Genetically modified. Innovative. Productive.

With the focus on Australian productivity, and the decline in manufacturing, we will soon be seeing stories about the innovation of Australian industry.  Today's announcement by the Queensland University of Technology developing genetically modified, iron-rich bananas for the Indian market is a great example.

We should praise scientific innovation - including GM

There has been a lot of criticism of GM food over recent years, but little focus on the benefits.  One of the world's great problems is food security.  As the world's population grows, we need to find methods to increase the amount of nutritious food grown on our limited amount of arable land.

GM is a fantastic example of scientific innovation.  If GM can add iron to bananas, that's something for Australians to be proud of.  Sure, there are many criticisms of GM - some valid, some less so - but the road from innovation to success is never a straight one.

Manufacturing productivity not old style factories

As Australia rapidly moves away from old manufacturing to new, value-added manufacturing, we should encourage scientific advances in agriculture.  The more that we shine a positive light on high-tech research and development efforts leading to high-tech manufacturing, the less we will be concerned about the loss of old-style factory jobs.

Libertarians support the free market

Philosophically, I'm also in support of less controls rather than more over new innovation.  If we want to be productive, and creative, we should release the chains on new ideas.  Whether it is the production of GM crops, or the creation of edgy art and movies, let's embrace new ideas - even if they subsequently fail.

It's good to see positive stories about Australian science and innovation.  Let's keep focusing on the good, not the bad.

Let me know what you think

Mark S

Greece and Italy set to gain proper governments from the wreckage

No more bunga bunga capitalists. No more crazy socialists.

While Greece and Italy have been forced into dramatic political change, for the first time in many years, they are set to be led by men who will govern the country with less interest into popularity.  Lucas Papademos in Greece and Italy's most likely PM Mario Monti are "technocrats".  That's political speech for "they'll get on with managing the economy".

It takes a crisis to find a leader


Not every crisis produces leaders of quality.  But serious crises do create an urgent need for change, even more urgent than an election.  The paradigm changes.

The paradigms in Greece and Italy (and a number of other European countries) has been to continue to do the  same that's always been done, just because it's always been the way.  There's even been acknowledgment that things could be better, but there's been no political will to change.

Finally, like a company in crisis who calls in the administrators, the new managers will be expected to fix the mess.  They won't expected to be popular, they won't even be expected to consult widely.  They will be expected to get the job done.

Frankly, we need more focus from our world leaders on getting the job done, and less focus on 10 second voice grabs.

Lucas and Mario - please stick to your guns and fix the mess.  The people will respect you for it.

Let me know what you think

Mark S

Business models change. Industries must adapt or die.

Although we are now well into the 21st century, I'm still surprised at how often there are calls to protect certain dying industries in Australia. Protectionism is simply bad economic policy. All it does is delays the inevitable.

The foreign competition argument for protectionism is growing from Bob Katter

Most arguments in favor of protectionism focus on the threats of foreign competition. Bob Katter and his new Australian Party are now leading the charge to "protect" Australia from China, Thailand, Philippines and Singapore. Of course, Bob is just pandering to those who see themselves as under attack from foreigners.  He is drawing on a potentially potent mix of short-term self interest and misguided patriotism, verging on xenophobia.

The Australian Party is committed to providing support and protection to Australian industries and reversing this madness - Bob Katter

Technological change is more important than foreign imports

Horse & buggy, Port Melbourne c.1900

The most important argument against protectionism is actually about technology change. Technology is not new and it will continue forever.

Let's take transport as an example. At the turn of the 20th century, the horse was the most common form of urban transport. But when the motor car was invented, jobs for blacksmiths and farriers declined sharply.  Yes, it was an economic problem for those employed in the horse-related industries.  On the flipside, the motor car created a whole new range of employment opportunities.

The same is happening in the early part of the 21st century.  Technological change from improved manufacturing processes have reduced items that were highly technical to mere commodities, and made them unprofitable.  That's the reason some forward thinking companies such as GE have moved on from manufacturing appliances to focus on higher value products such as medical equipment.

It's (the appliances business) a low-margin low-growth company being attacked by foreign competition

Those appliances are still being made - but by lower cost labor in emerging economies.

Technology change from the Internet is more dramatic

Over the next few years, the Internet will accelerate the pace of change of existing industries.  For example, already the development of Google Maps has rendered the old map making business model obsolete.  And this is just the start.

The big change is that services which used to be provided by experts will now be accessed by individuals themselves.  Instructions and systems are popping up all over the Internet, to do it yourself:

• Do it yourself wedding stationery - is fast making printers obsolete
• Do it yourself will kits - reducing the role of the family solicitor
• Digital photography and Facebook - cutting deeply into the professional photography market.
• A Google search - reduces the need for the average computer technician
• ETrade - means most shareholders no longer need a stock broker

If you are a wedding stationery printer, family solicitor, stockbroker or professional photography there is a natural desire to call for some protection for your industry.  Yet, that will only delay the inevitable.  Your industry is changing - you need to change with it.

Create the infrastructure for the layman.  The democracy of Google.

Industries that are currently serviced by experts will slowly become the realm of the layman.  One by one, professional services will be simplified, codified and made accessible to everyone.  It's democratisation by Google.

In 1985 when I was first trading shares, I never thought I'd be able to transact myself.
In 1990 when I was audio taping focus groups, I never thought it would be possible to video tape and edit them on a laptop computer.
In 1991 when I published a book via a publisher, I never thought I'd be able to self publish online.
In 1996 when we built our first website, I never thought I'd be able to create a website.

Instead of each of these services providers being paid for the labor, now we are happier that their knowledge has been transferred into infrastructure that we can tap into as we want.

Consultants and professional services are like manufacturers - be ready for the change

In 2011, there are a lot of things that I still need an expert for, but that won't be the case in 2020.  Consultants and professional services will become more and more accessible.  The change will be towards more and more automation, and online access.  I'm one of those consultants, and I'm enthusiastic about the change.  If you are a manufacturer, you should embrace it too.

If you are in an industry facing change, embrace it.  Specialise, innovate, develop infrastructure.  Just don't ask for protection.

Let me know what you think

Mark S

Shocking live cattle abuse in Indonesia deserves tight regulation but not the banning of an industry

In last week's blog "You don't ban a whole industry because of a few bad eggs", I explained the importance of self-regulation by companies.  That article focused on self-regulation in the porn industry, to ensure that workers are not exploited.  

Mistreatment of cattle at Indonesian slaughterhouses

Tonight's episode of Four Corners uncovered torture of live Australian cattle in Indonesian abattoirs, essentially exploitation and harm of the defenceless workers.  The revelation only came to light as a result of an investigation by Animals Australia, and then by Four Corners.  The  images are shocking. 


Self regulation means setting real standards and sticking to them


Ideally, the Australian cattle industry would be self regulating, to ensure the humane slaughter of the live cattle being sent to Indonesia.  The industry, under the control of Meat and Livestock Australia (MLA) and Livecorp, has standards that are expected to be observed by the slaughterhouses, and it even inspects these slaughterhouses and conducts training.  Some of the facilities conduct themselves in a way that satisfies those standards.  Unfortunately, as shown on Four Corners, many of them fall horribly, inhumanely, short of acceptable.


What is clear is that the cattle industry is not enforcing its standards adequately.  Nobody in the Australian industry wants cattle harmed.  Yet they continue to allow it.  The self regulation of the industry is tepid.  A strict enforcement of standards could easily be implemented by developing a tight set of regulations, including mandatory stunning of cattle before they are killed.


In fact, only 10% of Indonesian abattoirs currently stun the cattle.  Despite significant efforts by people such as Greg Pankhurst, whose company, Juang Jaya Feedlot, has installed many stunning devices, most Australian beef is still being killed without stunning.  Pankhurst says that "You could probably say 90 per cent of our animals could be stunned within 18 months to two years".


Despite Pankhurst being one of the leaders in animal welfare within the cattle industry, a self regulating industry would impose a zero tolerance policy.  What he is suggesting is that with 10% compliance now, 90% compliance in 2 years will be OK.  Surely, that is not what self regulation means.


Sometimes industries need a very large nudge


Today, LiveCorp has announced that it is suspending exports to three facilities.  It is taking a stand against maltreatment of cattle.


To get to this step has taken a strong nudge through this major campaign from Animals Australia and of course, a very public 45 minutes on national TV, with extensive press coverage in Australia, Indonesia and around the world.


This reinforces the need to encourage individuals and groups to speak up against the breach of standards.  Animals Australia should be congratulated on bringing this atrocity to our attention.


The government may regulate, but we must resist banning the industry.


In last week's blog, I posed a question around what should be done when a "Manufacturer X, that sells Product A, exploits and harms their workers".  Most people would agree that the manufacturer should be prosecuted, and consumers might boycott the product.


However, banning the product completely isn't the answer.


The case of live cattle exports is an example where a particular problem certainly needs to be fixed.  There are many ways that the Australian government could regulate.  Indeed, if an industry has proved itself too slow or incapable of self regulating, then government regulation is appropriate. But, the solution is not to ban the trade.  


The government should insist that live cattle may only be exported if they are delivered to a certified slaughterhouse, which uses stunning to kill each animal.


Industries, beware! There are costs of ignoring your own standards. The Greens will get you.


I've seen so many industries pay lip service to their internal standards, believing that they can get away without walking the talk.  In every case, this deceit comes back to bite them on the arse.  Tobacco, gambling, banking, alcohol, telemarketing, cattle, porn, manufacturing ...


As an industry, you must set standards, and insist that they be adhered to. No wiggle room.  If you breach your own standards, government will impose tighter regulations on you - it will hurt the bottom line more than the ill-gotten gains you made.  If you still ignore the standards, you will be prosecuted. 


But it is only in the extreme case where the whole industry ignores an imposed set of standards for an extended period of time that the industry might be shut down.  The live cattle industry isn't at that point of no return yet, and the calls of politicians tonight to close down the trade are misguided.  The Greens are using an appalling situation as an excuse to peddle an agenda.


We must expect standards from all industries, but we must also support economic liberties. Our government should not ban any industries just on principle.

Let me know what you think


Mark S

You don't ban a whole industry because of a few bad eggs

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Rejecting cake socialism - the operation of the free market in office morning tea

"Come have some scrumptious coconut cake near my desk ... Reviews from my team so far: "this is yummy" and "much nicer than it sounded, I think I'll have another bit"

Not the actual coconut cake

So announced the offer of a mid morning treat to all our team today. And an interesting example of social economics followed.

Apparently, the Marketing (email) was effective, the product (cake) good quality and the price (free) was attractive. Naturally, the laws of economics meant that demand was high, encouraging significant trial and repeat purchase. Soon the supply had been exhausted.


I wandered over for a piece of cake many minutes later to be told I was much too late. My suggestion that there should be rationing and "cake socialism" was rightly rejected. The free market had triumphed.

Let's dissect this cake giveaway market.

Supply: limited

• With the limited supply of product, the seller could extract a high price. Alternatively, they could control distribution, to ensure preferred purchasers were guaranteed product.

Pricing: Low

• Instead of setting price high, it was set low. Was this an error in assessment of the market need for cake? Or perhaps it was a deliberate tactic to generate "buzz"

Consumption controls: Low

• With such a great offer, why weren't any purchase quantity controls imposed? In fact, there were controls - only one piece could be taken at a time - this limited bulk purchase for resale, but there were no limits on returning for more.

In a controlled market, cake socialism might have ruled.  One piece might have been allocated per person.  Or even a ballot for who gets a piece. People who didn't even want a piece would probably be given one (and there is every chance that would create a black market for coconut cake with non coconut cake eaters onselling their portion to those who missed out)

Instead, by letting the market operate, competition for the limited supply ran wild.  Sure, I didn't get a piece.  But that's my own problem. Next time, I'll be faster.

So, how will the market operate next time?  The success of the coconut cake launch has generated positive brand trust for the cake provider.  She can increase her price (perhaps favors from colleagues), or maybe extend the product line into a more profitable offer.  Maybe she will increase supply to satisfy more colleagues.

In any case, the free market will find its level.  It's not perfect, but it's better than cake socialism

Let me know what you think (tick a reaction box)

Mark S

Postscript, with thanks to @almulcahy
Eddie Izzard- Cake or Death
 http://www.youtube.com/watch?v=rZVjKlBCvhg&feature=youtube_gdata_player

A budget preview - a patchwork economy means not everyone's a winner

Tomorrow night, Australia's Treasurer Wayne Swan will announce the Federal Budget. It will show that Australia's economy is the envy of the developed world.

Overall, the economy is doing very well because of China and India's huge need for our coal and iron ore.

But a key theme will be the "patchwork" nature of the economy. This is Swan's preferred phrase to explain that whole the resources sector is in a once-in-a-lifetime boom, manufacturing and tourism are suffering.

So, how should Treasury respond to a patchwork economy?

Free marketeers would say the economy will take care of itself. If that was allowed to happen, everyone who has suffered from the floods would be left to rot. Surely that's not an economically rational approach, as these people who could return to being productive would take much longer than if they were given a helping hand.

On the other hand, protectionists would want the old, struggling manufacturing industries to be supported. They would add tariffs to imports in the name of protecting jobs. All that would do is produce an environment of complacency. Rather than encouraging product innovation and increased efficiency, it would create a culture of laziness. No, that is not an option either.

Instead, the budget will seek to strike a balance between these two extremes. And as the Treasurer said in his most recent economic note, "you often have to choose between what’s right and what’s popular".

Australia has been blessed with a series of excellent Treasurers on both sides of politics for many years. Striking the continuing balance to achieve a stable economy allows each of us as individuals to strive to achieve our economic potential.

Let me know what you think

Mark S

Why financial systems need regulation - and the economic Libertarians are wrong

In yesterday's column I explained the importance of incentives to our economic system. But humans are not like rats in a laboratory responding to simple incentives like food pellets. Rather, we are complex and we relate to incentives in a subjective way.


As a result, humans are capable of misunderstanding what will happen as a result of their behavior.  A person may think:

• "if I do A then I will get B" 

but the reality might be that 

• "As long as C or D don't happen and if I do A then I will get B"

These sorts of complexities are very common, and very difficult to understand for even the most knowledgeable person. 


In the perfect world of the theoretical economist, everyone would have perfect knowledge of the system and all of the current information. If that is not hard enough, it's also assumed that everyone will make completely rational decisions.  The economist even named this perfectly rational person "homo economicus" (the economic man). Nobody has ever met him!


So, back in the real world. There is far too much data for any person to understand. There are far too many interactions for any person to grasp. And to make matters worse, some humans cheat, corrupt, steal or are simply unskilled at their jobs.


And this is why financial systems need effective regulation - our markets just are not transparent enough. It's simply impossible. 


The free market libertarians reading this are jumping up and down right now in outrage. They want an unfettered system where the market will regulate itself. I'm sorry, but it is just a bad idea. 


To support my case, take a look at the Australian and US financial regulation systems.  In Australia, the system is regulated by the "three peaks" - ASIC, APRA and the Reserve Bank, in concert with the Treasury.  In the US, the system is regulated by a disconnected collection of state and federal bodies.  As a result, all of the Australian financial system is effectively regulated.  That includes banks, other mortgage providers, public companies, property markets, insurance companies... Whereas in the US, the regulations are looser, with many gaps.

If regulation is unimportant, and the market can self regulate, then it shouldn't matter.  But it does. Take a look at how the sub-prime housing market was able to get out of control in the US, compared with Australia. Over 14% of mortgages in the US were sub-prime at the peak in 2006, whereas Australia had around 1%.

And then, what happened next? The loans went very bad in the US, and kick started the global financial crisis. As there weren't so many of them, they didn't go nearly so bad in Australia.

Unfortunately, around the world there are many more examples of financial systems suffering due to poor regulation.  Another great example has been the failures in the Irish system, resulting in frauds, overcharging of consumers and bank bailouts by the public.


So, what's this got to do with ordinary people, incentives and the free market?

Well, "If I am confident that C or D won't happen, I will try to do A so I can get B".

But if I can't trust the system, because nobody understands the rules or plays by the rules, it will provide me with an incentive to abandon the system, and do something else, outside the legal, free market.

Effective regulations in our financial system are good for everyone. Letting the free market run wild is not.

Let me know what you think

Mark S

If you want to read some more, try these links:
ASIC: The integration of financial regulatory authorities – the Australian experience
Reserve Bank: A Comparison of the US and Australian Housing Markets, May 2008
APRA - www.apra.gov.au
US Govt Accountability Office: Financial Regulation...
Financial and Energy Exchange Group

The free market does more good than harm - for proof, see China

After writing a couple of items about the socially liberal half of the blog's title, today's column focuses on the economic rational side.

So, let's start with my main premise - the free market does more good than harm.
And ... The main benefit of the free market is INCENTIVES.

Source: Wikipedia

A quick aside. My academic training is in Psychology. That means I have a good understanding of what makes people behave the way they do. One of the main drivers of behavior is the expectation of a personal reward - we call it positive reinforcement. Positive reinforcement works for people, rats, and every animal in between. If we receive something that we want, in return for doing something, then we will respond, and do it. In most cases, positive reinforcement is more effective than punishment - offering an incentive is more powerful than issuing a threat.

These reinforcements, or incentives, are at the heart of the free market system - it allows personal rewards to be offered to individuals in return for certain behaviors that are valued by others. The incentives inspire action. If I do something that the market wants, I'll get something I value in return. This simple process unlocks many powerful forces - creativity, innovation, design, production, technology, and more.

The free market is often criticised, particularly by those on the economic left of the spectrum. They would favor a system that focuses on the collective rather than the individual. That is, a socialist system. From a social perspective, this is underpinned by the ideal of treating everyone equally within a society. However laudable that goal is, from an economic standpoint, it just doesn't work.

So, to make this point clear, let's look at the most compelling chart that shows the benefit to economic systems that have moved from socialist to free market.

Chart source: Wikipedia

The big one of course is China, and the statistics are compelling. China is now the world's second largest economy - and all of the growth has occurred since the shift to a market economy.

Incentives drive economic activity. By and large, this is a very good thing.


Let me know what you think.


Mark S