A few weeks ago, on the 30th of Sept to be precise, I gave a speech to ‘science leaders’ in CSIRO. Science leaders are early mid career scientists from around the world whom CSIRO have recruited. As the speech explains, Jim Peacock, the Chief Scientist whom I met when on the Innovation Review asked me to speak. I sent this to Don Arthur, who enjoyed it, so I thought I’d post it for those who might like to read it on Troppo.
I must confess to some trepidation as I stand before you.
Ive never thought of myself as an after dinner speaker. But there I was working away I was going to say innocently working away but some people who know me might find that unconvincing.
Anyway, at that point, the nations Chief Scientist rang.
He said that hed come to think of my contributions to the Innovation Review where we both sat as members as so witty that he thought that if I turned up here tonight everyone could have a good laugh.
I note he didnt say witty and wise, but then thats just as well as it halves the level of performance anxiety I might otherwise feel.
Now naturally enough, those on the Innovation Panel regard a gentle request from the Chief Scientist in the same way that members of the US Military regard a gentle request from the Commander in Chief. So I accepted his kind invitation.
Anyway, immediately I got off the phone the saying that came to my fevered and terrified mind was the one attributed to Abraham Lincoln. You can fool all of the people some of the time, and some of the people all of the time (I think in these circumstances thats a reference to the Chief Scientist), but you can’t fool all of the people all of the time.
On thinking about that I nearly rang back and cancelled, but then I realised, that from what the Chief Scientist had said, all I really needed to do was fool all of the people in this room for fifteen minutes or so.
So here I go. Please dont refrain from having a few more drinks as I speak. A couple of minutes already gone!
Economics is known as the dismal science.
Anyway, Im that saddest, most dismal of characters, the second generation economist. My father was an economist and my brother and I tried exceptionally hard not to become economists my brother trying physics and then mathematical physiology, and I tried law, school teaching, cartooning, consulting and working in the public sector. But in the end, we both failed miserably. A life in economics was the ultimate expression of that failure.
What might an economist have to say to such an impressive collection of scientists? Well I if you ask me whether you should have bought stocks last week, I can tell you that you shouldnt have.
Only marginally more usefully, let me tell you a secret. The last time there was large scale public excitement about innovation and science in public life or the last major time I remember was the time of the National Innovation Summit in 2000. This is how it happened. I was working at the Business Council of Australia and did the first survey which showed that R&D had plunged following the Howard Governments halving of the rate of concessionality of the R&D tax concession from 150 to 125 percent.
In preparing to release the survey I was asked What is our message for the Government. I said that the message was that the policy was a mistake and that it should be reversed. There was immediate agreement that of course that was correct but somehow I wasnt getting the point. The government wouldnt like us to say that. What else could we say I?
Somewhat nonplused I said half tongue in cheek we could have an R&D Summit.
Thats a great idea was the reply. Then I watched amazed as the scientific community praised the Business Council for its vision. How visionary can you get? Before I could whistle that old Bee Gees tune I started a joke swarms of scientists were appearing swamping the meager resources of the Business Council and setting up the National Innovation Summit.
Id never seen anything like it since Id worked for Senator John Button and watched automotive industry lobbyists swarming at the sound of a tariff review. The scientists said the same kinds of things as the component producers. That without them the country couldnt compete; that it would be flat on its back and, to mix a metaphor, up the creek without a paddle. It was not a pretty sight.
But there is a difference between scientists and car makers lobbying, about which Ill have a little more to say shortly.
Another thing that I can tell you as an economist is that, extraordinarily enough, one of the best theories of science produced before the twentieth century was produced by the father of modern economics Adam Smith.
In his early years in the middle of the eighteenth century, Adam Smith produced a history of astronomy. It is a remarkable document. Its long winded and rhetorical. But it has a remarkable modernity to it. Because long before it became commonplace amongst philosophers of science like Popper and Kuhn, Smith was there insisting that science wasnt some inevitable convergence to the truth.
Somewhat like Kuhns Structure of Scientific Revolutions, Smiths focus on the engine of science grew from a psychological portrait of what it was like to do science what drove scientists.
Smith concluded that surprise was the initial engine of science. This is like Kuhns idea that there are anomalies lurking, waiting to disrupt normal science which can eventually propagate the seismic shifts of scientific revolutions.
As Smith puts it, where things occur as expected they come to be so connected together in the fancy, that the idea of the one seems, of its own accord, to call up and introduce that of the other. But when we come upon the unexpected We are at first surprised by the unexpectedness of the new appearance, and when that momentary emotion is over, we still wonder how it came to occur in that place.
Wonder is the next part of the process, and wonder is The stop which is thereby given to the career of the imagination, the difficulty which it finds in passing along such disjointed objects, and the feeling of something like a gap or interval betwixt them.
I remind you again that this focus on incorporating anomalies is not the product of some philosophy of science graduate in the 1970s, were talking the mid 1700s here.
But the thing I admire about Smith is that he then goes on to argue that after this period of wonder, we seek to find patterns that restore our mental equilibrium, and the criteria we bring to that search are aesthetic ones. We are looking for the aha moment, a moment of pleasure in our contemplation of the object and of repose in our troubled minds. And this leads us more fully to admire the world we are investigating.
Like his contemporaries, Smith was entirely smitten with the scientific revolution that Sir Isaac Newton had pulled off in the previous century. And yet what is extraordinary is his very modern insistence that Newton might not be the last word. That Newtons system wasnt the truth, it was a system, a human contrivance which was more fully appreciated as that, than being confused with the truth.
Here is Smith:
And even we, while we have been endeavouring to represent all philosophical systems as mere inventions of the imagination, to connect together the otherwise disjointed and discordant phaenomena of nature, have insensibly been drawn in, to make use of language expressing the connecting principles of this one, as if they were the real chains which Nature makes use of to bind together her several operations. Can we wonder then, that it should have gained the general and complete approbation of mankind, and that it should now be considered, not as an attempt to connect in the imagination the phaenomena of the Heavens, but as the greatest discovery that ever was made by man, the discovery of an immense chain of the most important and sublime truths, all closely connected together, by one capital fact, of the reality of which we have daily experience.
And in the shadow of Newton, Adam Smith built his economics around just one idea. Just as Newton had built his system around the inverse square law of gravitational attraction and a few simple laws of motion thrown in, Smith proposed to build a system of understanding how economies work and can be made to work better around the innate tendency of people to truck, barter and exchange. Economics has been built on very simple foundations since that time. Of course thats a weakness if people dont proceed with proper understanding of the simplifications theyre making. But its also a great strength the strength of Ockhams razor.
Smiths idea was that in the presence of certain conditions, the most efficient form of cooperation was competition. His idea has been refined, but Id say there is still a single idea at the foundation of economics. Today, Id say that the single idea in economics is opportunity cost. And that idea was being mulled around in Ricardos mind at the beginning of the nineteenth century during the Napoleonic wars. This was, by the way, around the time when Lord Wellington was reviewing his troops to go into battle and observed in his inimitably dry way, one feels after a long and tense sigh . . . well, they may not scare Napoleon, but by God they scare me.
It was Ricardos principle of comparative advantage that showed most clearly that countries that trade with each other dont compete in the way that firms do. I wont go into the idea here in much detail except to say that it reminds me of a joke that was circulating when I was a kid and circulates with different personnel today. On a church in Hawthorn the pastor had written the challenge What would you do if Jesus came to Hawthorn. Underneath in graffiti, someone had replied Move Peter Hudson to centre half forward.
You can get an intuition for Ricardos principle of comparative advantage if you understand how in the 1971 Grand Final Peter Hudson, the best full forward there was at the time, or Buddy Franklin in last Saturdays grandfinal likewise the best full forward there is now, spent quite a bit of time at centre half forward. Thats because what mattered for Hawthorn was not Buddy Franklins or Peter Hudsons absolute abilities, but their abilities relative to other Hawthorn players in the circumstances that presented themselves. Their absolute best position was full forward, but sometimes their comparative advantage comparative to the other players in the side was at centre half forward with other capable fellows filling in at full forward.
But a real understanding of comparative advantage of the fact that it makes more sense to say that our firms are competing against each other (for labour and cash and other resources) rather than against other countries is almost routinely ignored, including by people who present themselves as knowing, and indeed feel themselves to know the economic basics.
Heres the great Paul Krugman on the point:
Almost nobody in business or government would disagree with this statement: Today America is part of a truly global economy. To maintain our standard of living, we must learn to compete in an ever tougher world marketplace. . .
The problem is: Its baloney. In reality, there is almost nothing to our fixation with national competitiveness, or its central idea that every country is like a giant corporation slugging it out against rivals in global markets. The U.S. and Japan are simply not competitors in the same way that, say, Ford competes with Toyota. Any countrys standard of living depends almost entirely on its own domestic economic performance, and not on how it performs relative to other countries. . .
My advice is to consider a proper understanding of the real relationship between productivity and competitiveness as a kind of test of the reliability of supposed experts, in and out of government. The issues involved are not hard to sort out were not talking quantum mechanics here. So if you hear someone say something along the lines of America needs higher productivity so that it can compete in todays global economy, never mind who he is, or how plausible he sounds. He might as well be wearing a flashing neon sign that reads I DONT KNOW WHAT IM TALKING ABOUT.
But in case this talk about the single idea in economics sounds a little triumphant let me tell you a story. I attended the launch of the last book published by the Australias most distinguished public servant Nugget Coombs. Youll appreciate the prophetic topic of the book when I tell you that it was published eighteen years ago, yet was called The Return of Scarcity. Coombs was reviving a long dormant concern in economics that the world was running out of resources.
Anyway at the lunch after the launch I was sitting next to someone who claimed triumphantly that she really didnt understand economics. I said to her what Ive said to you that theres only one idea in economics and that it was simple commonsense. Nugget Coombs having overheard this, leaned over and added yes and its wrong!.
Because of the simplicity and the compelling nature of their logic, economists are constantly in danger of overreaching of thinking they know more about the world than they do. Thats something economists should have been reflecting on in recent months. This is what one US executive said in 2007.
It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.
The executive was Joseph J Cassano, and he was basing his comments on the analysis of risk quants who were sufficiently clever to build some mathematical contraptions that gave him these answers but not clever enough to notice that they were only valid for as long as the world remained as it was when they designed the model. Joseph Cassano by the way, was in charge of AIGs credit default swaps (CDS) operation which drove the company broke.
And theres an additional hazard. Though it is now infinitely more technical than it was in Smiths day, economics remains as Smith built it, one long diatribe against the fallacies of do-it-yourself economics. That is the economics which says that high tariffs create jobs when they typically destroy them, that technology will destroy jobs when it will more often create them. And added to the fools who seem hard wired to fall for this stuff, there are knaves who benefit from their doing so. Weve seen plenty of them on Wall St in the last week.
So economics comes with a strong sense of self righteousness against special pleading.
And thats a dilemma for science. Because there is very good economic evidence that a great deal of science needs to be supported by the public purse. The reason is simple enough. Science and R&D do much more good for the world than can ever be captured by anyone conducting it.
Now my idea of a true economic rationalist would be one that was aware of this problem and so in some sense welcomed lobbying for worthwhile uses of public money. But here I come back to Smiths great insight that aesthetics plays a big role in the thinking of disciplines. And like I said, economics is such a powerfully simple discipline, that it comes with a powerfully simple policy aesthetic. That aesthetic is to impose a heavy burden of proof against government funding of anything much and indeed to regard the process of lobbying as essentially distasteful.
But in a democracy you dont get money off the government without making it clear to the government which has no shortage of hungry snouts bustling at its trough that therell be a price to pay if they dont come good. There is nothing very pretty about this. But if there isnt a well organised lobby for science, science goes hungry and following it in a decade or sos time does Australias productivity growth.
Thats why Im very pleased that we included the Treasury in our deliberations on the R&D tax concession. And while they can speak for themselves, I think I am right in saying that they understand and are broadly sympathetic to the logic we pursued which called for more funding, and for a much smarter concession. In essence we proposed that the tax concession be increased and that the systematic bias built into it against tax loss firms be turned into a systematic bias in their favour.
Since Adam Smith tells us that surprise is the beginning of science, I thought Id end with a story about what was probably the most surprising thing Ive ever heard said in what is now quite a long history of policy making.
Some of you may recall the early years of Bob Hawkes excellent Prime Ministership for my money he was the only really good PM in my lifetime. Anyway in 1983 Japan was all the flavour in economic policy and particularly in what was then called industry policy and what is now called innovation policy.
Mr Hawke invited Mr Amaya who at least according to my memory had been the head of MITI in Japan to visit Australia. He was a very urbane man with a heavy shock of white hair and one of his most important visits was to the new Industry Minister my boss Senator John Button.
John Button was one of Australian politics least pompous politicians, but the occasion appeared to have got the better of him and he or someone else arranged chairs in his room so that there was a circle of chairs for officials around two chairs for the main conversation between Senator Button and his illustrious guest. Mr Amaya was asked about the secrets of MITI and he seemed to be stressing that there wasnt anything special to any of it that it was pretty much commonsense.
John Button then launched into a quite long monologue about national self-reliance. He said that he wondered whether it was the case that countries needed to go through some crisis in order for their populations to discover that no-one owed them a living, that they would sink or swim on their own efforts. I wonder if there are many countries that would even understand the idea of a countrys citizens thinking that others would look after them perhaps countries with a long history of benign colonisation. Anyway, I doubt it made much sense to Mr Amaya.
John Button expanded further. You see he said, the Americans had their war of independence. The British had the Battle of Britain and the Amada before that. And the Japanese had Commodore Perry and the black ships.
And, said Button finishing his peroration, I sometimes think that Australia has never had its own crisis of this kind which might lead it to take its destiny into its own hands.
Mr Amaya paused for a while in that inimitable Japanese way. I expect the amount of time he let pass was a grave courtesy in his own country, but in this country it was sufficiently long for the pause to become awkward. The officials were silent waiting for Mr Amaya to respond. And then he did.
Do you think we should have sent more submarines?