Islam’s free market heritage

With Andrew Kemp

American strategy in the Islamic world has been aimed at the establishment of political democracy — a worthy goal, but a worryingly incomplete one. Social and political freedom cannot be fully established unless they are united with the other pillar of liberalism, economic freedom.

One of the late Milton Friedman’s great insights was the inherently peaceful nature of an open economy: the free market, he wrote ‘does not care what [the participants’] religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another’.

This point also applies to states, as proved by the Economic Freedom of the World Index — reported in the December 2005 edition of the IPA Review. The higher a state’s measure of economic freedom, the less likely it is to wage war on other states. Economic freedom encourages valuable interdependencies between individuals which governments are reluctant to break.

While an Islamo-capitalism has yet to show its face in the most troubled parts of the Middle East, Muslim history and literature displays a sadly under-recognised liberal free market tradition. Islam is not inherently illiberal, as is sometimes portrayed, and there is a clear strand of Islamic tradition and thought that provides a stable base for a free society.

The Qur’an and the market

It is no coincidence that Makkah (modern Mecca), the site of Islam’s seventh-century theological birth, was also home to a thriving trading community. The early history of the Muslim world is a history of commerce—religious texts describing this period are replete with contextual references to commercial institutions, merchants and markets, commodities traded and commercial practices.

It would be hard to find a successful civilisation without a stable economic base at its origins, but it is worth emphasising the extent to which Islam, in particular, was conceived in a commercial environment. Makkah was a strategic trading hub, providing a gateway between East and West. Furthermore, its shrines to ancient gods attracted vast numbers of pilgrims, establishing the city as a form of sanctuary—an area recognised as free from interference by the internecine tribal rivalries of the time.

As a result, the Qur’an is infused with the smell of spices and the din of markets. Indeed, Muhammad himself, before arriving in history as a religious preacher, was a caravan trader and business manager. As the historian M.A. Shaban writes, ‘to attempt a study of Muhammad’s activities in Makkah and Arabia without taking trade into consideration is equivalent to studying contemporary Kuwait or Saudi Arabia without paying attention to oil’.

In a powerful article for the Islamic Free Market Institute Foundation, ‘Islam and the Free Market’, Peter J. Ferrara and Khaled Saffuri describe a Qur’an which strongly defends the market economy. The endorsement of voluntary trade is a keystone of the Qur’an’s attitude towards economic life, and is proclaimed in this early passage:

O ye who believe!
Eat not up your property
Amongst yourselves in vanities.
But let there be amongst you
Traffic and trade
By mutual consent (Qur’an, 4:29)

The Qur’an defends, amongst other things, private property, contract law, and profit through trade. It prohibits fraud. Muhammad himself prohibited price-fixing. The liberal scholar Dr Imad-ad-Dean Ahmad has argued that, even from a political perspective, the sacred text provides much guidance for believers in liberalism—advocating limited taxation, decentralisation, and strict restraints on the public sector.

Believers are to draw their income from the natural resources granted to them by God—it is not a legitimate role of the state to obstruct this process. The Qur’an is clear about Islamic priorities: pray, then profit.

And when the prayer is finished, then may you disperse through the land, and seek of the Bounty of Allah: and remember Allah frequently that you may prosper. (Qur’an 62:10)

The Qur’an is not a free market Bible. Islamic socialists have long pointed to an emphasis on the hero of ‘social justice’ within its pages, and many have drawn an inference in favour of state-granted minimum incomes, and even a large role for heavy public expenditures.

Others have cited Qur’anic prohibitions on usury (interest) as an indicator of anti-capitalist sentiment in Islam — even as an insurmountable problem for contemporary Islamic liberalism. (This objection will be dealt with below.)

But Muhammad, as the Marxist historian Maxime Rodinson wrote with perhaps a tinge of regret, simply ‘was not a socialist’.

As with many other religions, justice and fairness play a key role in Islamic theology, but it is disingenuous to ignore the emphasis on charity. Zakah refers to Muslims’ obligation to spend a fixed proportion of their income on the poor and needy—often supplemented by further charity (sadaqah). Just as voluntary charity is a vital part of a capitalist economy, zakah is the third of the Five Pillars of Islam.

Ibn Khaldun and The Wealth of Nations

These strong theological exhortations to prosper from God’s bounty have been reflected in early Islamic scholarship. Occupying a unique place in intellectual history, Ibn Khaldun was a medieval historian, historiographer, sociologist and economist who lived in Tunis, Granada, and Egypt in the fourteenth century. Largely written out of Western intellectual history — Joseph Schumpeter slandered Islamic scholarship by arguing that there existed a ‘great gap’ between the Greek scholars and the Christian scholastics — Ibn Khaldun deserves a central place in economic thought.

Indeed, Imad A. Ahmad argues forcefully that Adam Smith was ‘simply picking up where Ibn Khaldun left off’. Ibn Khaldun’s writings display a clear and unambiguous familiarity with many of the central tenets of what we know as classical economic thought — for instance, an appreciation of supply and demand, of causality, and an understanding of the difference between normative and positive analysis.

His support for the labour theory of value – the theory that the value of something is determined by the amount of labour that has gone into its production — is an open academic question. However, Ahmad convincingly argues that he had a strong appreciation of subjective value — a good’s value is solely determined by how much people are willing to pay for it — which would place him even higher on the intellectual hierarchy than many of the great nineteenth- and twentieth-century economists. While he wrote that labour was an important factor in production, elaborating on the work of Greek scholars, he nominated the utility of a good as a determining factor in its price.

Ibn Khaldun’s writings are rich with insights, and his clarity makes writing a review of his economic thought just that much easier. It is hard to avoid the temptation to quote him at length. For instance, he writes on the commercial ethic:

It should be known that commerce means the attempt to make a profit by increasing capital, through buying goods at a low price and selling them at a higher price, whether these goods consist of slaves, grain, animals, weapons, or clothing material. The accrued amount is called ‘profit’. The attempt to make such a profit may be undertaken by storing goods and holding them until the market has fluctuated from low prices to high prices. This will bring a large profit. Or the merchant may transport his goods to another country where they are more in demand than in his own, where he bought them. This will bring a large profit. Therefore, a veteran merchant said to a person who wanted to find out the truth about commerce: ‘I shall give it you in two words: Buy cheap and sell dear. That is commerce for you’.

He recognises the role of entrepreneurial risk and its relation to the supply of goods:

The transfer of goods from far away countries or through dangerous zones is of greater profit to traders and secures the fluctuations of the market in their favor, because the transferred good is rare and eagerly demanded, owing to its distant source or the risk incurred in its importation. It becomes thus rare, and much demanded and its price consequently rises … If, however, its exporting country was near and its communications secure, there would be many importers and it would be abundantly supplied and its price would tend to be low.

Ahmad’s characterisation of Ibn Khaldun as the Islamic Adam Smith is hard to dispute after reading his description of the advantages of a division of labour:

[T]he individual human being cannot by himself obtain all the necessities of life. All human beings must cooperate to that end in their civilization. But what is obtained through the cooperation of a group of human beings satisfies the need of a number many times greater (than themselves). For instance, no one by himself, can obtain the share of wheat he needs for food. But when six or ten persons, including a smith and a carpenter to make the tools, and others who are in charge of the oxen, the plowing of the soil, the harvesting of the ripe grain, and all other agricultural activities, undertake to obtain their food and work toward that purpose either separately or collectively and thus obtain through their labor a certain amount of food, (that amount) will be food for a number of people many times their own. The combined labor produces more than the needs and necessities of the workers.

Of course, no figure in intellectual thought can withstand all criticism, and Ibn Khaldun is no exception. For instance, he posited a beneficial role for public expenditure, writing, ‘if the state decreases its expenditures, the other markets follow its way and slacken much more’. But he quickly recognised the limits of this proto-Keynesianism, anticipating the Laffer Curve by about six centuries:

In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue … As time passes and kings succeed each other, they lose their tribal habits in favor of more civilised ones. Their needs and exigencies grow … owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects … [and] sharply raise the rate of old taxes to increase their yield … But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes … Consequently production falls
off, and with it the yield of taxation.

Murray Rothbard’s two volume Austrian Perspective on the History of Economic Thought rightfully rehabilitates the Christian School of Salamanca in Spain as heretofore unacknowledged giants in economic history, pre-dating Adam Smith with many of the Scotsman’s
key insights, but unfortunately he too neglects Islamic scholars such as Ibn Khaldun.

But as Ahmad notes, the Salamanca School was born shortly after the reconquista of Spain from the Muslims in 1492. Given the intellectual cross-pollination of Medieval Europe, it is hard not to imagine that the leading scholars of the School of Salamanca did not have at least a passing familiarity with Ibn Khaldun’s work — he only died in 1406. Ibn Khaldun may have until recently been neglected by economic historians, but his work was not so neglected by his contemporaries.

It is hard not to be struck by Ibn Khaldun’s discussion of Islamic liberty:

Those who, of their own free will and without any compulsion, act according to the Qur’an and the Sunnah [the practice of the Prophet] wear the turban of freedom.

Ibn Khaldun may be a shining light in intellectual history, but he was by no means alone. For instance, one of his students, the Egyptian historian al-Makrizi applied his theory to the contemporary Arabic world, concluding that the causes of Egypt’s economic woes at the
time were government corruption, high taxes, and depreciated coins.

Earlier Islamic Economists

Preceding Ibn Khaldun, the eleventh-century scholar Abu Hamid al-Ghazali had an enormous influence on Islamic economic thought. Al-Ghazali investigated the relationship between the materialistic behaviour of the physical world on the one hand, and the moral foundations underpinned by religion on the other. Despite these conflicting elements, al-Ghazali clearly recognised individuals are motivated by self-interest. Observing traders, al-Ghazali wrote,

The motive behind all these activities is the accumulation of profits, undoubtedly. These traders exhaust themselves by travelling to satisfy others’ needs and to make profits, and then these profits too are eaten by others when they themselves obtain things from others.

Al-Ghazali was hardly an advocate of selfish behaviour, however. A conservative with many traditionalist underpinnings, al-Ghazali argued for moderation in the pursuit of profit, and was vehemently opposed to the excessive profitmaking of merchants.

A more accommodating view on the pursuit of profit and individual achievement was presented by the twelfth-century merchant Dimishqi, a Muslim writer from Damascus. Dimishqi wrote:

the wealthy individual is here considered a respected person who deserves people’s esteem because he is rich, not in need, and because he makes for good use of his fortune.

A similarly secular observation is seen by the Persian prince, Kay Kavus, who, in giving advice to his son, wrote:

Do not be indifferent to the acquisition of wealth, yet do not cast yourself into the danger for the sake of it. Assure yourself that everything you acquire shall be the best quality and is likely to give you pleasure.

Ibn Taimiya, whose life overlapped with Ibn Khaldun’s, showed an earlier, although less rich, appreciation of the role of supply and demand:

People’s desire is of different kinds and varies frequently. It varies according to the abundance or scarcity of the good demanded. A good is much more strongly desired when it is scarce than when it is available in abundance … It varies also depending on the number of demanders. If the number of persons demanding a commodity is large, its price goes up against when their number is small … It is also affected by the strength and weaknesses of the need for the good and by the extent of the need, how great or small the need is for it. If the need is great and strong, the price will increase to an extent greater than if the need is small and weak.

The Usury Problem

Depending on the interpretation, the Qur’an either forbids all interest, or merely usury, the charging of excessive interest on a loan. Known as riba — literally ‘in excess’ or ‘in addition’ — this practice is repeatedly denounced throughout:

Those who charge riba are in the same position as those controlled by the devil’s influence. This is because they claim that riba is the same as commerce. However, Allah permits commerce, and prohibits riba. Thus, whoever heeds this commandment from his Lord, and refrains from riba, he may keep his past earnings, and his judgment rests with Allah. As for
those who persist in riba, they incur Hell, wherein they abide forever (Qur’an, 2:275).

This seemingly unambiguous position has not been the restraint on economic activity that it is often assumed to be. As Maxime Rodinson noted in Islam and Capitalism, the practice of financial lending at interest was well entrenched within Meccan society before the birth of Islam, and remained a feature of Islamic commerce well after. Rather than grinding to a halt, with the assistance of Islamic scholars, Muslim money-lenders and merchants devised an array of legal devices (ruses, or hiyal) to avoid the prohibition on riba.

One technique, described supportively in a Shi’ite legal treatise, while in the same breath condemning riba, seems to indicate that this prohibition was not taken very seriously:

There is a way of avoiding riba. For example, Zeid sells Emru a bushel of wheat, in exchange for some other commodity, while Emru sells Zeid two bushels of wheat in exchange for something else. The goods handed over in exchange for the wheat being of little value, and being given in payment for the wheat, there is no riba here, since the things being exchanged are identical neither in kind or in weight.

A translator of this legal text notes that ‘no one could recommend more naively a legal way of breaking the law’. More sophisticated were the techniques detailed in the Book of Escapes and Ruses.

Regardless of the extent to which the prohibition on riba was enforced in Islamic commerce, or whether it refers to all interest or merely ‘excessive’ interest, the usury problem should not be overstated. Prohibitions against usury have been common in all cultures, including Judaism, Hinduism, Buddhism and Christianity. It is hard to beat the fifteenth-century Dominican prior Sant’Antonino’s condemnation of usury as ‘diabolic’, the great ‘harlot’ of the Apocalypse, and those who practise usury ‘worthy of death’. Despite Antonino’s passion, Christian banking has not suffered from his opposition.

Liberal Enclaves in Modern Islam

None of this discussion is to imply that the Islamic religion is consistently or inherently liberal, or necessarily free market. If nothing else, the process of discerning a liberal tradition in Islam illustrates the subjective nature of theology — individuals interpret sacred texts, rather than being controlled by them.

Further, authors should always be careful to interpret another culture’s religion. This article highlights a perspective of Islam not often examined in the west. Around the world, a small number of woefully under-funded free market think tanks are attempting to broadcast a liberal message to the Islamic world.

Organisations such as the Minaret of Freedom Institute and the Islamic Free Market Institute may be small but, with the fostering of Islamic liberalism constituting one of this century’s greatest challenges, their inheritance of the free market tradition has never been more important.

Aunty Will Be Proud Of Maxine’s Candidacy

The Labor Party has decided that its secret weapon in John Howard’s increasingly contestable seat of Bennelong is Maxine McKew. It couldn’t have chosen a better candidate to attack the Prime Minster. After all, McKew has had years of experience doing exactly that at “our” ABC.

Indeed, the national broadcaster has certainly been a more reliable critic than the Labor Party, a fact Kevin Rudd now seems to appreciate. Even after having apparently stacked the ABC board with conservatives, the public broadcaster remains more effective at landing body blows on a conservative government than the ALP has been for most of Howard’s tenure. But it wouldn’t pay to get too excited about McKew.

Bennelong, which the Prime Minister has held since 1974, is demanding more attention. Howard has won the seat in 13 straight elections but his margin has been steadily declining. Since the Coalition’s victory in 1996, it has dropped from 10.1 percentage points to 4.3. The redistribution that moved Bennelong further into Sydney’s western suburbs has merely sped up the decay in support.

Bennelong is also supposedly peppered with “doctors’ wives”, a group of voters whose concerns align perfectly with the concerns aired nightly on Lateline. If they dominate the electorate as much as the ALP thinks they do, then merely writing “ABC journalist” on her resume should give McKew a landslide victory.

But presumably some of the people who have returned Howard for more than a dozen elections still live in Bennelong. And the recent migrants to move into Howard’s electorate may be more sympathetic to Labor than the Liberals, but they may also be more concerned with maintaining strong economic growth and employment than levels of arts funding.

So where is the evidence that McKew is a political genius who can topple one of the toughest political figures in Australian history?

The art of journalism does not necessarily translate well into the art of politics. Success on the television screen does not imply success pressing palms and hugging babies. But even as a media commentator her political judgment leaves a lot to be desired. This is, after all, the person who said in the days leading up to the 2004 election: “Yesterday [the day after then Labor leader Mark Latham’s launch of Medicare Gold] for the first time I got a real sense of the inevitability of the Latham ascension … Yesterday, I saw someone who, if he does not make it on October 9 [the date of the federal election] — and I think he may — he will make it. And he might make it within six months: it may not be a three-year full term that he has to wait … I think Latham’s time could be coming quite soon.”

The financial recklessness of Medicare Gold stood in opposition to everything Latham had stood for as an independent-thinking backbencher. The ALP was punished with one of its greatest electoral defeats.

Right now, McKew’s appeal to the voters of Bennelong is largely theoretical. She may warm the hearts of the latte Left, but since Paul Keating hired author Don Watson as his speechwriter, this has not necessarily been sound political strategy.

And rule No.1 of Australian politics is that one should never write off Howard. Giving him the kiss of death always amounts to mouth-to-mouth resuscitation. In 2004, despite McKew’s confidence, Latham only strengthened the PM’s lead. In 2001, despite Kim Beazley’s seemingly strong position, Howard easily held government. In retrospect, it looks easy. Howard has won more “certain losses” than any other Australian politician. McKew needs more than her Lateline and The 7.30 Report credentials to unseat him.

This cannot help but reflect poorly on the ABC. One moment McKew is an impartial, objective journalist with no political interest except the truth, and the next moment she is a hungry political campaigner, determined to unseat the head of the government.

ABC host Virginia Trioli refuses to vote at elections. McKew has only just joined the ALP. Although ABC journalists may make these symbolic gestures to assure the tax-paying public that they maintain a balanced objectivity, history suggests otherwise. Barrie Cassidy, Kerry O’Brien, Mark Bannerman, Greg Turnbull, Alan Carpenter, Claire Martin, Mary Delahunty and Bob Carr, among others, have moved from the ABC to the Labor Party, probably to the benefit of both. Indeed, on ABC radio Sydney yesterday morning, former Greens candidate for Bennelong Andrew Wilkie may have jumped the gun when he said that “it’s great that Virginia [Trioli] is taking on Howard”. A slip of the tongue or a future Labor masterstroke?

The list of ABC journalists migrating into the Liberal Party is not nearly as illustrious. Peter Collins, a former NSW Liberal leader, and Pru Goward, candidate at next month’s NSW election, cut lonely figures against their former colleagues across the chamber.

The ALP is learning from its mistakes. What use is a celebrity candidate if they don’t contest the election? After parachuting Peter Garrett into the safe seat of Kingsford Smith with a whirlwind of publicity, he largely disappeared during the campaign. But putting McKew up against the seemingly impenetrable Howard, the ALP is signalling its confidence in McKew, and the Labor branches will respect her for it.

Perhaps this will translate into a stronger local campaign by the ALP; it needs any strength it can get.

Howard said yesterday that the McKew challenge will only provoke him to work harder in Bennelong. “When I get news like this it only steels my resolve to work even harder for the people I have had the privilege of representing for the last 30 years.”

Only a fool would think otherwise.

Waving Goodbye? Fans Will Decide

Rather than jumping up and waving about, well, jumping up and waving, lovers of the Mexican wave can easily look at alternatives to the MCG’s ban.

It’s not the wave itself that causes the problem – the wave is a fun example of the possibilities of spontaneous voluntary co-operation between thousands of people. Management could target the real problem – people throwing projectiles in to the air, disguised by everyone else’s fun.

It would be relatively simple to do so. Bags could be searched upon entry, and anything that could be thrown confiscated, including, presumably, the bags themselves. Food and drink – instant projectiles – would not be sold at the ground. The probably mythical cup of urine would be impossible with a ban on cups.

Security guards and video cameras could identify the culprits.

This method would be costly, and intrusive. Fans might not be happy with paying dramatically higher ticket prices and then being told they cannot bring a drink bottle into the stadium, and once inside have to go hungry.

How important is the wave to enjoyment of cricket? If it is the difference between having fun and not having fun, fans could set up a competing stadium where the wave is allowed. This is a high-cost strategy as well, but entrepreneurs who sense this unfulfilled demand could make a huge amount of money supplying it.

This may seem flippant but it happens all the time in a market economy. When companies stop providing what people enjoy, competitors fill the gap. Private schooling, for instance, has arisen out of dissatisfaction with public education.

If the MCG has imposed too harsh a rule on fans, then they will stop going and start looking for alternatives. The MCG is betting that the new rule will instead increase attendance.

Ultimately, the fans will decide whether the wave should be allowed.

Dobbing And The Community

Australia is a nation founded by people who were dobbed in. Perhaps that’s why one of the first rules we learn in life is not to dob in each other: what happens in the playground, stays in the playground.

This lesson, quite obviously, doesn’t come from our teachers or parents. Dobbing is one of the ways that they can know about our infractions of their rules, such as swearing and sneaking away at lunchtime to buy chips at the 7-Eleven. Our anti-dobbing tradition frustrates this, and means that parents and teachers have to police us themselves.

Whatever its historical basis, Australia’s tradition against dobbing works well. Trust is a foundation of community. Without trust, individuals struggle to develop relationships with others.

We need to know that when we confide in another person, we can reasonably expect the confidence won’t be used against us. When we invite another person into our home, we can reasonably expect they won’t bring a baseball bat and start destroying our possessions.

Trust is vital in a market economy as well. When we buy an item we’ve seen in a store window, we trust the seller to give us that same item in a box.

We expect real estate agents to sell us houses that are actually on the market. In Nigeria, where, after decades of corruption and poverty, levels of trust are abysmally low, houses display placards stating this house is not for sale. One popular scam in that country is to sell houses the scammers do not own.

Trust is at the centre of every personal and economic relationship we have and without it, any community in the meaningful sense of the word is impossible.

Encouragement by the government to dob each other in discourages the formation of that trust. The extreme example of a government actively encouraging the breaking of that trust suggests how important it is. In totalitarian socialist and fascist societies, the state broke down civil society to such an extent that people would report even their own family members for any perceived minor infractions. Memoirs recall citizens being reported not out of desire to do the right thing but out of petty and unrelated personal grievances.

This indicates a further useful consequence of the anti-dob tradition: without being able to appeal to a higher power – parents, teachers or the government – we are forced to sort out interpersonal conflicts ourselves. In most cases, we negotiate with each other, and when we do so, we form and strengthen our relationships.

It also fosters Australia’s egalitarian spirit. Individuals negotiate with each other as equals. Running to the government is un-egalitarian.

The government uses its coercive powers to force a solution to a disagreement. The solution may not be efficient or fair, but it will certainly suit the government. Naturally, then, governments are urging us to abandon our anti-dobbing tradition and call a toll-free number every time we see a neighbour doing something wrong.

We are asked to dob in water cheats, litterers and disgruntled taxi drivers.

The tax office is hoping that all those amateur accountants will monitor their friend’s finances to detect tax cheats: he couldn’t possibly afford that on his salary, could he?

Importantly, mislabelled seafood has its own dob-in hotline: 1800 737 147.

Many dobbing-in schemes are beneficial. Crime Stoppers is a typical example. Few people would object to reporting robbery or assault committed in their neighbourhood.

The terrorism hotline, mocked and ridiculed when it was brought in, is theoretically just as helpful.

Reporting crime or terrorism helps, rather than harms, the viability of our communities by making us feel safer and more confident in our person and possessions. As a result, no one complains. The thief knows that stealing is wrong, and the dobber knows that stealing is wrong. Everybody accepts laws against stealing.

But not everybody accepts all government legislation. Speed limits are a good example of this.

The Victorian Government has set speed limits, for example, at 50 or 60 km/h. Hop into a car for even a few minutes, and you will notice that almost everybody exceeds that. Most cars travel five to 10 km/h over the limit, and few tickets are given out to drivers who do.

In fact, drivers who obey the speed limit can often be more dangerous than those who go at the speed of other drivers. Most of us would be outraged if we were dobbed in by another driver for going 5 km/h over the limit.

Another example of a law that we routinely reject is jaywalking. The semi-regular police blitzes against crossing roads diagonally or against the pedestrian crossing signs are treated with derision by even strong law-and-order folk.

Dobbing in a thief is unobjectionable. But dobbing in a water cheat or a slightly faster driver seems un-Australian or anti-social. This perhaps makes sense: these latter laws are not as well accepted by the individuals and the community.

It’s easy to sympathise with a home owner who waters on the wrong day, or splashes water on the roof of their car to give it a quick rinse. If we dob them in, its seems as if they’re being punished for a crime they didn’t really commit.

This is the cause of the furore over Dob in a Water Cheat: the disconnect between laws Victorians willingly accept and laws treated less seriously.

As more activities become illegal across the state – watering the garden of an even-numbered house on a Wednesday; telling a joke about religion; owning a cigar bar – the Government is going to face more of these reactions.

It’s only when governments make laws that we don’t fully believe in that our two desires – the need to build healthy communities and to obey the law – come into opposition.

Dob-in-your-neighbour initiatives undermine our egalitarian tradition and even our sense of Australian community.

If we have a problem in the playground, will we tell the teacher or sort it out ourselves?

Broadband Internet – Getting The Framework Right

The United Nations last month released a report on broadband policies for developing nations. Unfortunately, its recommendations provide little more than advocacy of futile, centralised, national “plans” to increase Internet availability and use.

Similarly, policy makers across the Australia are formulating grand plans to resolve this county’s broadband crisis.

In Communications Departments around the world, “plans” are in fashion.

These plans are trying to address real issues. In Australia, communications policy has comprehensively failed. Infrastructure investments are being tied up for years in regulatory negotiation, and they are abandoned when no compromise is reached. As a result, our broadband penetration is in the bottom half of the OECD rankings.

For developing nations, the lack of adequate communications infrastructure can be a significant obstacle to development.

The United Nations recommends that governments in developing nations institute a series of master plans to introduce and expand their infrastructure. These consist variously of government subsidises and interventions. Growth, and a reduction in poverty, they argue, will naturally follow.

But communications is a highly profitable business to be in. Entrepreneurs sensing a demand for communications networks, be they fibre-optic broadband or mobile, will strive to meet that demand.

What is the market failure that the lavish master plans advocated by the United Nations are supposed to address?

Institutional obstacles hold back many of these developing nations from the growth they desperately need. The popularity of mobile networks in developing nations is because they are typically unregulated, in contrast to the corrupt, state-owned telcos and rigid regulatory impediments which restrict markets in wired telephony.

Kenyan farmers, just like those in the Riverina, can now communicate with their markets to ascertain the level of demand for their produce. The waste of food and man-hours from lengthy trips to supply a demand that didn’t exist is no longer common. If you have food to sell or buy, you simply make some phone calls.

The “digital divide” is only indicative of a general economic divide between rich and poor countries. Communications networks are not the catalyst for economic development. Instead, they are built when a sufficient demand, brought about by economic growth, presents individuals and companies with opportunities to make profit in communications.

However, government policy in many of developing countries either discourages or even forbids entrepreneurial investment in communications and other infrastructure. The solution is institutional and government reform, to allow economic growth, rather than subsidies and plans.

It isn’t surprising that we have the same problem in Australia.

In the aftermath of Telstra’s cancellation of their fibre-optic cable to the node plans, politicians around the country have been spurred into action. Queensland Premier Peter Beattie announced last month a broadband initiative for Brisbane, which, incidentally, offered Queensland entrepreneurs nothing they didn’t already have.

The West Australian government has announced $1 billion worth of funding for a broadband network across their state. In New South Wales, the government has announced plans for free wireless broadband throughout Sydney.

And Federal Communications Minister Helen Coonan, has announced a range of grand initiatives to deliver broadband to regional Australia.

Many of these plans are similar to the existing subsidies being trialled in rural regions around the country. Taxpayer’s money will be transferred to businesses and individuals who would prefer slightly faster speeds than are currently available.

Like the United Nations’ master plans, these Australian broadband plans are a mere bandaid to cover the real issues in economic policy.

The Australian government administers a regulatory framework which actively discourages investment in infrastructure by forcing entrepreneurs to share their investments with their competitors, at a price chosen by the regulator. Telstra’s reluctance to build a new network and have its control immediately handed over to the Australian Competition and Consumer Commission is understandable. This is a failure not of the private sector, but of government.

The obvious solution is to reform access regulations to encourage investment. Competition regulation which does not do so is regulation which holds back economic growth.

Grand government initiatives aren’t needed to encourage telecommunications investment. Entrepreneurs merely need to be granted the freedom to build on terms of their choosing. On this measure, the Australian government, not the private sector, has failed.

No comfort should be taken in the enthusiastic proclamations of plans and initiatives by politicians.

The lesson for rich and poor countries are the same. Get the frameworks right, and the rest will follow.

Thumping the Table: Key Questions for the Labor Party’s ‘Industry Policy’

With Sinclair Davidson

Introduction: Is industry, in particular manufacturing, characterised by market failure that demands government intervention? The recently appointed Shadow Minister for Industry, Innovation Science and Research, Kim Carr has argued it is:

Industry policy is about addressing market failure … Clearly the reliance on market fundamentalism is not working. In the last five years we’ve seen the loss of nearly 40,000 jobs in manufacturing.

The Leader of the Opposition has similarly argued that Australia risks being relegated to the positions of ‘China’s quarry’ and ‘Japan’s beach’. In other words, the majority of Australia’s prosperity may become dependent on as few as two industries, tourism and mining, with a single buyer for each. Such a situation, it is implied, will provide a poor base for Australia’s future economic prosperity. Australia therefore requires a ‘sustainable economy’ buttressed by a diverse range of industries (a ‘broad economic base.’)

The Shadow Minister has also targeted low-end service industries as an example of what ALP industry policy will avoid, arguing that Australian employment cannot be restricted to ‘burger flippers’ and ‘cappuccino makers’. This constitutes an extraordinary slight on those workers, and indeed on all low-skilled workers. This type of job-snobbery is entirely inappropriate for an elected representative. Such a view also ignores the fact that these jobs are typically entry-level positions, as employees go on to higher level, higher skilled and higher paid positions either internally or externally.

Reflecting on the claim that Australia’s extractive industries provide an unsustainable base for economic prosperity, the Opposition Leader and Shadow Minister for Industry have signalled their intention to rejuvenate Australia’s ability to ‘make things’. This call for ‘reindustrialisation’ is a return to leftist ideas of the 1980s.

The term ‘industry policy’ refers to any active assistance given to economic production by government. These forms of assistance can range from the relatively benign — for instance, the legal protection of intellectual property — to the strongly interventionist — for instance, the imposition of protectionist tariffs, subsidies, or direct government control.

Australia has a long and disgraceful history of protectionism; high tariffs, the ‘White Australia Policy’ and highly regulated labour markets were some of the tools employed as part of previous industry policies. The state socialism, which characterised Australia’s political economy for much of its history, drained the nation of much of its natural wealth.

Instead of these ‘old-fashioned’ measures of an industrial policy, the Federal Labor Party proposes a new brand of industry policy. The Shadow Treasurer Wayne Swan says ‘Industry policy means to me getting the basics right — skills, education, innovation, infrastructure and tax’. Senator Carr has indicated a more expansive program, including measures such as utilising government procurement policy to provide a ‘base level of demand’ for Australian products.

Available here.

The other flurry of media mergers

With Hugh Tobin

The media is big business. Organisations such as Microsoft, Google, Apple and Yahoo! are rapidly manoeuvring themselves into competition with the traditional services. They exist in an unregulated online environment where innovation is rewarded and there is no limit to the acquisition power of companies.

In a short time, many Internet companies have grown to be even larger than the regulated traditional media players with which they compete. For instance, Fairfax’s market capitalisation of US$3.43 billion is dwarfed by Google’s US$139.1 billion. In the US market, Yahoo!’s market capitalisation is larger than CBS’s.

These companies are genuine competitors, and represent one of the greatest challenges to the incumbent leaders in the media industry since the introduction of broadcasting.

Like their traditional counterparts, the new media players have recently been undergoing dramatic structural and ownership changes. The big names — Google, Yahoo!, Microsoft — are buying up smaller entities which have developed recognisable and popular products, in order to integrate them into broad suites of products united under a single brand.

The quickest way to fortune in 2006 is to develop a Web product, build a strong and supportive user base, and sell out to Google.

The social networking video site YouTube, which gathered headlines around the world when it was acquired by Google for $2.2 billion in October 2006, is the most famous example, but it
is by no means alone.

A typical story in this era is Writely, a word-processor which runs within a browser, created by the Silicon Valley start-up Upstartle. At the time it was acquired by Google, in March 2006, it had only four employees. Google has since merged it with a spreadsheet program it developed independently, a product which most commentators believe signals a direct challenge to Microsoft’s dominating Office software suite.

Indeed, the often reported YouTube acquisition is just the tip of the iceberg. In the same month that Google acquired YouTube, it also acquired JotSpot, a collaborative document service, which will also integrate into its Office competitor.

In November, Yahoo acquired Bix, an advertising/contest service, MyBlogLog, a blogging aggregation tool, and KenetWorks, a service for mobile phones. Since 2002, Microsoft has bought 24 individual Web services, Yahoo! 25, including the bookmark-sharing Del.icio.us and the photo-sharing flickr, and Google has bought 27.

Online media is still in its early stages of development. But this ‘flurry’ of mergers and acquisitions seems to indicate that online media can now directly challenge incumbent broadcasters and traditional printers.

It was only in 1998 that NetFlix — a US subscription mail rental service which combined the two relatively new technologies of DVDs and the internet — was inaugurated. Bigpond Movies,
Telstra’s clone for the Australian market, is even younger.

But both of these services have already been made obsolete by offerings from Apple, Microsoft and Google — all released in 2006 — which provide films and television programmes for download or streaming at home. These services are an example of the competitive threats
that are now facing the traditional media.

But they also highlight the amazing benefits that increased competition brings for consumers.

Diversity — as far as it has any useful meaning — will survive any manner of media mergers or acquisitions, even in the unregulated online environment. It is now more useful to look at the media as an integrated market consisting of all the players mentioned above rather than the segregated silos of print, broadcasting and online which seems to dominate the analysis of the commentariat.

There is money to be made on the Internet, and there are serious businesses online. If only the traditional media were as dynamic.

How significant is online news?

The two opposing cases in the debate over ownership deregulation of the media can be quickly summed up. The first group argues that the case for deregulation is buttressed by the explosion of choice available on the Internet, and the second group counters that the influence of online media is exaggerated.

This second group commonly cites a series of polls indicating that the most commonly trafficked sites for domestic news are owned and operated by the proprietors of existing media businesses. Fairfax, News Limited, Channel 9 (in its ninemsn partnership with Microsoft) and the ABC top the list, with ‘new media’ sites such as crikey.com.au and Yahoo! News struggling to compete. Not only this, but fewer people than it is often assumed gather their news online—in one such survey, 75 per cent of people were either unable to name an online news source they visited, or did not do so.

The news revolution and the deregulation it inspires, is, argue the critics of reform, a myth. Of course, none of the data is surprising. In 2006, established media organisations can far easier produce news content, with their network of in-house journalists and associations with news services such as Reuters and Associated Press. Obviously not everybody is comfortable yet with browsing the Internet for their news; established patterns are hard to break.

But there are problems with these one-dimensional measurements of news site popularity. It is arguably more interesting that, in the 2005/2006 poll displayed on this page, in fifth and sixth position are Yahoo! and Crikey, archetypal Web start-ups. Bigpond comes in seventh—before the Internet, how many people could say they primarily sourced their news from Telstra?

Drawn from a series of interviews and extrapolated to the population at large, the polls also appear to underestimate the traffic at these sites. The 2005 poll reports 190,000 visitors to the Crikey Website per month. Crikey itself claims double that — 355,000 unique visitors to their Website, with 41,000 readers of the daily e-mail.

Internet statistics are an amazingly problematic enterprise. The differences between hits, page views, visits and unique visitors are arcane and technical, but can dramatically raise or lower sites in the rankings. Whether the user is on a home computer directly connected to the internet, or through a corporate network — which could mean that a couple of thousand employees only register as a single visitor—adds to the challenge. Whether you identify unique users by tracking their IP address, with a cookie, or by imposing a registration system on the site itself, further complicates the issue. Unfortunately, trying to ascertain traffic by interviewing consumers doesn’t really cut it.

The diffusion of knowledge about current affairs is not as linear as these surveys imply. As these metrics measure ‘news only’ sites, they ignore a large number of sources of news and opinion available both on and offline. Outlets which are not classified ‘news only’ are often rich with references to current events. Online services run by traditional proprietors are richer with content and opinion than their print or broadcast counterparts, and in many cases, by linking to other sources, encourage consumers to explore alternative outlets.

News consumption is shifting from a hit-driven culture to a niche culture, as consumers spread out across a suddenly massive array of media outlets available online.

By leaning on surveys such as these as a crutch, opponents of media deregulation miss the point. Media use has rapidly and irreversibly changed. Whether consumers visit Fairfax Digital or an obscure blog — or more likely, both — they have not just shifted format, but shifted their approach to news gathering.

The media is now more than ever intensely competitive — the ABC, ninemsn, News Limited and Fairfax aren’t resting, confident in their status as most popular news sites, but are instead being chased by hungry start-ups and competitors eating away at their bottom lines. Media regulation has to change to suit.

Software design by competition law

Europe is providing a steady stream of wrongheaded and counterproductive regulations — good for anecdotes, bad for Europeans.

When Windows Vista, the long-awaited successor to Microsoft’s operating system Windows XP, is released to the general public on January 30, some consumers around the world will have an additional product available. But, if the sales records of Windows XP ‘N’ are any indication, then Vista ‘N’ will be Microsoft’s most unpopular product in a long time.

The ‘N’ series is a special variety of Microsoft’s operating systems designed specifically to comply with antitrust rulings in the EU and in South Korea, which also has aggressive competition laws. In order to do so, XP ‘N’ shipped without Media Player, the free video and audio player which, for users outside these jurisdictions, is bundled with a standard XP installation. Both versions, ‘N’ and the bundled package, were available to European consumers at the same price.

Unsurprisingly, there have been no reported sales of XP ‘N’ to consumers since it was released in mid-2005. It would be hard for a market to reject a product any more entirely.

As has been argued, as long as competition is a download away, the law has done its job. But a steady stream of regulatory intervention and litigation in the computer industry over the last ten years disagrees.

Microsoft has been a staple target of antitrust authorities across the world. In 1998, the US Government sued the software manufacturer for tightly integrating its Internet browser with its operating system. The litigants alleged that their victory in the ‘browser wars’ — a period of vigorous competition between Microsoft’s Internet Explorer (IE) and Netscape Navigator — was due to IE being bundled with XP. Both products were free — but free and bundled can’t compete with free and downloadable, the critics alleged.

Experience suggest otherwise. Mozilla’s Firefox, the heir to Netscape Navigator, is rapidly gaining a share of the browser market. Firefox’s success has largely been due to a perceived lack of security and performance with Microsoft’s bundled product. Consumers are fickle enough to choose between competing products.

Indeed, there is good reason to suggest that the death of Netscape Navigator in the late 1990s was not due to predatory bundling by its powerful competitor, but to consumer disappointment with the software itself. Navigator had undergone a complete rewrite, and was buggy and bloated. When consumers were looking to upgrade their browser for the new features and web specifications becoming available, Internet Explorer was simply the better choice.

In the highly competitive computer industry, technological change makes pronouncements of such-and-such company as ‘anti-competitive’ laughable. IBM is no longer the terrifying anti-competitive monster that prosecutors described it as in the 1970s — in part because of Microsoft’s aggressive marketing of MS-DOS in the first years of the 1980s, and then the Windows 3.1x family of operating systems.

The 2004 competition actions in the European Union against Microsoft were encouraged by organisations such as Real Networks, which publishes a competing product to Windows Media Player. Again, Microsoft’s rivals allege that the competitiveness of their product is harmed by the product bundled with Windows. The EU regulators forced Microsoft to provide European consumers the option of buying XP ‘N’ — without the bundled Media Player. Microsoft wanted to call the package ‘Reduced Media Edition’ until the EU objected.

But again, reality intervenes. While Real Networks may have been disappointed with the popularity of their product, many of Microsoft’s rivals should not be. Apple’s iTunes, for instance, has ridden the popularity of its portable music player, the iPod.

In 2006, before it has been officially released, Windows Vista is under heavy fire from its competitors, and they’re going to the European Union for help. The new operating system includes an array of new features for which, presumably, Microsoft foresees a demand. Producers of anti-virus and security software object to the new low-level enhancements to security—a feature that consumers have desperately sought for a long time. Adobe, which invented the PDF document format, objects to the new document format XPS — a more dynamic format than the now standard PDF.

The EU fined Microsoft €497 million for bundling Media Player with XP, and it has been remarkably vague about Vista’s prospects when it comes before the European regulators. While Microsoft is already obligated to produce the Europe – only Vista ‘N’, the European regulator’s role, the EU argues, is not to give a ‘green light’ before Vista is available to consumers. If Adobe and others have their way, Microsoft could be lumped with another massive fine or have its product crippled for providing new features that consumers demand.

The nineteenth-century French liberal economist Fredric Bastiat divided human activity into two categories: ‘harmonious’ and entrepreneurial, or ‘antagonistic’ and rent-seeking. Unfortunately, as the vibrant, innovative technology industry becomes bogged down in competition litigation, too many are showing themselves to be the latter.

Containers and their enemies

A review of The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson (Princeton University Press, 2006. 392 pages)

Strictly, the father of the modern international shipping container, Malcolm Mclean, didn’t invent his own invention. It wasn’t even new.

When the shipping container was first deployed on McLean’s converted World War II tanker Ideal X in 1956, experiments with its ancestors had been being conducted for nearly a century. British and French railway operators tried using custom-made wooden boxes for household furniture shipment in the second half of the nineteenth century. After the First World War, entrepreneurs experimented with interchangeable truck bodies and steel containers for railroads.

The problem was simple: none of these efforts ever demonstrated any cost savings to transport. Malcolm Mclean’s innovation was not the box itself, but the systematised, standardised, international network of shipping containers, freighting massive quantities of goods speedily and efficiently across the world.

Marc Levinson’s The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger illustrates clearly how great risks are taken by entrepreneurs when entrenched interests and government regulators conspire against them. Even after these opponents are dispatched, technological and economic uncertainty plague the entrepreneur just as much as the vaunted ‘first-mover advantage’ blesses him, perhaps more.

The story of the shipping container is the story of the opponents of innovation.

Unions

Before the shipping container, the job of a longshoreman was brutally physical. Longshoreman could utilise winches to load and unload ships, but, as the unsorted cargo was dumped on the dock after its trip by railway or truck, and squeezed into every irregular space in the ship’s hold, human force was resorted to more often than not. Levinson quotes a former pier supervisor: ‘Because they had to bend over to do that, you’d see these fellows going home at the end of the day kind of like orangutans. I mean, they were just kind of all bent, and they’d eventually straighten up the next day’.

Not only this, but as pallets were packed and unpacked to squeeze into irregularly shaped cargo holds (the shipping fleet used after the war was mostly converted military surplus, not custom-made cargo vessels) damage — and ‘damage’ — were common. Longshoremen would pride themselves on such skills as the ability to tap whiskey form a sealed cask supposedly stored deep in the ship’s hold.

Automation, in its full-blooded shipping container form, came as a shock to the highly parochial and defensive maritime unions. Containerships could be loaded and unloaded in one-sixth of the time it took for traditional cargo ships. Sealed containers dramatically reduced theft. More disturbingly, containerisation required one-third of the labour. When the first shipping line asked to hire a smaller work gang in New York, the unions announced boycotts. The industry was to become bogged down in union disputes for ten years after the Ideal X first sailed.

Levinson details carefully the internecine rivalries of competing unions and the negotiations needed to relax the rigid contracts which had dominated maritime work. The radical changes that were re-negotiated slowly modernised the docks, but also spurred a massive boost in productivity for non-containerised cargo loading, as employers were suddenly given the capacity to change previously entrenched work practices on the docks. The casual conditions and practices were, in the ensuing decades, converted into highly paid, highly structured and highly secure jobs. But one unionist lamented: ‘the fun is gone’.

Regulators

Unions desperate to preserve existing work practices present a huge challenge for entrepreneurial innovation, but, as Mclean and other adopters of the shipping container discovered, the challenge posed by regulators can be even larger. By the mid-twentieth century, the United States’ Interstate Commerce Commission (ICC) had developed a firm regulatory structure which was being undermined not only by the nascent shipping container, but also by the increasing dominance of trucking.

The ICC, which regulated the rates and services of both trains and interstate trucks, struggled to adjust its regulations to the new dynamics of trucking and shipping. Rates were previously set depending on the commodity being carried, but in an era of homogenous containers distinguishable only by weight, this rate-setting principle began to make less and less sense.

But the ICC’s primary error was not practical but philosophical. The ICC’s brief, which was reiterated in the Transportation Act of 1958, was to block the chimeras of unfair or destructive competition. In the highly dynamic transport industry of the 1950s and 1960s, this instruction encouraged the ICC to protect existing operators from innovative practices such as the shipping container, and ‘piggy-backing’ — that is, placing a truck’s body on rail for the long legs of its journey.

A regulator briefed to defend an industry against ‘destructive’ competition — a phrase which is antithetical to an entrepreneurial economy — is not uncommon. It is just as antithetical to economic growth. Regulatory frameworks which are built around specific technologies or business models have no reason to promote innovation within that industry, and firms which benefit from the confines of those frameworks have every reason to prevent or resist change.

After a lengthy series of court decisions and regulatory pronouncements, the full influence of containerisation, which both ripped up the transport industry and pumped up the world economy, is obvious.

Levinson spends time trying to tease out the quantitative benefits of the box — as he notes, ‘a near impossible task’ — but he quotes Edward L. Gleaser and Janet E. Kohlhase who argue that, ‘it is better [now] to argue that moving goods is essentially costless than to assume that moving goods is an important component of the production process’.

Levinson convincingly credits McLean’s shipping container as a major, if not definitive, cause of the boom in world trade since the 1960s.

Ports

There was a boom for the international economy, but like so many economic revolutions, the benefits were diffuse. There were definite losers, particularly if you were a mayor in a town traditionally based around a port. The new breed of ship quickly outgrew the available space in ports designed before the container. Furthermore, older ports tended to have entrenched unions with just as entrenched antagonism towards change.

But some of the largest problems for older ports stemmed from the rapid change in business models caused by dramatically cheaper ocean transport. Immediately, the cost advantages of a factory location in New York, right next to the port, were eliminated. Between 1967 and 1976, New York lost a quarter of its factories and one-third of its manufacturing jobs.

In 2006, with ‘essentially costless’ transportation, it is possible to distribute the production of goods across the globe. The sudden rise of ports at Busan in Korea and La Havre in France and new ports at Felixstowe in England and Tanjung Pelepas in Malaysia, capable of processing super-sized container ships is just as much a factor in the deindustrialisation of the Western world as is industrial relations.

Once the impact of containerisation was clear, traditional port cities unleashed vast sums of money during the 1970s and 1980s to upgrade their infrastructure. In some cases they were successful. Seattle’s docks saw 10 per cent less cargo in 1960 than 1950, but had managed to resuscitate their traffic by the 1970s. Others, such as New York, tried and failed to do so.

But by the 1990s, not even the largesse of government was sufficient to make or break ports. Seven of the top 20 ports in 2003 had seen little or no traffic in 1990. Tanjung Pelepas, which now handles three and a half million 20-foot containers a year, did not exist in 1990. These new ports are mostly privately financed and managed — as Levinson describes them, ‘investments in globalisation’. As container ships inevitably grow, new ports will be built to service them.

In 2006, the revolution in international transport is obvious, but not complete. All innovation is incremental; steady computerisation and automation is cutting down the time spent at port and streamlining the processes. Reduced paper handling in Australian ports, and the reduction in manpower and human error it has brought, has already brought greater productivity for shipping lines. The upheaval brought about by containerisation has cleared many of the entrenched obstacles to change.

For the dock culture in the old, traditional, highly-unionised ports, the fun may be gone, but the benefits to all consumers brought about by costless shipping are clear.