On Telecoms, Regulator Chuting Blanks

With Alan Moran

Far from a success of public policy, the $1 billion rural broadband subsidy won by Optus and Elders demonstrates once again the failure of the competition regulation.

Ever since Optus and Telstra rolled out similar cable networks in the mid-1990s, wasteful duplication has been the bogyman of telecommunications investment. Companies wield the term like a weapon when they want to avoid having to invest in their own infrastructure and, unfortunately, politicians listen.

This stands in contrast to the duplicated roll-out of Safeway/Coles supermarkets and the rival brand petrol stations located next to each other. Duplication in these cases is applauded as competition.

The roll-out of cable was one in which two private businesses went head-on for customers — just as we see competing supermarkets at every shopping centre and bowsers along every major strip. This is genuine competition and investment with shareholders’ funds.

By contrast, the latest Optus proposal to roll out broadband to rural areas is one that will be bankrolled by the taxpayer.

Broadband policy has, in the past few months, become highly politicised. For people who use the internet to watch high-definition movies, the ALP’s $4.7 billion fibre proposal would bring all their Christmases at once. But the cost to the taxpayer is daunting, especially considering that a private company, Telstra, is desperate to pay for the network itself.

The Coalition’s plan is an attempt to cobble together the wide variety of longstanding subsidies to rural broadband users. Communications Minister Helen Coonan has put herself into the uncomfortable position of defending the merits of specific technologies — the sort of “winner picking” that has long discredited national industry policies.

But broadband roll-out in Australia has been absurdist theatre since well before this year. And the Optus plan brings this theatre into sharp relief.

Most of the attention has been focused on choice of technology. Telstra claims the WiMAX standard won’t work as advertised. But, while WiMAX will provide the Optus/Elders network with a link to the most remote Australians, much of their plan rests on the wireline technology ADSL2+, an upgrade of the widely used ADSL.

In contrast to the cable roll-out, or competition between supermarkets, this is taxpayer-funded duplication. Telstra, with its own shareholders’ money, already has installed its ADSL2+ network in exchanges around the country.

Telstra will not switch its network in areas in which it is the only service available. For instance, in Tasmania Telstra has installed ADSL2+ in more than 100 exchanges. But only three of these have been switched on. This scenario is repeated across the country.

To Telstra, switching on the network risks its appropriation by the ACCC. The regulator would force it to be provided to other businesses at an artificially low price.

There are several competing telecommunications networks in Australia, wireline and wireless, but the ACCC sees the spectre of monopoly and the possibility of regulation everywhere.

Expropriating the value for innovatory business activity or new investment is a sure-fire way of stopping such activity.

Australia is facing deficiencies in infrastructure development in areas beyond telecommunications — rail and port services being the other hot spots. In all cases the investment shortfall can be traced back to regulatory impediments.

This is the outcome of a flawed competition law, compounded by poor administration of the law both politically and bureaucratically.

The answer is radical reform. The existing regulatory framework punishes entrepreneurial investments that bring a new or improved service.

We don’t regulate manufacturing plants or processes in this way. We don’t regulate such innovations in software. We resist the temptation in those areas for very good reasons — regulating them would grind down the economy’s productivity.

We should cease regulating new investments in infrastructure unless we want to see the economy falling behind in technology and capacity.

In telecommunications this is extremely important — the pace of technological change far outstrips the plodding feet of the regulator.

Today the conversation is about WiMAX and fibre to the node, but when the next, inevitable, upgrade is necessary, it will again be regulation that is holding investment back.

Media Faces An Unsentimental Future

Media critics have made careers proclaiming how dangerous media moguls are for Australian democracy. These critics now face an even more serious problem – no media moguls.

If PBL Media – which private equity now controls- is anything to go by, we may see nameless, faceless, investors replace these personalities.

Private equity firms may be nameless and faceless, but they are ruthless. CVC Capital Partners has already torn out the symbolic heart of the PBL empire, Alan Jones. The relationship between Jones and the late Kerry Packer was not atypical – the journalist under the mogul’s patronage.

Press critic A. J. Liebling wrote that few journalists under William Randolph Hearst’s tutelage would be employable elsewhere.

The Bulletin has long been made viable by a tacit acceptance of its unprofitability and its prestige as Australia’s oldest magazine. But sentimentality, as Jones and his audience have learned, is not a defining characteristic of private equity firms. CVC will be looking closely atThe Bulletin.

Private equity groups act when they see a company with good but underutilised assets. They assume a big risk. To make this risk pay off, private equity needs to cut fat and make money. Typically, after a few years they exit, selling a more efficient company for an enormous profit.

If this is CVC’s game plan, it picked a great time to get into the media industry. CVC has given itself a five to seven-year window. But by then, PBL Media will not just have to be a streamlined organisation, it will have to be radically different, if it is to keep up with the radical changes in the form and content that media consumers demand.

It took only 18 months for YouTube to go from a garage to a $US1.65 billion ($A1.96 billion) Google acquisition, during which the user-uploaded video website had firmly implanted itself in media consumption habits around the world.

The search giant quickly moved on to an even bigger acquisition this year, buying advertising outfit DoubleClick for $US3.1 billion.

The business of the media is to connect eyeballs with advertising. YouTube and DoubleClick present new competitive pressures on companies that depend on both. Given the pace of online innovation, how these companies will affect the market for media content is unknown.

Corporate responses to these changes have been mixed. In the US, the media empires have already begun dramatically overhauling their structure and, in many cases, spinning off subsidiaries.

It is far easier to point out failed attempts to modernise businesses than successes. The merger between America Online and TimeWarner, which was greeted by the US commentariat with fear and awe, is now an embarrassing failure.

In part, the struggle with modernisation is due to the dramatic internal and philosophical changes required. For instance, Google’s project to index all the information in the world forces media companies to rethink rapidly their relationship with their own content and the value received from it. The chief executive of Macmillan book publishing this month demonstrated his confusion of the issues underlying new media by swiping two laptops from the Google stall at a publisher’s expo.

Google Book Search has been indexing his company’s books under the US “fair use” copyright exception. But rather than giving Google “a taste of its own medicine”, the incident was a cringe-inducing display of the chasm between “new” media and the old. The CEO was devoted to the traditional business model on which his company was founded decades before. Hopefully, as we move towards private equity, similar attitudes in Australian companies will be jettisoned. The regulatory framework that has controlled the broadcasting sector for the past 50 years, for instance, has been a complex web of protectionism, restriction and government favours.

Relationships between press barons and governments have dominated Australian public policy. But private equity groups have few political aspirations – their only aim is to make money.

Politicians who have been used to trading favours with media moguls may have to adjust to a press less interested in politicking and more interested in marketing. CVC hopes to make a big profit out of PBL Media. To do so, PBL Media will not only have to be lean and efficient, but comfortable competing with all-new competitors in an all-new space.

A. J. Liebling once wrote: “The function of the press in society is to inform, but its role in society is to make money.” When private equity owns media, it hopefully can do both.

When Reform Has No Bang And Barely A Whimper

What a difference a year makes. One year ago, when Communications Minister Helen Coonan released the discussion paper which was to become the September 2006 media reform package, was also coincidently the same day that Apple’s iTunes service released its first movie for download – High School Musical, a movie apparently popular with the tween set. iTunes has now sold 50 million TV shows. Apple started shipping their Apple TV, a device which delivers content downloaded from the iTunes service to the family television, in March this year.

The frenzied media commentary which greeted YouTube’s sale to Google in October for $US1.65 billion wasn’t all hyperbole. YouTube only opened for business a year prior, and, due to its popularity, it now plays a central role in modern political campaigns, public relations, and is at the centre of debate about copyright online. No television program with aspirations of greatness can ignore the contradictory importance of YouTube – success on the online social video networking site can mean enormous popularity, but also copyright infringement on a massive scale.

YouTube and iTunes are merely two of the largest services. Video downloading services, in different shades of legality, have sprouted up rapidly over the last twelve months, and are injecting themselves into media consumption habits across the globe. In 2004, an American study found that in the United States, consumers spent roughly 10 per cent of their leisure time online. With the increase of applications and bandwidth since then, that number is no doubt higher.

There are few serious commentators on the media who doubt that in the near or at least foreseeable future, new media will be as popular, important and influential as the traditional print, radio and television triangle was in the second half of the 20th century.

On the one hand, change of this dramatic nature isn’t new. The history of media and technology is scattered with examples of disruptive, radical innovations.

Numerous technological innovations have altered the way we consume, produce and interact with media. The transition in the 1960s and 1970s of magazine printing from the older rotary press to offset lithography dramatically reduced the cost of printing, resulting in the proliferation of hundreds of specialty publications, in contrast with the previously rather limited selection.

The history of popular music was shaped by the potent combination of the use of the FM band by independent broadcasters, and the emerging competition from television in the 1950s. Vinyl recordings, tapes, CDs and MP3s – and the devices they are played on – have further altered our relationship with popular music, and the content of the music itself.

Similarly, entrepreneurs have altered patterns of media consumption with existing technologies with innovative new business models. Charles Dickens serialised his novels in popular magazines, changing the nature and structure of his stories, and creating new market opportunities to great effect. The practise of block booking, where film studios bundled multiple films together to sell to theatres, buttressed the Hollywood studio system, until it was prohibited by the Hollywood Antitrust Case of 1948.

The history of media is change, not continuity.

The dynamism of technological innovation couldn’t be better contrasted than by the narrow approach taken by governments to media law and regulation. It is a consequence of the inertia of the political process that major regulatory changes can be enacted perhaps once a decade. When policy is made and reform is pursued it must be forward-looking enough to facilitate unexpected changes in the industry it is trying to regulate. By this measure the government’s 2006 media law reforms were a regrettable failure – after ten years of promises to liberalise Australia’s media regulation, the package passed in Parliament in October had no bang, and barely a whimper.

Minor adjustments to ownership rules, the introduction of two crippled “non-traditional TV” licences, loop-hole closing in anti-siphoning regulations, another delay of switchover to digital television – it is only by force of habit that the package was referred to by commentators as “reform”. Where large regulatory decisions changes were made, they went in the opposite direction. Regional and rural radio licensees ended 2006 staring down the barrel of a draconian array of new regulatory controls, designed to keep rural politicians on the air, rather than increase any level of local “diversity”.

The federal government’s reluctance to pursue any meaningful reform after such a long build up is most unfortunate. The laws which govern Australia’s media are a fragmentary web of protectionism and restriction. It is hard to beat the Productivity Commission’s characterisation of a regulatory framework that “reflects a history of political, technical, industrial, economic and social compromises. This legacy of quid pro quos has created a policy framework that is inward looking, anti-competitive and restrictive”.

These regulations rest on an outdated conceptual framework. They assume that there is a fixed pie of media content and media outlets – there can only be so many television or radio stations, for instance. The regulatory framework then slices up that pie to a number of operators, and ensures they don’t get in each other’s way.

But this model is entirely unsuited to the contemporary media landscape. Gone are the days when our consumption of news and opinion was constrained by the number of printers in the town, or broadcasters with licenses. An infinite range of news and opinion can be now gathered at almost no cost from the Internet, produced by professionals and, increasingly, amateurs.

This new availability of sources requires us to look carefully at what we mean by “diversity”. The left-wing political critique of the 2006 reforms centred on the notion that a free market in media would necessarily result in media monopolies – Australians ruled over by omnipotent media moguls, rather than their democratically elected politicians. It’s true that the vast bulk of media consumed by Australians is still clustered around these “traditional” owners – Fairfax and News Limited have the lions share of online readership for Australian news sources.

But the measure of diversity should not be an analysis of what everybody is currently reading or watching, but what is available for their consumption, should they choose to investigate outside of the Murdoch, Packer and Stokes empires. We should not only include sources likeOn Line Opinion, but also the Washington PostPravda, and the Borehamwood & Elstree Times. Diversity is a question of available choice, not a question of how best to stop everybody reading Murdoch’s tabloids.

This question about what constitutes true diversity pervades the debate over ownership regulation. The reflections of former FCC chairman Michael Powell on a similar debate about reform in the United States could easily apply to Australia:

Here’s the truth: the ownership debate is about nothing but content … [The ownership rules] became a stalking horse for a debate about the role of media in our society. … It was really an invitation for people with particular viewpoints to push for a thumb on the scale, for content in a direction that people preferred.

Luckily, little the government does will alter the inevitable migration of our media consumption to the Internet. But retaining the byzantine regulations which we have inherited punishes consumers by both privileging and restricting the traditional media outlets which have, until recently, been protected from full exposure to the market.

There are a range of specific reforms that can be adopted. Governments could take convergence seriously and being to harmonise regulations across networks – the regulations that apply to radio broadcasting should apply to television broadcasting, which should also in turn apply to web broadcasting and podcasts. Similarly, the use of the electromagnetic spectrum should be determined by the market – who owns it, what technologies utilise it, how many television and radio stations are broadcast on it, and so on.

But the biggest change needed is philosophical. There is no legitimate role for government in the entertainment business. Consumers determine what they want to watch on television, listen to on the radio, or browse on the Internet. The sooner policy-makers acknowledge this simple fact, the better off our media will be.

Inventing Market Failure

Governments need problems. Without them, there would be nothing to solve. Australia’s broadband situation has presented governments across the country with ample opportunity to intervene. But is Australian broadband caught in a trap of underinvestment and market failure?

The importance of high-speed internet access to a nation’s economy is encouraging a great deal of policy experimentation around the world, and Australia’s state governments are enthusiastically embracing them. The Western Australian government pledged $1 billion to invest in a state-wide broadband network, modelled on a similar network in Alberta, Canada.

The New South Wales Government is tendering out a wireless broadband service, which is to echo the trend in the United States and Europe towards municipal WiFi. Municipal wireless networks tend to haemorrhage money, get bogged down in politics, and in the end deliver far less than they promise, so Sydney consumers should be glad that there are already a number of private wireless operators able to meet their demand.

There is perceived political benefit in attempting to deliver broadband to consumers. Queensland Premier Peter Beattie announced late last year a plan to pipe fibre directly into Brisbane homes, but private companies would have to pay for it, build it, and operate it. Beattie’s grand broadband initiative consisted of little more than a press release about how good a new network could be.

The federal government, having subsidised rural telecommunications since we first got a federal government, now feels compelled to update those subsidies to include broadband at increasing speeds.

If the prevailing political winds are to be trusted, it seems that governments have concluded that the marketplace cannot provide the level of telecommunications expected by consumers in the 21st century. But there is little good reason for their pessimism.

In the United States, Verizon is investing US$18 billion in fibre-optic cable straight to the home. It’s an enormously risky investment, and has its fair share of critics who note how uncertain the industry’s terrain will be when the rollout is completed in 2010. But nevertheless, Verizon has laid US$18 billion worth of chips on the table, to the benefit of US consumers.

An investment the size of Verizon’s would be almost impossible in Australia. Australia’s forced access policy would place any investment immediately into the hands of the ACCC, which would be likely to require it to give access to its competitors at a price of the regulator’s choosing. The disincentive to invest is obvious.

But the federal government has refused to reform the Trade Practices Act to encourage greater infrastructure investment. Instead, we are left with a set of telecommunications regulations which are designed to induce competition into a government-owned, 20th century telecommunications monolith, rather than regulations more suited for the 21st century consumer demand and technology.

The access provisions of the Trade Practices Act are far more draconian than in other jurisdictions. But entrepreneurial firms need to be given the freedom to invest on terms of their own choosing.

Some commentators have argued that the government should do that investment itself, but it would be better if the risk inherent in building a new network is borne by the companies that will profit from it, not Australian taxpayers. Would the government also commit to building every telecommunications network into the future? It is unlikely that a fibre optic network will be the last network Australian consumers demand.

Politicians are always eager to assert market failure – it gives them opportunities to gain publicity, deliver services which might translate into votes, and forge reputations for ‘getting things done’.

But Australian telecommunications is caught in a trap of poor public policy, not market failure. If the government wants to encourage investment, it should at least try to fix the problem.

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.