The Cryptoeconomics of Cities, Data and Space

With Darcy W E Allen, Kiersten Jowett, Mikayla Novak, and Jason Potts. Published in in Cosmos + Taxis, Volume 8, Issue 8 + 9, 2020

Abstract: We explore the connection between new decentralised data infrastructure and the spatial organisation of cities. Recent advances in digital technologies for data generation, storage and coordination (e.g. blockchain-based supply chains and proof-of-location services) enables more granulated, decentralised and tradeable data about city life. We propose that this new digital infrastructure for information in cities shifts the organisation and planning of city life downwards and opens new opportunities for entrepreneurial discovery. Compared to centralised governance of smart cities, crypto-cities are more emergent orderings. This paper introduces this research agenda on the boundaries of spatial economics, the economics of cities, information economics, institutional economics and technological change.

Available at Cosmos + Taxis and in PDF here. Preprint available at SSRN. (Previously titled ‘Spatial Institutional Cryptoeconomics’)

Blockchain and the Evolution of Institutional Technologies: Implications for Innovation Policy

Research Policy, Volume 49, Issue 1, February 2020. With Darcy WE Allen, Brendan Markey-Towler, Mikayla Novak, and Jason Potts

Abstract: For the past century economists have proposed a suite of theories relating to industrial dynamics, technological change and innovation. There has been an implication in these models that the institutional environment is stable. However, a new class of institutional technologies — most notably blockchain technology — lower the cost of institutional entrepreneurship along these margins, propelling a process of institutional evolution. This presents a new type of innovation process, applicable to the formation and development of institutions for economic governance and coordination. This paper develops a replicator dynamic model of institutional innovation and proposes some implications of this innovation for innovation policy. Given the influence of public policies on transaction costs and associated institutional choices, it is indicated that policy settings conductive to the adoption and use of blockchain technology would elicit entrepreneurial experiments in institutional forms harnessing new coordinative possibilities in economic exchange. Conceptualisation of blockchain-related public policy an innovation policy in its own right has significant implications for the operation and understanding of open innovation systems in a globalised context.

Available at Research Policy. Accepted version available at SSRN.

International policy coordination for blockchain supply chains

With Darcy Allen, Sinclair Davidson, Mikayla Novak and Jason Potts. Published in Asia & The Pacific Policy Studies, 30 May 2019

Abstract: From the adoption of the shipping container to coordinated trade liberalization, reductions in trade costs have propelled modern globalization. In this paper, we analyse the application of blockchain to reduce the trade costs of producing and coordinating trusted information along supply chains. Consumers, producers, and governments increasingly demand information about the quality, characteristics, and provenance of traded goods. Partially due to the risks of error and fraud, this information is costly to produce and to maintain between dispersed parties. Recent efforts have sought to overcome these costs—such as paperless trade agendas—through the application of new technologies. Our focus is on how blockchain technology can form a new decentralized economic infrastructure for supply chains by governing decentralized dynamic ledgers of information about goods as they move. We outline the potential economic consequences of blockchain supply chains before examining policy. Effective adoption faces a range of policy challenges including regulatory recognition and interoperability across jurisdictions. We propose a high‐level policy forum in the Asia‐Pacific region to coordinate issues such as open standards and regulatory compatibility.

Available at Wiley Online.

Blockchains and Constitutional Catallaxy

With Alastair Berg and Mikayla Novak

Abstract: The proposition that constitutional rules serve as permanent, fixed points of interaction are challenged by observations of contestable rule amendment and the emergence of de facto authority. This observation not only applies to conventional political constitutions, but to the fundamental rules which govern interactions by numerous people using new forms of technology. Blockchain technology aims to coordinate action in a world of incomplete information and opportunism, but the governance arrangements in blockchain protocols remain far from settled. Drawing upon recent theoretical developments regarding constitutional change, we interpret changes to the fundamental working rules of blockchain protocols as central to the adaptive, emergent nature of activity within this technological space. We apply this concept of “constitutional catallaxy” to selected blockchain platform case studies, illustrating the dynamism inherent in establishing protocols within the blockchain. Blockchain coordination changes and adapts not only to the technological limitations of the available protocols, but to mutual expectations and influence of interacting stakeholders.

Available at SSRN

From Industry Associations to Ecosystem Associations: Blockchain, Interest Groups and Public Choice

With Mikayla Novak, Jason Potts and Stuart J Thomas

Abstract: Conventional public choice literature suggests that interest groups have a largely malign effect upon the economy. Suggesting that interest groups are primarily established to lobby governments for rents, the public choice approach essentially rests upon normative presumptions concerning the appropriateness of relationships between interest groups and the state. This analysis tends to overlook constructive roles undertaken by interest groups to facilitate economic coordination, including the facilitation of technology adoption, and to collaborate with political and other actors to overcome obstacles to innovation and industry dynamics. The development of blockchain technology in recent years serves as a useful case study illustrating the role of interest groups in contributing toward the development of a blockchain-enabled economy. We provide support for our general hypothesis of a beneficial economic contribution by interest groups by profiling the activities of blockchain industry associations. This paper also considers to what extent interest group involvement in blockchain coordination and governance is designed to pre-emptively avoid more stringent governmental action, or respond to perceived inadequacies in public policy settings. This study contributes to a revision of public choice scholarship regarding the appropriateness of interest group activity.

Available at SSRN.

Blockchain: An Entangled Political Economy Approach

With Darcy Allen and Mikayla Novak. Published in the Journal of Public Finance and Public Choice.

Abstract: This paper incorporates blockchain activities into the broader remit of entangled political economy theory, emphasising economic and other social phenomena as the emergent by-product of human interactions. Blockchains are a digital technology combining peer-to-peer network computing and cryptography to create an immutable decentralised public ledger. The blockchain contrasts vintage ledger technologies, either paper-based or maintained by in-house databases, largely reliant upon hierarchical, third-party trust mechanisms for their maintenance and security. Recent contributions to the blockchain studies literature suggest that the blockchain itself poses as an institutional technology that could challenge existing forms of coordination and governance organised on the basis of vintage ledgers. This proposition has significant implications for the relevance of existing entangled relationships in the economic, social and political domains. Blockchain enables non-territorial “crypto-secession” not only reducing the costs associated with maintaining ledgers, but radically revising and deconcentrating data-conditioned networks to fundamentally challenge the economic positions of legacy firms and governments. These insights are further illuminated with reference to finance, property and identity cases. Entangled political economy provides a compelling lens through which we can discern the impact of blockchain technology on some of our most important relationships.

Fast track available at the Journal of Public Finance and Public Choice

Crypto Public Choice

With Alastair Berg and Mikayla Novak

Abstract: This paper presents ‘crypto public choice’ which examines the economics of collective decision making in the functioning of blockchain protocols and among related communities of users. We introduce the blockchain community to public choice theory and show how it can be applied to the study of this technology. Public choice offers an extensive literature that can be applied to blockchain design, can interpret the actions of different types of blockchain users, and can explain governance problems and challenges in each of the blockchain protocols. Blockchains are institutional technologies which provide new ways in which to produce public goods including consensus over shared facts and the security of property rights. Collective decision making by users of blockchain protocols relates to consensus over the contents of a shared ledger, as well as the initial design and subsequent upgrading of these protocols.

Working paper available at SSRN

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.

The Case for No

With Mikayla Novak

Make that three times. One of the happy casualties of Kevin Rudd’s decision to go to an election one week before Julia Gillard’s preferred date of September 14 is the referendum to recognise local government in the Australian Constitution. Local government recognition was defeated at a referendum in 1974. It was defeated again in 1988. Now it has been abandoned in 2013.

Let’s hope this is the last time this terrible idea gets up.

Anthony Albanese, the Commonwealth Minister for Local Government, was eager to point out that the change to the constitution proposed was only 17 words. The referendum to recognise local government would have amended Section 96 to read:

96 Financial assistance to States and local government bodies.

During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State, or to any local government body formed by a law of a State, on such terms and conditions as the Parliament thinks fit.

Local governments and their peak lobbies said this was a minor, technical change. Albanese has described it as ‘modest’ and ‘sensible’. Julia Gillard said it simply ‘reflect[ed] modern reality’. The Lord Mayor of Sydney, Clover Moore said it ought to be ‘non-contentious’.

It was anything but. The change to Section 96 was one of the most significant, dangerous, and consequential constitutional amendments ever proposed. It would have completely unbalanced Australia’s system of government. It would have freed the Commonwealth from any spending constraint. It would have unleashed local government fiscal recklessness. And it would have eliminated the checks and balances embedded in a federal constitution.

The referendum may not be going ahead — thank goodness — but it was a brief window into one of the most deep-seated problems of Australia’s constitution, and a reminder of how the biggest power grabs are dressed up as minor housekeeping.

The uncertain place of local government

There is one small way the advocates of a local government referendum are right: councils are strange beasts: they’re half state government departments, half autonomous democratic governments in their own right.

The development of Australian local government by colonial governments was among the many institutional innovations enacted during the nineteenth century.

Town trusts were established throughout Western Australia in 1838 primarily for the management and funding of roads. This was followed shortly thereafter by the first elected municipal council in Australia, established in Adelaide in 1840, and similar bodies in Sydney and Melbourne two years later.

By the late nineteenth century local government bodies were widespread and, notwithstanding interstate variations, they were generally responsible for a myriad of functions and activities, such as roads, tramways and other public transport, water supply and sanitation, gas facilities and other local infrastructures.

In some jurisdictions, local governments during the colonial era were responsible for the provision of local schooling, care for orphans and the sick, cultural and recreation services including libraries and public gardens, and even the control of prostitution. Some of these functions have been maintained to this day, whilst others such as direct provision of infrastructure services have been allocated to the states or devolved to the private sector.

While the division of powers in a federated Australia were central to the discussions at the Constitutional Conventions of the 1890s, local governments were largely overlooked due to the understanding that local governments were, and remain to this day, the legal and administrative responsibility of individual states. There was little by way of direct financial relationships between the commonwealth and the states for most of the twentieth century, although tied roads grant funding to the states had an indirect effect on local road works, and councils had some involvement in the growing post war preoccupation with regional planning by commonwealth and state governments.

The size and scope of local government services significantly expanded during the 1970s, as the Whitlam government initiated a direct commonwealth local funding relationship which provided grants funding, bypassing the states, for programs including senior citizens’ centres, leisure facilities, urban transport and tourism.

The ratcheted federal funding to councils reflected Gough Whitlam’s own perception that ‘there are few aspects of our environment or our development, our culture or our welfare which can be adequately tackled without involving local government.’

And, he ought to have added, ‘without sidelining state governments’. Whitlam’s agenda was highly political: local government financial recognition was a vehicle for the traditional Labor Party hostility to the states. Canberra felt that the federal structure of government was a roadblock to its grand plans for bigger government and social reform.

Voters felt otherwise. When Whitlam put the question of local government recognition to a referendum in May 1974, the No case won. While the Fraser government abstained from some of the more interventionist aspects of Whitlam’s intrusion into local affairs, the general architecture of Whitlam era commonwealth funding arrangements to councils and shires remains to this day.

The constitution allows the Commonwealth to fund local government two separate ways. Section 51 gives the federal government power to make policy and spend money in thirty-two separate areas — such as the administration of the postal and telecommunications networks, immigration, banking, weights and measures. Section 51 was designed to neatly divide up the roles and responsibilities of government between the Commonwealth and the states. The Commonwealth can give whatever money it wants to whoever it likes if it is acting in one of the areas allocated to it by Section 51.

The other way is through Section 96, which allows the Commonwealth to pass money to local governments through state governments. Section 96 was added to the constitution at the last minute. It has no international precedent in other constitutions. And it has completely undermined the clean divisions of Section 51. Section 96 currently allows the federal government to pay state governments to do whatever the Commonwealth cannot, and allows them to impose tight terms and conditions on that funding.

This broad section is how the Commonwealth is now involved in education, health and housing. It is Section 96 that is to blame for the ‘blame game’ — the confusion of roles and responsibilities in Australian public policy.

In other words, Section 96 should be scrapped, not expanded. Adding local government to the mix would supercharge this terrible constitutional provision. The Commonwealth would be able to completely bypass the states. Unlike state governments, local governments have no stake in the division of roles in the constitution. They have no powers to protect. They’re also easier to bully: it would be much simpler for Canberra to manipulate and control 565 small councils than six well-funded states jealously protecting their sovereignty.

Local governments fantasise that Commonwealth money would be liberating. This is only half-true. Local governments would be financially empowered, but they would also be tools of Commonwealth policy.

There is a desperate hunger in Canberra for more control over every area of public policy. During his first term as prime minister, Kevin Rudd even said the Commonwealth should assume responsibility for urban planning — the quintessential local and state government role. Given the steady centralisation of power over the last hundred years, aided in no small part by Section 96, it is virtually a certainty that every local government policy will be eventually decided in Canberra, far from the local communities they effect. But the last thing we want is Commonwealth bureaucrats deciding local rubbish and recycling policies.

Unleashing local government recklessness

The current system has one distinct benefit: state supervision of local government has kept councils from soaking ratepayers.

Since the late 1970s the New South Wales state government has maintained a ‘rate pegging’ system, which sets the maximum percentage increase to general revenue, including municipal rates and some user charges, for councils.

Other states have also employed rate pegging in the past, such as Victoria and South Australia during the 1990s.

Several interrelated reasons have been put forward in support of pegging the growth rate in rates. These include the desire to constrain cost of living increases faced by rate paying households, and the prevention of fiscal
exploitation by local governments in setting rates which finance monopoly goods and services.

Efficiency arguments in favour of rate pegging could also be posed, in the sense that constraints on municipal rate increases may encourage councils to finance goods and services through user charges, ensuring that the costs of council outputs are more closely aligned with their underlying demands.

While NSW councils are permitted under rate pegging to formally seek rate increases above the statutory limit, the system has succeeded in constraining the growth in municipal rates revenue compared with most other states.

Since the introduction of the GST, municipal rates revenue in NSW have grown in nominal terms by an average of 4.3 per cent per annum, the lowest growth of all states and the NT and below the national average growth for rate revenue of 6.8 per cent per annum.

The NSW municipal rates regime also generally fares well against other states with regard to other indicators of tax burden. In 2011-12 councils and shires in NSW collected $473 in rates per head of population, the lowest of all jurisdictions except the Northern Territory. NSW rate collections, as a share of gross domestic product, stood at 0.8 per cent in the same year, which was higher than only Western Australia and the NT.

Local governments have long resented constraints imposed upon their abilities to raise additional revenue from municipal rates, with some councils arguing that it prevents them from meeting infrastructure requirements, and other additional service demands placed upon them, resulting from population growth.

Approval of the referendum proposal for financial recognition of local governments in the Australian Constitution would formally provide councils and shires with access to revenues forcibly acquired from federal taxpayers. Unprecedented access to the federal funding tap would diminish the effectiveness of state rate pegging initiatives, as the relative share of commonwealth grants in the total local government revenue mix inevitably increases over time.

Unleashing the Commonwealth

The local government referendum is one part of a much broader attempt by the Commonwealth government to free itself from constitutional checks and balances.

One obscure piece of legislation passed by the parliament last year was the Financial Framework Legislation Amendment (No.3) Bill. This bland sounding law was in fact a complete abrogation of the parliament’s duties to scrutinise government spending.

The bill purports to gives the Commonwealth power to spend on more than four hundred separate areas — everything from United Nations contributions to subsidising political party apparatus — without having to ask the parliament for permission ever again.

It’s no exaggeration to say that revolutions have been fought over the question of whether parliament can scrutinise the executive’s spending. But this Australian parliament — with complete, bipartisan support, mind you — has willingly and happily tossed away that responsibility.

The Australian Constitution serves as the enduring ‘rule book’ framing the nature and scope of collective action to be undertaken by the federal government. In doing this it aspires to provide people with a sufficient degree of certainty to go about their daily lives, without undue fear of arbitrary fiscal and regulatory exploitation by politicians and bureaucrats based in Canberra.

The Commonwealth government is also more distant from the locus of political decision making in local and regional areas, and is thus more prone to significant errors as demonstrated by numerous policy failures over the past few years.

It is for these reasons that proposals to shift the constitutional goalposts in favour of greater control and political prestige for Canberra have rightly been resisted in the past. But the Financial Framework Bill has already allowed the executive to bypass parliamentary scrutiny on its spending.

Local government recognition is no small matter. It would have completely, irreversibly, and destructively rewritten Australia’s constitutional settlement. Will we be asked to revisit it a fourth time? Unless the federal government stops wanting to accumulate power and unbalance the federation, almost definitely.

The Impact and Cost of Health Sector Regulation

With Mikayla Novak and Tim Wilson

Executive Summary

  • The demands on Australia’s health care sector will increase considerably as the Australian population ages.
  • The regulatory burden on health care professionals is increasing and is coming at the expense of fulfilling their primary purpose of providing health care services.
  • Health care providers may be required to liaise with up to 100 health care regulators with nearly 80 commonwealth regulators and between 15 and 20 in each state.
  • There are now more than 22,600 pages of combined state and federal legislation across 305 different Acts of Parliament covering the health sector.
  • There are unnecessary disparities in regulation for health care providers between States which cause confusion and increase the barriers to establishing new health care facilities.
  • The cost of regulation is rising rapidly. For example, the estimated compliance burden on general practice for enhanced primary care has grown by nearly 900 per cent between 2002-02 and 2007-08.
  • General Practitioners are becoming the interface for approval for Australians to access other government services such as welfare and support services draining their time to provide health care.
  • Licensing arrangements for different health care facilities from state to state add confusion to the capacity for new and existing health care providers to operate across the country.
  • The pharmaceuticals industry is one of the most heavily regulated industries in Australia and faces annual costs of at least $89 million to receive regulatory approval for sale. Much of this cost is duplicating work to seek regulatory approval already commenced or resolved overseas.
  • The average time frame for regulatory approval for a new medicine can be as high as 160 days resulting in the slower introduction of life saving or extending medicines.
  • The most effective way to decrease private health insurance premiums is not government regulation, but competition in health insurance products.
    Australia’s health care needs significant regulatory reform to ensure it can deliver the services expected of it with an ageing population.

Available in PDF here.