enough of us live to get the most out of our own short lives to ensure that at least some countries will sometimes have rulers ready to play nuclear-chicken with other.

Humanity as a whole can only live on the edge so long though. Our luck will run out. Or not?

Continue reading

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Productivity Commission super report: Apply the Medicare approach to super

Today’s Fin Review column

What would Abraham Lincoln think of the Productivity Commission’s report into Australia’s super system? A funny question I know, but amongst his charms those eight-score years ago was a lively interest in economics and an original mind – seriously.

He had his head screwed on when he said that government should “do for the people what needs to be done, but which they cannot, by individual effort, do at all, or do so well, for themselves”.

In this spirit, Lateral Economics made a submission to the Commission proposing to ideologically ‘complete’ the idea of competitive neutrality – a term first coined right here in Australia when we led the world in competition policy reform from the early 1990s.

Competitive neutrality as currently understood requires that, if they compete with private firms, government enterprises should compete on a ‘level playing field’ with any unfair advantages – for instance in tax and planning – neutralised.

But as I proposed over two decades ago we should also take the converse idea seriously – that where governments are invested in providing services exclusively to some special group, anyone should have (unsubsidised) access to them.

So, given governments provide employee super schemes, we should all be able to access them. With super compulsory and the sector pervaded with market failure, this solves lots of problems.

Just as Medicare is an ‘informed purchaser’ and supervisor of sophisticated medical services, so government owned super schemes — like the Future Fund — can be informed purchasers of investment management services on our behalf. This interdicts many of the channels through which private financiers would otherwise feed their avarice – at our cost. Continue reading

Posted in Economics and public policy | 4 Comments