Not our ABC

With Sinclair Davidson

The Australian Broadcasting Corporation is a $1.04 billion piece of public policy and we treat it as exactly that: a government intervention into the market for news, entertainment and communications. Policy interventions are financially costly. Policy interventions are also costly in a non-monetary sense. They can have unintended or counterproductive consequences. They can crowd out non-government activity, stifle entrepreneurship or technological innovation, distort the marketplace, systemically favour particular political interests and ideologies, and create fiefdoms of unaccountable bureaucrats.

The ABC was established in a moment of history significantly unlike our own, facing a cultural and political environment greatly different to our own, with technological and economic challenges completely opposite to those we now face. Over the course of eight decades the ABC has embedded itself in the Australian political system and public consciousness. But the original rationales for the ABC have long since expired. Technology has made the concerns of Australian policy makers in the 1930s – or even the 1990s, when the ABC was last subjected to a major review – redundant or anachronistic. Economic justifications for a state-owned media broadcaster simply do not fit the modern media landscape.

The arguments for public broadcasting in the twenty-first century are simply not compelling. It is certainly the case that the ABC has bound within it an enormous amount of cultural capital as a consequence of its eighty years of pre-eminence in the Australian media industry. But that should not be confused with either a claim that a publicly-funded broadcaster was necessary to build that cultural capital or that Australian culture would suffer in a world where the ABC had been reformed or privatised.

The ABC is an Australian ‘icon’ in the same sense that the Commonwealth Bank was an icon before its privatisation, and in the same anachronistic sense that Qantas, the ‘national carrier’, is imagined to be an essential part of the Australian psyche. We can celebrate the achievements of the ABC, its cultural significance, and its role in Australian history. But that should not prevent us from looking sceptically – as we should with all costly government interventions into the economy and society – at whether the ABC remains good public policy. Does it have a good reason to exist, now?

That question invites us to speculate as to the rationale for the ABC. The ABC itself denies that it is a market failure broadcaster, while the notion of it being independent is difficult to pin down. Independent of whom? It is publicly funded and its management are required to appear before parliament and answer questions posed by politicians. True, the ABC is independent of the demands of commercial reality, but it is not independent of its political paymaster. Of course that undermines the argument that the ABC is a bulwark of democracy. A free press may well be a necessary condition of democracy but that does not necessarily imply that the government should subsidise the press. To the contrary, many non-democratic nations have maintained very high levels of government ownership and subsidy in the media. A further argument undermining the ABC’s claim relates to the large and obvious political bias in its reporting and news coverage. A 2013 survey revealed that ABC journalists are almost five times more likely to be Greens voters than the average voter and twice more likely to vote Greens than the average journalist.

Other arguments for the ABC include quality programming, Australian content, and rural subsidy. What constitutes ‘quality’, however, is a value judgement. Australian content and rural subsidy can be provided for much less than $1 billion per annum. That is the challenge; the ABC is a massive government program with no clear objectives and no clear accountability.

Few Australians would realise that the ABC charter does not include the word ‘fair’ nor does it include the word ‘balanced’. The charter is at best only a loose guide to what the ABC does. Nor is it any constraint on ABC operations. While the charter is spelled out in legislation, section 6(4) explicitly states that ‘Nothing in this section shall be taken to impose on the Corporation a duty that is enforceable by proceedings in a court.’ Additionally, there is nothing in the charter that could be described as an enforcement mechanism, nor any penalties detailed for potential breaches. The charter is in law – insofar as it exists on the statute books – but it is not law that the ABC has to abide by.

What should be done about the ABC? It is certainly the case that doing nothing and muddling through is very much underrated as a government policy. Yet lower-cost alternative public policies are available and clear savings can be made. One possibility would be to refine the charter. In the first instance, the ABC could be redesignated to be a market-failure broadcaster. Alternatively, it could be required to be self-funding, i.e. commercialised. Here the ABC could be required to finance its activities through advertising revenue and then pay dividends to the government. A further option would be to reform the governance of the ABC.

Then there is privatisation. The ABC could be sold off to a single bidder or consortium. Or it could be listed on the stock exchange. Our preferred option would be for shares in the ABC to be given away, either to all Australians or to existing and previous staff. The staff are the best people to realise the value of the ABC – and they would pay for their shares over time through the capital gains tax as they sold their shares.

In this sense the privatisation of the ABC would proceed much like higher education is currently funded. ABC employees would receive their shares at zero-price and only pay for them when they disposed of the shares and only then if the shares had increased in value. The proceeds of the privatisation would be realised over time and would not constitute a ‘sugar-hit’ to the budget. Nor can the privatisation be characterised as a stunt to balance the Budget in the short term. Rather, it is a program to establish a newly-private ABC on a firm footing, vesting it with a cohort of new owners who have the most interest in making it a commercial success.

ABC is about partisanship not diversity

With Sinclair Davidson

The difference between the ABC and Fairfax and News Ltd is that the ABC is a $1 billion government program that provides media services to Australians. Fairfax and News Ltd are private entities that do so at their own expense and hope to earn a profit. Those small details were missing from Laura Tingle’s defence of the ABC published in Weekend AFR.

As such we can expect somewhat different behaviour from the national broadcaster than from the private sector. Indeed, holding the public sector to a different standard is commonplace in our society. The ABC, very often, wants to have it both ways. For example, paying its employees market rates of pay when they don’t have to compete in marketplace for income.

But some criticism of the ABC is unfair. Of course the ABC would send journalists to cover the recent royal wedding. As every other serious media organisation did. That, however, should not detract from the mounting criticism that is being levelled at the ABC.

For all its protestations of “independence” the ABC as a large and generously funded government program can and should be scrutinised by government, the Opposition, and ultimately the taxpayers who pay for it. Having embedded itself into the Australian psyche and culture the ABC has managed to avoid serious scrutiny for a long time. The ABC – like all government programs – should be an election issue at every election.

To justify its existence the ABC and its supporters posit a range of mostly overlapping rationales. We hear a lot about independence, quality and diversity. Less about being a market-failure broadcaster. Rural subsidy also appears to play a role in justifying the ABC’s existence – although it seems to be very Sydney-centric for a rural audience. It was the diversity argument that Laura Tingle emphasised at the weekend.

>But it isn’t quite clear what is meant by the term “diversity”. The idea that media markets might lack diversity has its origins in a famous spatial economic model by the mathematical economist Harold Hotelling. In his model, firms, in a market with a small number of firms and not competing on price, would offer near identical products. Hotelling believed this explained the “excessive sameness” in capitalist markets. That is an interesting model but it does not explain the creation of public broadcasters in Australia and the UK.

To the contrary, public broadcasting in the UK was introduced explicitly to reduce diversity – the perceived cacophony and anarchy of radio broadcasting seen in the United States. The ABC was designed to follow the BBC model (albeit with a small commercial sector alongside). To argue that the ABC provides diversity where the private sector does not is entirely incorrect. What the ABC does is provide those very same services without having to attract an audience.

A generous interpretation of that feature is that there are some media services that should be provided that the private sector won’t provide. But it is difficult to imagine what those services might be. In any event, the ABC explicitly denies that it is a market-failure provider.

What the ABC does provide in excess, however, is partisanship. Any media organisation should be ashamed to be told that it is reporting political falsehoods as facts. Yet Mitch Fifield – the Minister for Communication and (very) nominally responsible for the ABC, did just that. No doubt he’ll be told something about consistency with “editorial standards”.

Those would be the same editorial standards that saw Emma Alberici publish Labor talking points on company tax cuts as if they were uncontroversial facts. The same editorial standards that saw two News Ltd journalists compared to a mass murderer just last week. Yet we are supposed to be fed up with News Ltd antics.

Let’s be blunt here: the ABC burns through $1 billion of taxpayers’ money every year. Not shareholder money, not a mogul’s money. Taxpayer money. The ABC is a not a blog run on a shoestring, or out of someone’s basement. To argue that being left-partisan is simply to compensate for right-partisanship in the commercial sector is to disfranchise all those coalition voters who pay for the ABC. Australians do not expect their government agencies – even nominally independent agencies – to exclude other Australians without excellent reason.

Blockchain is (now) a competitive industry

With Sinclair Davidson, Jason Potts and Ellie Rennie. Originally a Medium post.

With the anniversary of the Bitcoin whitepaper looming on October 31, it is remarkable how far and fast this industry has come since it was anonymously launched on a crypto bulletin board just ten years ago. Ethereum, which gave us smart contracts and ICOs, was only started in 2015. The Consensus conference, only in its fourth year, packed over 8500 attendees into the New York midtown Hilton with representatives from most major corporations and industries being present.

Blockchain is quickly becoming mainstream. The industry is entering the phase of industrial competition — and this is happening on a global scale.

Consensus is the centerpiece of Blockchain Week in New York City, and the main global industry conference for cryptocurrency and blockchain technology. It is also increasingly a platform for major industry announcements. Two clusters of announcements in particular are propitious markers of where we’re up to in the development of the industry.

In politics, David Burt, Premier and Finance Minister of Bermuda, announced his country’s Parliament had tabled the Digital Asset Business Act, staking an ambition and claim to be the world’s leading crypto-regulator. On Tuesday, Eva Kaili, Chair of European Parliament Science and Technology Options Assessment, announced the Blockchain Resolution had passed the European Parliament.

In enterprise, Fred Smith, CEO of FedEx called blockchain the next big disruption in supply chains and logistics with the potential to completely revolutionise the global trade system. Circle, a Goldman Sachs backed crypto finance company, announced it will be issuing a fiat stablecoin, which is to say a crypto-version of the $USD. And buried in the announcement by Kaleido — a blockchain business cloud — of a partnership with UnionBank i2i (a Philippines Bank specializing in rural banking), was a joint partnership with Amazon Web Services.

These announcements indicate that we have entered a new industry phase, moving well beyond the first entrepreneurial phase of highly speculative market-making start-ups operating entirely in a disruptive mode, and are now at the onset of a second phase of industrial dynamics, that of industrial competition. While still incredibly young, because of the speed and scale at which it has developed, the blockchain industry has now entered the phase of market competition.

The Bermuda announcement is a competitive response to the innovative regulatory frameworks built by jurisdictions such as Singapore, Zug (CryptoValley), Estonia, Gibraltar, Isle of Man, and other crypto-havens. The Bermuda announcement clearly signals that we’re now in the phase of global regulatory competition, and that crypto-regulation and legislation in countries such as the US and Australia will be held by the competitive pressure of exit-options from departing too far from the competitive equilibrium.

The announcement by Kaleido is in itself less significant than that of the AWS partnership, which signals the new shape of competition in cloud computing. Technology companies such as Microsoft, Oracle and IBM are competitively positioning themselves to provide foundational infrastructural services and standards in this new space, and the Fred Smith’s pronouncement signals that the logistics industry is about to be competitively disrupted again.

The difference between the first and second phase of industrial dynamics is that in the first phase entrepreneurs are inventing new technology, disrupting existing markets, and seeking to create new business models. It’s a process of de-coordination of an existing economic order. But this is not generally well described as a competitive market process, usually because markets themselves are still forming, and uncertainty is very high. Cooperation in networks and innovation commons is the predominant institutional form.

Competition emerges when uncertainty begins to clear as the outlines of how the technology works and what it will be used for, which markets are affected and how, and which firms will be involved, and a speculative game turns into a strategic game because it becomes clear who the players are and what they are doing. Investment is not just for R&D, for discovery of new technology; but is strategic investment to compete for market share, and ideally for market dominance.

This is where we are up to now: the phase of global market competition.And further evidence of this is that the main concern of industry participants is global regulatory uncertainty, which is to say the rules of the competitive game.

Now to be clear, crypto and blockchain is still an experimental technology. But we’re now past the early innovation phase — the start-up phase — and have investment is now a C-suite concern, and a parliamentary agenda item.

What does competition mean for Web 3.0?

So blockchain is being absorbed into the economy and global political system. But what does this mean for the future of the internet?

The other big question arising from the Consensus 2018 announcements was the extent to which the involvement of incumbent internet platforms, such as Microsoft and AWS, will affect the distributed nature of the emergent blockchain ecosystem.

Joseph Lubin, co-founder of Ethereum, argued that the technological foundations for a distributed future have been built and that the essential task now is to achieve scalability. Data storage is an important aspect of scalability that will be essential to the success of decentralised applications (dapps), and more radical solutions (such as the InterPlanetary File System, IPFS) are apparently not ready for widespread adoption.

The involvement of AWS in Kaleido enables enterprise participation in the Ethereum blockchain whilst ensuring that the data (including oracles) are housed securely. While numerous self-sovereign identity dapps are available (as displayed through Civic’s identity-checking beer vending machine at the conference), common standards are necessary for those providing verified information.

Microsoft’s partnership with Blockstack and Brigham Young University is a development towards these standards that is potentially significant for this new approach to online privacy.

Neither development necessarily threatens Web 3.0, but this is now being driven by a competitive logic of market forces.

Crypto constitutionalism

With Sinclair Davidson and Jason Potts. Originally a Medium post.

Blockchains are constitutional orders — rule-systems in which individuals (or firms, or algorithms) can make economic and political exchanges.

In this sense, blockchains look a lot like countries. They have currencies (tokens), property (digital assets), laws (protocols), corporations (DAOs), and security systems (proof-of-work, or proof of stake, or delegated byzantine fault tolerance, etc.).

And like countries, blockchains have systems of governance.

Satoshi built one system of governance into Bitcoin: how the network comes to a consensus when miners announce two equally valid blocks to the network. The protocol (the constitution) resolves this problem by incentivising nodes to prefer the chain with the most work.

But this is a tiny fraction of the governance questions that just surround Bitcoin. How should the Bitcoin network be upgraded? Who decides? How should the various interests be accommodated — or compensated?

In these blockchain governance debates — disputes about whether governance should be on-chain or off-chain, who writes the rules, who can be a node, the role of voting, and the relative position of protocol developers, miners, block producers, HODLers and third party applications — we’re seeing the history of thinking about political economy being rediscovered.

Happily there exists an enormous body of thinking on governance, constitutions, the function and efficiency of voting and voting mechanisms, and how power is allocated in a political and economic system.

Blockchains as constitutional experiments

Historically, experimenting with new constitutions has involved things like civil war, secession, conquest, empire, and expropriation. The English fought civil war after civil war to limit the power of the monarch to tax. Expanding the franchise involved protest and violence.

In the real world, constitutional experimentation is costly and slow: limited by the rights and preferences of real populations and the real endowments of physical land and property.

By contrast, blockchains offer a space for rapid, hyper-experimentation. New constitutional rules can be instantiated by a simple fork. New protocols can be released in months or weeks.

Blockchains are an environment for institutional innovation — a place to apply hundreds of years of thinking about political governance.

Why vote?

For instance, networks such as Decred, NEO and EOS use voting to manage their decentralised consensus mechanisms. Vitalik Buterin and Vlad Zamfir have argued that on-chain governance is overrated.

What this debate is missing is an understanding of the economics of politics. Blockchain developers aren’t writing protocols — they’re writing constitutions. And we know a great deal about constitutional design and voting mechanisms.

The first thing we know is that choosing the rules of a voting system is effectively choosing the result of the vote.

The eighteen-century mathematician the Marquis de Condorcet found that a three cornered vote using a simple majority rule might not come to a clear consensus on the winner. A might beat B, B might beat C, but C might beat A. The ‘ultimate’ winner of this cycle will depend on how the votes are ordered.

Kenneth Arrow generalised this into his impossibility theorem: there’s no unique procedure that reliably comes up with a stable ordering of aggregated preferences. A set of quite reasonable institutional assumptions — such as no dictator, the independence of irrelevant alternatives and so forth — can’t be combined.

The lesson economists have taken from all this is: tell me what you want, and I’ll design you a mechanism to get it. What matters is how we decide how to decide.

Public choice scholars have focused on problems how political agents shape their policy positions to suit median or marginal voters. Retrospective voting models suggest that voters assess how happy they are (in general, not just with politics) at the time of voting and vote for or against incumbents on that basis.

Other scholars have focused on why people even bother to vote — given there is a miniscule chance that they can change the outcome of a vote. This had led scholars to the theory of ‘expressive voting’, where voting is effectively a form of consumption or signalling.

This is a rich body of political and economic theory that has been absent from the blockchain governance space. For instance, is voting a positive or negative externality?

It depends on what the purpose of the voting is. If preference aggregation is your goal, ‘low-information’ voting is a problem — it introduces noise. Blockchains should then tax voting.

However, if simple legitimation is the purpose of voting (as Vlad Zamfir argued at the Ethereal conference) then even low-information voters add value. Ideally the mechanism would subsidise all voting.

The incentive design problem for blockchain voting depends on what you think the purpose of the voting is.

And it turns out that this question has been one of the over-riding concerns of economists, philosophers and political scientists for hundreds of years.

Only A Flesh Wound

With Sinclair Davidson

Howls of outrage from the ABC and its fans on social media over the most mild of cuts to the broadcaster’s budget ignore the fact of an institution that has drifted far away from its charter’s demands for objectivity.

Judging by the howls of outrage echoing through twitter it seems that the Turnbull government has destroyed our democracy, if not Australian civilisation itself. But no. The Turnbull government has frozen ABC operational funding for three years. That translates to a ‘funding cut’ of some $83 million.

Not $83 million per year, mind you. Over three years.

Not quite a rounding error, but hardly a crisis.

The ABC only has itself to blame. In the pre-budget period it went well out of its way to annoy the government. The prime minister – a former communications minister – is something of a fan. Yet the ABC chose to publish a highly opinionated and factually challenged analysis by the ABC’s Chief Economics Correspondent of the government’s centrepiece economic policy. Then there was the small matter of pooh-poohing the current communications ministers’ complaint about a conservative politician being pointlessly abused in a comedy skit.

These hostilities have not come cheap.

There may well be a market for ‘edgy’ humour, but the ABC’s efforts tend to boorishness. Reproducing flawed ALP and Greens talking points on company tax cuts as being ‘independent’ and ‘trust worthy’ is arguably a greater problem. These are not minor lapses in editorial policy – the ABC is politically biased and incapable of self-regulation.

Rather than viewing the ABC as a ‘trusted’ news source we should recognise it as being a political actor in its own right. Not just any sort of political actor. Journalists, as David Marr has suggested, are usually ‘vaguely soft-left’ and sceptical of authority.

The ABC, however, is not so vague and not so soft. A 2013 survey of journalists revealed that 41.3% of ABC journalists intended to vote Greens at the 2013 election. That compares with 19.8% of journalists at both Fairfax and News and just 8.7% of the electorate.

ABC journalists are well to the left of journalists in general, and nearly five times more likely to vote Greens than the general public.

To be fair – there is nothing wrong with voting Greens or being left-wing. Journalists are citizens too. But the ABC claims to be a bulwark of our democracy. While nearly 80% of Australians claim to believe that the ABC is balanced and even-handed there is a huge drop off in actual audience numbers. There are three to four times as many Australians who claim to trust the ABC than who actually watch the ABC. Sure 86% of Australians value to ABCs service to the community, but that probably reflects its status as an emergency broadcaster.

Generally there is no reason why political opinion should cloud professional performance. Coalition voting journalists are a minority even at News. Yet none of the mechanisms that crowd out personal preference operate at the ABC. It does not have to please advertisers, it does not have to earn a profit, nor does it not have to explain itself to controlling shareholders.

To claim that the ABC Charter constrains it is laughable. The Charter is written in legislation but it is not law. It doesn’t require anyone to do anything, it contains no penalties for non-compliance, and it has no enforcement mechanism. If only the Tax Act worked on the same principles.

The ABC pleases itself; in practice that means it pleases its staff. To the extent that many ABC journalists are professional in their activities that is a personal preference and not institutional discipline.

Unsurprisingly the ABC does as it pleases and largely it gets away with doing as it pleases.

Being stripped of a mere $83 million over three years is a very mild rebuke from an otherwise indulgent government. Yet the ABC seems to have chucked a temper tantrum in response. Threats to bully the government into restoring funding indexation should be resisted.

Rather than simply restore indexation after three years the Turnbull government should be looking at innovative market solutions to commercialise and professionalise the ABC. Expecting value for money from the ABC is not an attack on its independence but rather a minimum expectation of any government program that costs the taxpayer $1 billion per annum.

Some economic consequences of the GDPR

With Darcy Allen, Alastair Berg and Jason Potts.

At the end of May 2018, the most far reaching data protection and privacy regime ever seen will come into effect. Although the General Data Protection Regulation (GDPR) is a European law, it will have a global impact. There are likely to be some unintended consequences of the GDPR.

As we outline in a recent working paper, the implementation of the GDPR opens the potential for new data markets in tradable (possibly securitised) financial instruments. The protection of people’s data is better protected through self-governance solutions, including the application of blockchain technology.

The GDPR is in effect a global regulation. It applies to any company which has a European customer, no matter where that company is based. Even offering the use of a European currency on your website, or having information in a European language may be considered offering goods and services to an EU data subject for the purposes of the GDPR.

The remit of the regulation is as broad as its territorial scope. The rights of data subjects include that of data access, rectification, the right to withdraw consent, erasure and portability. Organisations using personal data in the course of business must abide by strict technical and organisational requirements. These restrictions include gaining explicit consent and justifying the collection of each individual piece of personal data. Organisations must also employ a Data Protection Officer (DPO) to monitor compliance with the 261-page document.

Organisations collect data from customers for a range of reasons, both commercial and regulatory — organisations need to know who they are dealing with. Banks will not lend money to someone they don’t know; they need to have a level of assurance over their customer’s willingness and ability to repay. Similarly, many organisations are forced to collect increasingly large amounts of personal data about their customers. Anti-money laundering and counter-terrorism financing legislation (AML/CTF) requires many institutions to monitor their customers activity on an ongoing basis. In addition, many organisations derive significant value from personal data. Consumers and organisations exchange data for services, much off which is voluntary and to their mutual benefit.

One of the most discussed aspects of the GDPR is the right to erasure — often referred to as the right to be forgotten. This allows data subjects to use the government to compel companies who hold their personal data to delete it.

We propose that the right to erasure creates uncertainty over the value of data held by organisations. This creates an option on that data.

The right to erasure creates uncertainty over the value of the data to the data collector. At any point in time, the data subject may withdraw consent. During a transaction, or perhaps in return for some free service, a data subject may consent to have their personal data sold to a third party such as an advertiser or market researcher. Up until an (unknown) point in time — when the data subject may or may not withdraw consent to their data being used — that personal data holds positive value. This is in effect a put option on that data — the option to sell that data to a third party.

The value of such an option is derived from the value of the underlying asset — the data — which in turn depends on the continued consent by the data subject.

Rational economic actors will respond in predictable ways to manage such risk. Data-Backed Securities (DBS) might allow organisations to convert unpredictable future revenue streams into one single payment. Collateralised Data Obligations (CDO) might allow data collectors to package personal data into tranches of varying risk of consent withdrawal. A secondary data derivative market is thus created — one that we have very little idea of how it will operate, and what any secondary effects may be.

Such responses to regulatory intervention are not new. The Global Financial Crisis (GFC) was at least in part caused by complex and rarely understood financial instruments like Mortgage-Backed Securities (MBS) and Collateralised Debt Obligations (CBS). These were developed in response to poorly designed capital requirements.

Similarly, global AML/CTF requirements faced by financial institutions have caused many firms to simply stop offering their products to certain individuals and even whole regions of the world. The unbanked and underbanked are all the poorer as a result.

What these two examples have in common is that they both have good intentions. Adequate capital requirements and preventing money from being cleaned by money launderers are good things, but good intentions are not enough. Secondary consequences should always be considered and discussed.

Self-governance alternatives, including the application of blockchain technology, should be considered. These alternatives use technology to allow individuals greater control over the personal data they share with the world.

Innovators developing self-sovereign identity solutions are attempting to provide a market based way for individuals to gain greater control over — and derive value from — their personal data. These solutions allow users to share just enough data for a transaction to go ahead. A bartender doesn’t need to know your name or address when you want a drink, they just need to know you are of legal age.

Past instances of regulatory intervention should make us cautious that even well-meaning regulation will achieve its stated objectives with no negative effects. Self-sovereign identity, and the use of blockchain technology is a promising solution to the challenges of data privacy.

Sober liberal

A review of Sir Joseph Carruthers: Founder of the New South Wales Liberal Party by Zachary Gorman, Connor Court, Qld, pp.425, $59.95

Australia has a rich heritage of nineteenth century classical liberalism. But that history has been almost completely lost in the flood of historical work focusing on either federation or the labour movement. Zachary Gorman’s new biography of Sir Joseph Carruthers, the nineteenth century free trade liberal and founder of the Liberal party of New South Wales, helps balance the ledger – recovering the tradition of free market liberalism that has been so significant in Australian history.

In many ways, Joseph Carruthers embodies that tradition, with its strengths and flaws. In the colonial era liberal political thought was one of the dominant strands of public life, and Carruthers’ career reflected its dominance. Born in 1857, he entered NSW politics in 1887. Carruthers was a father of federation, a minister under Henry Parkes and George Reid, and after the establishment of the Commonwealth became premier of New South Wales. He only left politics when he died in 1932.

Like his university friend George Reid, Carruthers was a great admirer of William Gladstone. He believed in balanced budgets, individual liberty, and that ‘we should encourage commerce in its freest sense’ (as he once informed a branch meeting of the Labour Electoral League).

Carruthers was a liberal, but not a radical one by the standards of the time. Gorman positions him as a moderate, or pragmatic liberal within the free trade movement. On one side was Bernard Wise, whose support for free trade was matched with a pro-government intervention and regulation program. On the other side was the radical free market liberalism of Bruce Smith, whose 1887 book Liberty and Liberalism was a full-frontal attack on the left-liberalism advocated by people like Wise. A working politician has to satisfy multiple constituencies. Carruthers was no exception, balancing both liberal and conservative supporters, as well as managing coalitions with the progressives.

Histories of political life can sometimes be a little deadening. Much drama in politics consists of a stream of legislation and amendment, which can be both complex and (in the hands of poor biographers) dull. Gorman does not fall into this trap: he is able to very clearly explain the significance of each well-chosen controversy in a way that makes the relevance to liberalism and Carruthers’ life obvious.

Gorman is also sensitive to instances of where Carruthers’ thought deviated from classical liberal ideas. These are worth detailing, because classical liberals have not always lived up to their underlying belief in the inherent equality and political dignity of all people. One philosophically minor but historical significant example was temperance. His father had struggled with alcohol and was ultimately involved in the temperance movement. Likewise many of the Liberal party voters were motivated by temperance. Gorman writes that Carruthers believed ‘liberalism could bend on this issue’. Carruthers ended up supporting the so-called ‘local option’ which handed the regulation of liquor licences to electorates and municipalities – not always a win for liberty.

More serious to modern readers was Carruthers’ opposition to female suffrage, for which he believed the case had not yet been made. His was perhaps a half-hearted opposition, and he later supported the suffragette movement in Britain when he visited there in 1908. But his stance compares poorly with some contemporaries like Bruce Smith, who actively called for universal suffrage in Australia.

Carruthers’ attitude to immigration presents a similar story. While being supportive of high immigration levels, he also backed the white Australia policy on the grounds that a multiracial society could harbour ethnic tensions. This view changed when he began to visit Hawaii, as he did regularly late in life. He saw there a society in which Americans, native Hawaiians, Japanese and Filipinos coexisted prosperously, helped in no small part by American free trade relationships.

Carruthers’ views were more admirable when it came to the relationship between colonists and the Indigenous population. As a child growing up in Macleay he had spent much time playing with Aboriginal children, and he maintained a sympathy with Indigenous people his whole life. He wrote later of the ‘ruthless indifference [of] the whites, who have invaded their homelands, bringing with them new diseases and vile habits, and sometimes unspeakable cruelties that have unnecessarily wiped out millions of so-called inferior and backward peoples’. Carruthers’ language often betrayed a paternalistic or patronising mindset but he was more wide-eyed than most about who bore the costs of colonialism.

For the most part, Carruthers was a needed defender of liberal values. During the First World War he refused to get too caught up with the anti-liberal sentiment of wartime Australia, and opposed the NSW government’s sedition bill (which had been mainly targeted at the labour movement).

This is not the first full length biography of Carruthers. Beverly Earnshaw published One Flag, One Hope, One Destiny: Sir Joseph Carruthers and Australian Federation in 2000, which as its title suggests finds interest in Carruthers because of his federation role. (Carruthers’ own memoirs also received commercial publication in 2005.) But for Gorman, Carruthers’ greatest legacy is the New South Wales Liberal party, which he views as one of the crowning organisational achievements of nineteenth century liberalism. While it has repeatedly changed its name, the NSW Liberal Party is still, organisationally, the same entity today as the one Carruthers established as the Liberal and Reform Association in 1902.

For modern classical liberals the post-Federation decade has a somewhat melancholy tone. The rise of the Labor party led to an alliance, and then fusion, between the free traders and protectionists under the banner of anti-socialism. Gorman’s book both adeptly navigates this history, and, with his picture of nineteenth century liberalism, underlines just what we lost.

Are Australians ready to embrace libertarianism?

How much influence does libertarianism have on Australian politics? The first thing to know is that the Australian political system has very few libertarians in it.

The only federal member of parliament to self-describe as a libertarian is Senator David Leyonhjelm of the Liberal Democratic Party. Other candidates – like my former colleagues at the Institute of Public Affairs (IPA), Senator James Paterson and Tim Wilson – describe themselves as classical liberals.

Ideological classifications can get very tedious very quickly, but generally libertarianism is a variety of classical liberalism. Both philosophies believe that public policy should be designed to maximise free markets and civil liberties. That is, governments should get out of both the wallet and the bedroom. Libertarianism is generally seen as inhabiting the more radical end of the classical liberal spectrum.

A 2007 study published by the Centre for Independent Studies (CIS) estimated that 3–6% of the Australian electorate were classical liberals. So it is unsurprising they have little electoral influence on Australian politics.

The reason libertarians and classical liberals exercise some degree of influence is that they make up a disproportionate share of Australia’s policy wonks, think tank staff (especially at the IPA and CIS), and political commentators.

An extremely big tent

Australia’s right-of-centre political community is not so large as to have exclusively libertarian or conservative think tanks, as exist in the United States. Everyone works together. This co-mingling hasn’t generally been an issue because Australian political debate has tended to pivot around economic issues (taxation, regulation, privatisation) or basic shared liberty issues (like freedom of speech) rather than the thorny moral debates that might divide the two camps.

Occasionally there have been polarising issues. Same-sex marriage is one. Conservatives were generally opposed, while libertarians tended to be in favour. But there was also broad agreement that any change to marriage laws should also protect religious freedom.

Immigration – particularly asylum seeker policy – is another. Libertarians are inclined towards freer immigration, whereas conservatives want more control over the borders. Here the tiny number of libertarians have been completely ineffective against the policy stalemate.

For the most part, there is much agreement between conservatives and libertarians about the current state of Australian politics. Both think the Turnbull government is a disappointment, for much the same reasons. It failed on the campaign to repeal section 18C of the Racial Discrimination Act, which has become an iconic restriction on free speech. It has also repeatedly raised taxes, and been unable to drive any serious economic reform.

This may sound excessively Pollyanna-ish, as if everything is just swell between Australian conservatives and libertarians. Much has been said (almost all by commentators on the left) about a political split between libertarians and classical liberals on the one side and conservatives on the other. But I don’t really see it.

In the US, the fusion movement of the 1950s and 1960s was a deliberate project to build an alliance between these two distinct systems of political thought. The presidency of George W. Bush pushed that alliance to breaking point, and it seems the Trump administration has broken it.

By contrast, Australian politics has never been large enough to maintain such divergent streams. Every Liberal prime minister has for the most part maintained a sort of centre-right middle ground that kept everyone equally disappointed and dissatisfied. People are leaving the Liberal Party under the Turnbull government, not because it is too conservative or libertarian, but because it is too, well, nothing.

Liberal achievements and libertarian growth

The last quarter of the 20th century saw Australian public policy take major strides in a classical liberal direction. The economic reform movement that substantially liberalised the economy was matched with social reforms such as the decriminalisation of homosexuality and the repeal of obscenity laws.

I’ve argued in the past that Australian economic thought has had a distinct – even occasionally dominant – classical liberal tradition. There is no question that this tradition has driven policy debate and reform at a few key historical moments.

Though classical liberal efforts were often focused on economics rather than social policy, it’s worth pointing out that the IPA was one of the key voices against state overreaches such as the Hawke government’s ill-fated Australia Card, and more recently, mandatory internet data retention.

In recent years, there has been some notable growth of libertarianism as a self-aware and distinct group. A large part of that has been the Friedman Conference – named after Milton Friedman, David Friedman and Patri Friedman, who represent nearly the entire spectrum of classical liberal/libertarian thought in one family – which attracts hundreds of libertarians and fellow travellers to Sydney every year.

The Friedman Conference is in its sixth year, thanks to the organisational efforts of Tim Andrews (of the Australian Taxpayers’ Alliance) and John Humphreys (of the Australian Libertarian Society). The political success of the Liberal Democrats with David Leyonhjelm in the Senate is another factor in libertarianism’s modest gains.

My hope is that this sort of organisational effort fosters the idea in Australia of libertarianism as a distinct political philosophy, not just a quirky sub-category of the Australian right.

There is a need for this. The challenges we face now are not the same as they were in the over-mythologised 1980s. The combination of growth of the regulatory state, radical technological change, and the crisis of democratic trust require new ideas and new policy solutions. Libertarianism offers a framework to understand how these economic and social questions interact.

Outsourcing vertical integration: introducing the V-form network

With Sinclair Davidson and Jason Potts. Originally a Medium post.

The Nobel laureate Oliver Williamson distinguishes between U-form companies and M-form companies.

Traditional U-form companies are unitary— their units are divided by business process (for instance, accounting, human resources, component manufacturing, assembly) and are not treated as separate cost centres.

M-form companies are multidivisional — their units are self-contained divisions that report profits and losses to an umbrella central body. They’re fully owned by a parent company, but they tend to have their own business services (accounting and human resources departments, for instance) and even market relationships.

But now we see a new corporate form — the V-form network — made possible because thanks to the application of distributed ledger technology to supply chain problems.

These V-form networks consist of a number of fully independent companies that effectively operate as one vertically integrated company through blockchain technology, coordinated and supplied by a third party.

This is a big change to the nature of the firm. We can already see V-form networks in the real world. They date as far back as January. It is surprising the economic community haven’t noticed them yet.

The IBM and Maersk TradeTech

Two weeks into 2018, IBM and the shipping giant Maersk announced a joint venture to develop a digital supply chain management system on their Hyperledger blockchain platform. Hyperledger is a private blockchain which requires permission to access.

In a previous Cryptoeconomics piece, we described how international trade is an information problem. As goods are shipped around the world, they are accompanied by information — really stacks of paperwork — that describe their provenance, destinations, regulatory and tax liabilities and so on.

In the IBM-Maersk system, each firm and bureaucracy in the supply chain — producers, shippers, port authorities, regulators, importers, retailers — will access and update a shared blockchain ledger containing all the information needed by each organisation.

And each organisation would have access to that information everywhere, ensuring complete visibility on where goods are in the world and which economic and regulatory hurdles they next need to overcome.

Before blockchains, there were only two basic ways to coordinate a supply chain: vertical integration, or regulation.

Vertical integration has problems. Large conglomerate firms struggle with the challenges of specialisation, and size tends to make firms less efficient.

Regulation has even worse problems. At the very minimum, regulation only works plausibly well within a single nation. The cost of multilateral harmonization — which includes things like treaties and global courts — is very high.

Blockchains can work to coordinate supply chains without the need for either (traditional) vertical integration or regulation. The vertical integration is outsourced to a distributed ledger. The blockchain provides the managerial service that coordinates each ‘unit’ (that is, firm) in the supply chain.

Regulators in any country can deal any firm in the supply chain as if it was a small unit of a larger, global company.

Each firm in the supply chain get the benefits of vertical integration through a network rather than a hierarchy.

The crucial role of IBM and Maersk

In this, the IBM and Maersk joint venture plays a novel economic role.

We’ve written in the past about the paradox of trust in the blockchain world: it takes a lot of trust to establish a trustless ledger.

Imagine a supply chain with seven firms in it: primary producer, manufacturer, exporter, shipper, importer, wholesaler, retailer. Each firm has an established and trusted business relationship with the firms above and below them on the supply chain. But do they have a similar relationship with those one- or two-steps removed? Would the wholesaler in one country necessarily trust the primary producer in another?

A supply chain of two or three firms would be able to easily come to an agreement over shared digital systems. They wouldn’t even need a blockchain — market discipline would be enough to ensure stable coordination.

But firms which do not have direct market relationships with each other face a trust problem when they try to coordinate.

IBM-Maersk provide the trust. They are a large trusted firm that can broker a solution — get all parties around a table — and build the network.

This is a different sales and service model to the IBM of the 1960s. But not that different. With Hyperledger for supply chains, IBM is selling a single solution to multiple clients — just as they did with mainframes or do today with their Watson artificial intelligence machine.

It is only possible because IBM (and Maersk) has already built up deep client relations over past century or so. It is both trusted and has internal information and knowledge about client needs.

(A regulator has none of this information. Neither would a potential corporate raider attempting to vertically integrate through a merger and acquisition strategy.)

We expect to see competition between firms (IBM and and other full-stack technology/strategy/management consultants) to seek ongoing (that is, locked in) contracts for these sorts of services.

The innovative thing here is that they aren’t offering their services to individual firms. They are consulting to a group, or chain, or network of firms — a network that they may have themselves helped create. Economic coordination in the simplest sense of the term.

That’s why IBM is involved. But why is Maersk? The shipping company in this case is the firm with the most to gain from the adoption of the new technology and architecture — that is, which would benefit most from reducing the costs of the existing market architecture.

Vertical integration can be outsourced elsewhere

In the V-form network, the blockchain’s token establishes the consortium, and incentivizes cooperative behaviour.

The token also serves to move rents around the network. In this way, the blockchain provides a market mechanism to solve the sort of bargaining problems described by another Nobel laureate, Ronald Coase, that may occur as the network operates.

Outsourced vertical integration could be applied to many industries that are now integrated. Energy firms that currently integrate the exploration, production, generation, and retail of electricity might be better decomposed, with blockchains and tokens taking the place of head offices. The token economy, rather than energy regulators, could make decisions about the distribution of rents around the network.

We expect that a blockchain economy will have more, smaller firms linked together by protocols. One question — which we expect will preoccupy regulators for decades to come — is how just many protocols? It’s worth pointing out that these networks are inherently global, and any regulatory questions global as well.

Governments might be able to exploit the V-form network themselves. Instead of selling a vertically integrated state-owned asset to shareholders (and then controlling rents with price regulation) they could then privatise components directly on a blockchain network. Ports and airports might be privatised successfully in this way.

In that sense governments would provide the initial coordination now being provided by IBM and Maersk — a trusted third party to broker and establish a decentralised economic network.

Tradetech and the problem of international coordination

With Darcy Allen, Sinclair Davidson, Mikayla Novak, and Jason Potts. Originally a Medium post.

International trade is an information problem.

As goods move between firms and across borders, information about the provenance, characteristics, and compliance liabilities (whether they are subject to taxes or tariffs) of those goods move alongside them.

Handling companies need to know which goods are going where.

Regulators and trade authorities need to know whether the goods crossing a national border are compliant with domestic regulations.

(Does a good need an import permit? Does it require any special documentation? In Australia the Minimum documentary and import declaration requirements policy is a 27 page document.)

And end-users increasingly demand information about where their goods came from and how they were produced.

(Consumers want to know where their food is grown, whether it was grown to organic standards, or was manufactured gluten-free or nut-free. Advanced manufacturing firms want assurances that components — such as aircraft or wind turbine parts — are of high quality. And everyone wants assurances that their goods have been looked after while in transit.)

The result is piles of documentation shipped alongside internationally traded goods.

And the demand for documentation is growing. Supply chains are getting more complex. Regulatory requirements are increasing. End-users want more information about what they’re buying.

Introducing TradeTech

FinTech is the application of new technology — particularly developments in computer science — to the financial services industry. RegTech does the same for regulatory compliance.

Now we have TradeTech — the application of information technology to reduce the information costs of international trade.

TradeTech can reduce transaction costs, increase transparency for firms, regulators, and consumers, facilitate trade finance, and significantly lower regulatory and tariff compliance burdens.

Tackling border costs

One TradeTech application, blockchains used to manage supply chains, have the potential to provide a new digital services infrastructure for international trade in goods.

Blockchains use a combination of cryptography and economic incentives to allow people to come to a consensus on a shared digital ledger without the need for a trusted third party. Blockchains are a technology for secure non-hierarchical information governance.

Blockchains can store information about the provenance and distribution of tradable goods through the entire supply chain in circumstances where firms (and regulators) through the supply chain do not necessarily trust each other.

The invention of the shipping container in the 1950s radically transformed international trade by tackling the high cost — and unreliability — of getting goods on and off ships intact.

But in the 2010s, it isn’t the cost of transport that is the biggest burden on international trade. According to IBM and Maerskthe costs of bringing goods across borders are higher than the costs of transport costs.

In 2018 and 2019 we expect blockchains used in supply chains and to facilitate global trade will be one of the breakthrough blockchain use cases.

The impact of this sort of TradeTech will provide an enormous boost to the potential for global trade.

Facilitating trade flows

The information flows that facilitiate international trade are still to a remarkable degree governed and organised on a one-to-one basis and using paper. Each firm in a global supply chain passes off information relating to a tradeable good to each other one step at a time, vouchsafing that information until it can be passed to the next firm on the chain.

Furthermore, despite two decades of the digitisation of global commerce, it is still the case that international trade is a significantly paper-based process — which is slow, error-prone and raises fraud risks.

The growth of the regulatory state over the last thirty years has significantly increased the compliance costs of trade. While regulatory harmonisation and tariff reductions have encouraged larger volumes of trade, these have been matched by greater demands for information those goods travelling across borders.

New regulatory concerns about labour, environmental, chemical, and biosecurity standards are being reflected in international trade agreements and are translating into more regulatory requirements at the border.

Longer and more complex supply chains as a result of globalisation has multiplied these compliance burdens.

Blockchains can provide a ‘rail’ on which all this information travels.

Blockchains are uniquely suited for an era of advanced globalisation, the regulatory state, and demand for information about product origins and quality.

But TradeTech needs multilateral coordination

Private industry is developing the technology for blockchain-enhanced supply chains.

But there is the need for an international coordination to ensure that industry is able to exploit the opportunities this technology presents.

For example: information rmanaged on blockchains needs to be accepted as valid and compliant by domestic regulators.

One risk is that industry-developed blockchains might not be not treated as compliant with existing regulations. Goods could then remain subject to existing paper-based processes, necessitating double-handling of compliance and reducing the benefits of blockchain-enhanced trade.

Another risk is that individual trading countries adopt their own standards, which would also necessitate double-handling.

A further risk is that standards are developed by early market leaders in the blockchain-facilitated trade space, are adopted by regulators and trade authorities on an ad-hoc basis, and through regulatory lock-in limit the contestability of this trade infrastructure.

The benefits of TradeTech will be realised in a world of open-standards, rather than closed ones.

Multilateral bodies like APEC (Asia-Pacific Economic Cooperation) should be considering these questions now.

We don’t think governments should try to regulate the development of blockchain technology, or compel its introduction. The blockchain is an experimental technology that needs space to evolve. But there is a clear role for multilateral bodies to set standards for information managed through blockchains.

TradeTech doesn’t need government regulation or direction. But it does need government cooperation.