Quack Science

In every era ideology and dogma and superstition prevail.  These take the forms of conventional practice, academic theory, and political protocol.

Intellectual vanity, habit and the politics of power entrench flawed or limited concepts as standard practice.  These may take the form of practices that have usually worked in the past, or that have a result that looks effective at first encounter, or that work some of the time at least.

The themes reoccur in different forms as society evolves; voodoo becomes economics; bloodletting becomes monetary policy the flawed logic is the same but applied to a different task.  Just as with most religious or cultural prohibitions and practices these arise from practical survival strategies or from superstition but rarely from logical thought.  As these mores become entrenched in the belief system their validity becomes unquestioned even as their practicality becomes questionable.

The high priests of the time have varyingly claimed that the earth was flat, the sun orbited the earth or that the earth was created in six days and the dinosaur fossils where there just to tempt man into false thoughts.  These dogmas are protected by the priesthoods with a pathological viciousness perhaps most clearly exemplified by the Spanish Inquisition which managed to roll several dogmas into one grand dogma and used them for all sorts of evil political purposes. 

Even a profession as grounded in science as the medical profession has been marked by similar denials of common sense over the past centuries. Indeed some of the best examples of the power of dogma and vested interest prevailing over commonsense observations occur in this field.  

 Large parts of our entire belief system are invariably wrong due to the limitations of our knowledge.This in itself is reason to always question the common beliefs.

For the past century Economics has been the prevailing dogma. It shares the common attributes of previous dogmas or belief systems in that it attempts to control and explain the present and predict or map the future.  But its theoretical assumptions ensure it is founded in a basic denial of reality.  It has become the language of power and control, replacing the religious dogma and political dogmas of previous centuries.

The agents of power and control use the theoretical constructs of Economics to convert common sense observations into rules about behaviour.  Much of the time this is an effective survival strategy as it is efficient to turn good practice into rote behaviour.  The problem arises when rules become commandments and observation becomes replaced by dogma because then we stop questioning and learning.  

To illustrate the fundamental similarity of economics with previous belief systems it is only necessary to compare the ritual themes in action.  Voodoo is nothing more than reading the signs. A slaughtered goat or chicken is disembowelled and laid out according to ritual and then the “anointed ones” gather around to interpret the signs.  There is no scientific basis for the interpretation, it is just a judgement based on informed opinion and historical observation embedded in ritualised learning.

Each anointed one has a different point of view but as they sit around the dead chicken tugging on their beards and making their prognostications they observe the views of the other anointed ones and the reactions of the surrounding tribe and reach a consensus or an agreed difference in opinion and leave it up mob to interpret their wise sayings. 

The dead chicken provides nothing other than a structured forum for consideration of an issue. 

As with voodoo, economics is a process of ritualised debate based on practical observations but described in the anointed ones’ own special language that the rest of us barely understand.  The specialised language adds complexity not clarity to the debate.  It enables the debate among the anointed ones to proceed without interference from the uninitiated who might otherwise question the soundness of the observations and conclusions subject to discussion. 

Economics is nothing more than a conceptualised disembowelled chicken.

These ritual processes can allow the anointed ones to leap to some fairly daft conclusions as they become more wedded to their rituals than their observations.  The specialised language and the symbology prevents their advice from being vulnerable to widespread derision or critique.

It is reasonable to posit as a general rule the more abstract the language of the discourse the less concrete the substance of debate.  Take some of the more radical social discourses such as post modernist or deconstructionist theory.  These have not moved much beyond a debate on the meaning of the specialist language involved because at their core they possess nothing to discuss other than a few interesting ideas with little relevance to society.  The process of defining the language of the debate becomes more important than the subject of debate.

The participants in these abstract debates need to make the language used particularly impenetrable to ensure that the uninitiated who fund the ongoing discourse do not see it for what it is, an intellectual diversion populated with a bunch of high priests who couldn’t make the grade in a more demanding area of dogmatic thought let alone being out there in the real world doing something useful.

Education is about teaching acceptance of the status quo and compliance with the existing order.  As such it teaches the orthodoxy and that is learning not thinking, it is based on learning not logical thought.  As a result the status quo is not effectively subject to a constant process of challenge and review, just repetition.

Rational rather than logical and conceptual thought dominates our systems.  Rote learning rather than commonsense prevails.  This tends to breed a delusional state in the dogmatists and a resigned state in the rest of the population who adapt their lives to the realities the dogmatists force on them.  The more entrepreneurial then identify the distortions in the social and economic fabric that the dogmas create and exploit them for gain or power.

There is good reason for this human behaviour.  Society can only function if the great majority comply with its rules and practices.   We would all have been lion food a long time ago if most of us sat around pondering the meaning of life.   It is our nature that most of us have to be focussed on the here and now and getting the daily chores done.  It only becomes a problem when the here and now becomes divorced from reality by excessive adherence to dogmatic responses than common sense.

Who do you believe

As a reality check it is useful to compare weather forecasters with economists.  Most of us know a bit about weather.  We understand seasons and the regular progression of good weather after bad.  We can read the signs of oncoming change but none would dare to predict what the weather would be like on a particular day in a month’s time as we know that odds are utterly against us doing anything better than a lucky guess. 

It is also evident that most people have less faith in weather forecasters than in economists if the relative salaries of the two are anything to go by.    This is a classic illustration of the gullibility of the human race.  A weather forecaster is using some of the most advanced technology available to measure systems that abide by the laws of physics.  Even though the weather is hard to predict it is not truly chaotic just highly complex.  Every day the weather follows the same rules as it did the day before and each year it follows the same cycle. 

Economics is the complete opposite of this.  The system being described cannot be measured in anything but the roughest approximation.  It does not follow any physical law but is driven by human sentiment, political circumstance and random environmental influences.  On no two days are these parameters ever the same, the one certainty is that yesterday’s economic environment will never occur again and the next year will bear no resemblance to the last.

As a result of this economists can only be guessers, and the most they can lay claim to is being better informed than the rest of us, though most of us might think they just have a narrower view and less imagination.

Weather forecasters are likely to be happy with being 80% right looking five days ahead and are pleased to be able to predict a rough approximation of the trend one or months into the future.  Meteorologists are dealing with a science of forecasting probabilities.  Economists are dealing with an art of forecasting possibilities.  The more foolish of them treat it as a science the wise as an art.

The principal failure of economics arises from its conversion from art to science.  Where once economics was a philosophical art describing and analysing behaviour patterns in the marketplace it has been turned into a pseudo-science based on study of numbers.  When economics was a study in philosophical thought the leading practitioners where people with a very strong conceptual talents.  

As it is converted to a pseudoscience the practitioners are now people with numerate talents.  The numerate apply rules and, unless blessed with a rare combination of talents are, by nature, intellectually unable to partake of the questioning and the resultant conceptual debates required to keep the “pseudo-science” behind the rules grounded in reality.  As a result they keep describing tomorrow’s possibilities in terms of yesterday’s measurements and dogma.  They are driving into the future looking in the rear view mirror.  As with driving a car in the same manner the deficiencies of this approach are obvious to the bystanders.

As with many areas of intellectual endeavour the acolytes are taught to learn not to think, to remember not to question, to never challenge the rituals, and at the end of their training they possess knowledge but not wisdom.

Each time one of their projections fails they rework their models but like a dog chasing its tail, the task is circuitous.  The justification for the inaccuracy is that the model needs refined.  It doesn’t matter how much the model is refined, it is using yesterday’s data to predict tomorrow’s reality and is attempting the impossible.  This doesn’t matter however as the model has become the purpose not the process of their efforts.

The end result of this is that there is no proper feedback process for testing the assumptions underpinning the current economic orthodoxies.  That this is the case is evident in the fact that most of the orthodoxies do not even conform to the most basic tenets of economic theory.

The weakness of modern economic dogma is compounded by the pluralism arising within its increasing complexity and artificiality.  As more and more “high priests” are produced by the monasteries of economic thought the greater is the detail of the examination and interpretation of the dogma.  Like all faiths, separate schools of thought arise as opinions within the high priesthood polarise.

This leads to the syndrome of the blind men describing an elephant.  Each can only described the bit that he is hanging on to at the time and has no understanding of, and no desire to understand, the other bits.  Economists unfortunately also seem all to be hanging on to the beasts tail.

The worst problem is that economists are that they are the primary factor preventing society from adapting to the system change that is occurring through resource depletion, demographic pressures and the consequences of years of allowing human greed, selfishenss and stupidity to dominate over the finer human attributes.  

Community Ownership of the Telecommunications Network

The recent interest in the government’s broad band initiative articulates a fundamental problem with the supply of comprehensive modern telecommunications network across New Zealand under the current market structure.  It is a problem that government appears to be grappling with through the Broadband Initiative however this initiative is not the answer and is likely to only exacerbate the problems of fragmented ownership of the network.

I would propose that the right answer is for the telecommunications network to return to some form of community agency ownership.  The agency could be regional councils or some form of regional infrastructure trust.  This would not require radical change to the existing service structures, little other than the network element being owned and managed by the community agency.  The existing service suppliers would remain as network services companies.

There are very sound reasons to return the network to community ownership.  Private ownership cannot efficiently provide public utility services such as telecommunications in the longer term.   These failures are apparent in telecommunications and in electricity; they have been clearly evident over the past two decades in rail and in airlines and in coastal and international shipping.  It is not possible to effectively run a national economy when the key foundation services are driven by the profit motives of a private owner rather than for viability and growth in the national economy.  I am not advocating a return to the old days of government departments running everything but propose a hybrid that achieves the benefits of community ownership with the advantages of private enterprise.

The key issue at present is that the community being serviced by the network has no power to determine the level of service.  The community receives the level of service that the network owner can afford to deliver profitably, not the network that enables the community to most effectively meets its present and future needs.  Indeed the consumer is likely to only receive the minimum level of service that the supplier can sustain without undue political consequences.

Telecommunications, like all public utility networks, are governed by a different economic logic than most other goods and services that can be supplied competitively.  Networks underpin the entire economy.  They enable society to function and to progress.  Utility networks function best as monopolies as any fragmentation detracts from the performance and integration of the whole or leads to needless duplication, this being the issue discussed in recent news items.   Network services also tend to be uneconomic at the margins, yet that is where they are most important because it tends to be at the margins - in rural New Zealand - where our export income is earned.  And the margins sustain the core.  The whole network loses functional value if the uneconomic services are not provided.

The optimum level of capacity for the whole network needs to be determined by the consumer, not the supplier.  This does not mean that there is no role for private enterprise in the supply of these services, just that the power relationship needs to change to one dominated by the consumer as a collective.   There are much better mechanisms for blending the efficiency of competitive private investment and the benefits of public ownership than that currently in place. 

The ownership, management and use of the roading network provides the best model of this “blended” alternative presently operating in New Zealand.  Councils and the Crown “own” the roads but in most cases those roads are established and maintained by private enterprise through contractual arrangements with the owner.  The owner sets the service levels and raises the cost of developing and maintaining the network in part through user charges and part a levy on the land serviced by the network.  All of the services provided on the roads are undertaken by private business except where the community requires services such as public transport (again a utility within utility as completeness of network is essential).  In the same way, this service may be best provided by contracting out its delivery with the community determining the level of service. 

The simple core concept is that network services have to be purchased as a whole.  That is one of the reasons why local government was established.  Local government generally runs far more infrastructure than private enterprise and does so with less fuss and bother, lower salary structures, and with less unnecessary complexity in the manner services are supplied, and funded more cheaply than the market can achieve.  Local government also specialises in investing for the future and developing infrastructure strategically, though Auckland does fail us there.  However, that is a political failure not a philosophical one.

I first raised this idea of local government taking over the Telecom Network at a TUANZ (Telecom Users Assn) conference some five years ago and senior executives from Telecom and Vodafone present supported the idea with them remaining as service providers.  The need for this initiative is now more urgent as the issues around urgently required investment in leading new technologies starts to severely undermine the economic viability of the existing private providers, while also holding back the national economy.

There are a raft of other reasons why the market is not able to provide these services effectively.   The arguments against the status quo would fill a book, however I hope I have done sufficient to justify the concept in somewhat less than that.

The logic of a community-owned telecommunications network for each region across the rest of New Zealand is compelling.  It is also going to become essential as the internet develops as a core tool for delivering social services and undertaking economic transactions.

There are real advantages in planning and managing these networks as a collective of regional entities.  It will allow regional initiatives and innovation.  To illustrate this, at present we are given a complex set of low performance service options where a single more advanced one would do the job for less cost to the consumer. 

We are also provided with a national solution to a broad range of differing regional needs.  The technology required to service a city centre is much more complex than that needed in a rural low density context.  We get the city solution whether it works for us or not.

Rural New Zealand could go wireless right now without the technical difficulties that are likely to be experienced in urban areas. 

The current system is also expensive.  I personally have five phones, a data connection and a satellite TV link and multiple contact numbers.  Current technology could allow me to have one phone with multiple identities (numbers) me at work (3 numbers - direct dial, front desk, cell), me at home (private and cell).  When whole family connectedness is taken into account, each home now has a multitude of phones.  We are all paying for a multiplicity of networks and connections when we need only one.

There is no reason why my cell phone could not also provide my data link and the same service - probably also the pay TV.  These multiple connections currently cost me and my employer $300-400 per month, and I am a relatively light user.

The regulatory mechanisms that are in place to compensate for the market failures inherent in the current service model are only making the whole system more cumbersome.  As an example, I understand that Central Southland has high speed fibre optic internet infrastructure but the consumers can’t use it for the next two years because not all phone companies can access the new Telecom cabinets and the regulator will not allow one company to market it until all others have access.  If it is true (and the information came from a Chorus employee involved in installing it) then this is just plain stupid.

The regulatory process is also used for anticompetitive purposes in building delays and barriers that serve the network owners’ interests rather than protecting the consumer’s best interests.

The lack of strategic control and investment is also inhibiting innovation in the use of these technologies. 

As for funding, we as a community are already paying for the current setup; we would just transfer the cash flow to the new arrangement.  In effect we are subsidising an inefficient operation, both directly through unnecessary cost and indirectly through lost economic opportunity, for no better reason than that it is privately owned.

Additional comment

The provision of network infrastructure for telecommunications (or most other utility networks), most particularly in rural communities, cannot be effectively achieved by competitive private ownership of the network. 

The role of infrastructure in an economy

Utility networks provide the foundation functions of society and the economy.  To be effective they must be complete and ubiquitous so that effectively, everyone has equal access.  This cannot be achieved by competitive private ownership of the network for the simple reason that it is uneconomic to provide connections at the periphery and where services are required at a low density.  

Infrastructure has a whole-of-economy function.  Businesses in the cities benefit from irrigation development in the rural hinterland, not just the farmer who owns the irrigator.  The wider community should contribute to the establishment of infrastructure for its own interests.  Similarly, the farmer in the back blocks who can communicate with Fonterra, the accountant and business by internet benefits the parties at both ends of the line.  If infrastructure enables greater economic activity in the country, the benefits flow to all parties that trade with that enterprise.  They all benefit from the infrastructure that enables that increased economic activity.  Private ownership of the network won’t allow this to happen as the infrastructure owner can not capture any of the benefit of the additional economic activity that the infrastructure enables and so will not invest in the additional capacity required to enable that development to occur.

There is a wider range of reasons why competitive, privately owned multiple networks are less economically efficient than a publicly owned monopoly.  Telecommunications networks, as with all utility networks, are natural monopolies.  A single network is the cheapest and most efficient means of providing the required service. 

To be economically effective, networks need to be managed in a manner that allows society to innovate and for the economy to grow and evolve.   Investment in infrastructure needs to be strategically driven, not profit driven.  Utility networks provide foundation services for the rest of the economy.  Infrastructure releases economic potential whether it is within the resources of a nation or the capabilities of a technology.  The optimum level of capacity for an economy will always be uneconomic to the supplier as society requires infrastructure that enables the wider economy to function and to develop.  It creates an opportunity for the economy to grow but that growth can take time and that renders the investment uneconomic in the narrow sense of private ownership.

There are many complexities to infrastructure ownership.  It must have idle capacity to enable growth.  It must not be capacity constrained at crucial peak times. It must invest in technologies long before their use is widespread in the economy.  None of these attributes fit well with the competitive model, which must necessarily view surplus capacity as a cost and long term investment decisions as highly risky, particularly in a market where technological change is such a dominant factor.

Investment risk

The investment risk for infrastructures under private ownership is greatly increased by the fact that Infrastructural hardware are “stranded assets” from the moment they are purchased.  Once purchased they have no worth beyond their value in use.  They have no significant salvage value and no alternative use.  This aspect makes investment in network infrastructure in an area of rapid technological change highly risky as it becomes technologically redundant in far too short a time for an economic return to be made on it.  Much of Telecom’s existing network falls into this category.  Their main value is their incumbency not their service.  A consumer cooperative could destroy this value by simply investing in a new infrastructure and there would be no additional cost to the consumer as a result.

Community ownership would introduce stability and structure to the introduction and utilisation of technological advances.  It could do this by adopting technologies on staged or set replacement periods.  It would progress according to a planned investment path.

Telecommunications as an adaptive technology

The capacity to transmit large quantities of data very cheaply is changing many basic functions and relationships within society. 

Telecommunications capability is critical to the functioning of the economy.  It is becoming even more vital as technological advances ensure that a greater share of the physical function of society and commerce is “virtualised” - that is, being conducted electronically rather than physically.  This trend is going to continue and is spreading from commerce and entertainment into the realms of health and education.  

Southland Insitute of Technology’s English language course’s #1 ranking on iTunesU is an example of what is possible from the most isolated corner of the planet.  It is also a harbinger of what is coming to challenge all educational institutions.  Telecommunications will be the roads of the future and it willalso be the school house and the hospital.  The better and the earlier we build this capacity into the function of our economy and society, the more rapidly our economy and society will progress along it. This won’t happen fast enough if we have to wait for the infrastructure to be profitable.

Communications technology is also about to become the primary substitute for travel as carbon cost policies change the relative costs of physical and virtual meetings. 

Communications technology is the primary technological facilitator of the future growth of the economy.  The SIT experience with iTunesU is an illustration of the possibilities of a virtual planet.  Time and distance are removed from these interactions.  The principal constraint in the future will be lack of system capacity, delay in the itnroduction of new technology and impediments to innovative use of the network.

Regulatory risk

Private ownership of infrastructure is also vulnerable to regulatory risk.  The current political debate over the broadband initiative is a striking example of this.  This is the risk that regulation will be imposed to set service levels or to reduce monopolistic behaviour or to othrwise amend marekt conditions for politcal consdierations with a consequent loss of earning capacity that flows on to a reduction in share value.  This effect is clearly evident in the value of both Telecom and Telstra in Australia.  In both cases billions of dollars of investor value was destroyed by regulated change to the market place.  The offsetting argument is that the share value was created in substantial part by the value of the monopoly rather than the value generated by the business assets and commercial operation.   That however is little compensation to the investors who in good faith bought shares in these privatised puclic services.

The regulatory framework also becomes a forum for anticompetitive behaviour where suppliers debate issues to protect monopolistic advantage or to delay innovation by a competitor.

The status quo

The main reason for retaining the existing service structure seems to be that Telecom is a major element of the capital value of the NZ share market.  This is an unsound concept that is costing the rest of the economy and society dearly.  It is in effect is using what is essentially a public utility to subsidise another facet of the economy.  This subsidy is not justifiable and is sustained at the expense of the wider dynamic of investment in productive enterprise.

It would seem that the current market structure is one based on a belief system rather than logic.

Many of the apparent or claimed operational efficiencies arising from the privatising of formerly public infrastructures have actually been a transfer of costs from the network operator to the network user. It hasn’t resulted in a net benefit to the economy, and generally could be claimed to have had the opposite aggregate effect.

The key transfer of costs has been from the present user to the future user through under expenditure on maintenance and development.  These transfers range from running down the skill base required to maintain the network through to running core infrastructure into the ground.  There are also the costs of lack of peak capacity and system failures that cost the owner a relatively small penalty but impose a huge cost on the whole economy.  The owner does not carry anything like the full cost of system failure.  Nor does the private owner consider system resilience in a civil emergency, or place any value on the essential function of their infrastructure in times of civil emergency.

A core problem with the unregulated competitive provision of network-based services is the tendency for investors to “cherry-pick” by only providing services - or at least full capability services - in the areas with high consumer density.  The “whole of network” capability will only be provided by regulatory intervention or it will exist, as it does in many countries - New Zealand included - as a residue from the time when the network was publicly owned.

Investment risk from technological change

The current status of the market and the subject of the attached article is the risk of investing in new technologies when these are rapidly evolving.  This creates a “first mover” disadvantage.  This is where one market entity introduces a new technology at great expense only to be overtaken by those who delay their investment so that they can take advantage of yet further improvements in technology. 

The second risk is that even where technologies are introduced across the market the life of the technology can be so short that there is insufficient time for an economic return to be generated by the investor. 

There is also the reverse situation that is currently evident in the move from CDMA to 3G, in that the incremental benefit of change is, in the short term, minimal slight or even negative for the majority of users and that rtechnologcal advances can only be induced through the subsidised replacement of the consumer’s personal equipment.

As well, there are technologies that threaten the entire existing investment.  This is where the “stranded asset” element of infrastructure investment really bites.  It is possible now to introduce a new infrastructure that completely or largely eliminates any residual use and hence value in the existing physical network.  This is one of the opportunities for communities to invest.  The regions could just leapfrog the entire existing network infrastructure.  Local government could provide telephones as a rate-funded service in the same way that it provides sewers, water and roads.  It is perfectly affordable for the community to do this.  It does not need outside investment as the consumer community already pays for the services it consumes.  If the cash flow from existing telecommunications services provided to the region were to be diverted by the community to fund a new network, the locals would not see any difference except a significant improvement in service, and perhaps a reduction in cost.

Telecommunication should be much cheaper than it is and it should have much better capability.  The current market structure is both delaying access to new technologies and increasing the cost through anticompetitive behaviour and inherent cost inefficiencies, particularly duplication of investment.

If there is a regional difference in affordability through lower density of demand there may need to be some national level of funding support.  Again, road funding is a good model for achieving this.  However, the expected cost of a new network is in the order of $2000 per connection in capital costs which should translate to an annualised capital cost on a five year lifecycle of $600.  The current cost of connection in Southland will be producing annual charges of approximately $1000.  This is also paying for a service that is still largely based on technologies that have long since passed their use-by date.

The average cost per household probably exceeds $2000 when cell and work phone connections are taken into account.  This amounts to an annual cash flow across Southland of $100 million annually.  As a service purchaser, we should we looking to the future best interest of the community and have no sympathy for the investors’ current asset value.  It is the service we purchase that is the key issue.  If an existing investment is destroyed because we can buy a service that better provides for our interests, then as a consumer we have that right . 

Out of the Silos

A key issue that appears not to have been considered concerns the inter-linkages within society and the economy that the narrow interest private infrastructure provider cannot and does not have an interest in addressing.  These are the unanswered questions, such as: how could health services benefit from modern communications technology? How will education change with the introduction of new “placeless” education processes? Again clear evidence of how this will work is apparent from SIT’s success on iTunesU. 

The investment and development decisions for health and education infrastructure are affected by strategic decisions for investment in communications technology.  Investment decisions in one drive or are driven by investment decisions for the other.  As an example the recent amalgamation of the Otago and Southland Health Boards was not only unnecessary but was a 1980s response to current issues that is ignoring the likely future development of health services.  Local government is not immune to this effect either (which is why the changes in Auckland’s local government structure are a waste of time and money). They are an unimaginative response to last century’s issues not to the opportunities and challenges of the future.  Technology should be driving us to operate more collectively across many public fucntions than we do service but amalgamations aren’t the answer; changes in processes and relationships that are facilitated by development in communication and information technologies are. 

Regional networks

The regional community’s wealth is based on rural businesses.  If the foundation of the economy is not fully linked into the support sectors then the network is failing to fulfil its most basic function.

Rural regions particularly need the opportunity to control the level of service for communications technology.  That this is quite achievable at a greater level of autonomy than proposed is evidenced by the community telecom cooperatives that are widespread in rural USA. 

What needs to be owned communally?

While outright ownership by the community is the most obvious alternative to the status quo, there are alternatives that provide the best of private enterprise with the advantages of public ownership.  The core issue is that the right to determine the level of network service needs to return to community control.  There is a collective interest in having a monopoly service that meets the needs of the collective interest.  This does not mean that either the network or the services provided over it has to be publicly owned as the provision of network hardware and the operating system, can be done by private interests, by contract to the consumer community. The provision of services over the network would be by private companies and even where these have a public good component, they can be provided by contractors. 

Infrastructure and the services provided through it are different business in the same way that roads and freight companies are different.  The more services that can be provided by private enterprise over the public network, the better.  Freeing the network from the commercial interests of the dominant service providers should lead to a surge in commercial innovation.

Under this model the current market structure would in most respects appear to remain unchanged.  The existing regulatory framework would be removed, or not applied where communal control is in place as it may be that the model discussed here is applied in rural regions and not in cities where sufficient demand supports competitive service delivery.  This would reflect the American Cooperative Telecoms model.  Some parts of the market in the US are serviced by private investment and some by communally owned regional networks.  In New Zealand, however, it would seem logical to have a single network using a common technology.

NZ’s Carbon footprint

The expected increase in the cost of carbon-based fuels is not only likely to drive demand for greater capability in communications technology; the technology will enable society to cope with reduced mobility.

Funding and affordability.

In rural regions the community is currently likely to be paying more for its connectedness than would be required to fund the replacement of the entire network with the most up-to-date wireless technology. 

Regions are paying for three networks with fragmented main trunk capacity.   They are getting neither the best service available nor the best value for money.

It would be quite possible for regional councils to establish a community cooperative in effect by rating for the provision of phone and network hardware and even data services and providing both the network and the handset.  This is something that should be able to be done under the existing local government legislation if it had community support.  It would certainly be a good place to start the discussion as a consumer cooperative can hardly be seen as being anti-competitive. Indeed it would restore the balance of market power between supplier and consumer that is so badly lacking from the present market place.   It would also enable the community to plan strategically for its future telecommunications and telecommunications-supported needs.

Why selling infrastructure is stupid.

Public infrastructure includes a range of assets and services that enable an economy to function.  Many take the form of networks where completeness of the network is essential to its functionality.  Networks allow the core of the economy to interact with the periphery.  

•         Networks are required to always have spare capacity
•        Networks create opportunity not value

 Infrastructures do not, at their optimum service level, usually operate profitably, they create opportunity for profit making activity.  It is impossible to run an infrastructure to maximise returns to the owner while also maximising economic value to the economy. 

Infrastructure is typically owned by a governance entity on behalf of the collective of those who benefit from it.  This agency takes a number of forms but most typically is the state, local government, or an owner’s cooperative.   This has been the case for as long as history because infrastructure is both a natural monopoly and also because the economic optimum level of service is well beyond the profitable level of service.

Infrastructure also has a large beneficiary class who benefit as much from its existence as its use (think roads).  This is a problem for the owner as there is no direct means of capturing the value of the indirect benefit other than by taxation (or property rates).

This is why the mixed ownership model is unsound.  Furthermore it is not possible to have two owners, the state and the investor, with conflicting expectations of value.

New Zealand is full of lost opportunities to maximise the economy because privatised infrastructure over-charges and under-provides.  This means that both use and utility of the infrastructure are constrained and the entire economy constrained accordingly.

Public ownership of infrastructure was never a problem and management of publicly owned infrastructure was never the problem.

What we had and still have, is a governance problem.  

Those who decide on the investment strategies and management policies were the problem.  The fact that Parliament is still contemplating partial privatisation of infrastructure shows that Parliament still does not understand its governance role.

The privatisation of public infrastructure has become a popular concept.  After several thousand years where the logic of public ownership prevailed, it has suddenly become a good idea to sell essential public services to profit making entities.  Private business love this as it gives them an asset that it can either strip of capital then dump or can be run at a guaranteed profit as a natural monopoly.  Often the new owners attempt both (as with NZ rail and to some extent Telecom) only to be eventually thwarted by deterioration of the function of the asset at which point the State has to restore it to public ownership (NZRail) or regulate the activity at a cost to the inflated capital value of the business or otherwise regulate and subsidise the restoration of its function (Telecom).

Private owners usually hit these assets savagely when they first take control, stripping out much of the bureaucracy that contains the organisation’s intellectual property.  Service reductions are presented as efficiencies when they are typically cost transfers from the cost of operation out to the wider economy. 

When communities or states sell their infrastructure they seem to view the proceeds as a windfall.  The beneficiaries of these “windfalls” do not seem to understand that nothing is free.  

The taxpayer and the infrastructure user are one and the same person.

The “windfall” must be paid for and the only ones who benefit from the services of the asset they have just sold is themselves.  That they have sold an essential service, something they cannot do without - to some one who has no regard for anything other than profit does not seem to register in their awareness – until the first bill comes in.  

Our leaders have in effect sold the right to be taxed forever in return for a once only payment.  This is a Mephistophelian deal.  In all cases it would be cheaper and much less foolish for the community owning the infrastructure that they wish to sell to go and obtain a loan against the asset and spend the money.  They will have to pay the money back but at least they will still both own their infrastructure and have control of the cost of debt.

This thinking seems to have reached its ludicrous extreme when it results in the Victorian State government selling parts of its electricity reticulation network to a Singaporean based retirement fund. 

Every time someone throws a switch in Victoria they make another small payment towards someone’s retirement in Singapore.  It needs to be asked why is it that an agency of a foreign government can do a better job of owning and managing a strategic asset essential to the economic future of Australia than the Australian Government? 

This is a statement about the relative competence and strategic vision of the politicians forming the Australian Government and the Singaporean Government rather than the relative merits of state versus private ownership.

We have the same problem.

At least the Aussies stood up to their government when it came to selling the Snowy River Scheme!

The economic consequences of no longer being self-sufficient in porridge.

After Goodman Fielder purchased the Flemings range of products in May 2006, production was shifted to Australia and the product was marketed under the Uncle Toby's brand. Otago Daily Times 6 Oct 2006

Flemings was a profitable business making Creamoata Porridge that at the end of its life employed 36 people in a small rural town and was supplied by ten farmers with specialist machinery and infrastructure.  Its sale to the dominant enterprise in the market resulted in it being closed and production shifted to Australia.  Effectively the competition has been bought out.  

The sale gave the former owners a one-off return that reflected a premium for the monopoly rents that would be generated by market dominance.

This sale resulted in a considerable loss to the national economy

•    The NZ taxpayer had to support 200 people on the benefit for more than a year,
•     The government lost the tax on the business’s profits
•     The community economy shrunk through the loss of trade and payroll,
•     The property market in the town went into a severe decline,
•     Ten farmers had to find an alternative crop to grow.
•      Competition in the cereal breakfast food market was significantly reduced
•   The cost of this sale to the national economy was substantial.  

In addition the country also has to generate $20 Million in additional exports every year to cover the cost of importing what it once made for itself.

The New Zealand economy effectively subsidised the closure of this plant to a level that significantly exceeded the sale price and now has to earn export income to pay for a product that it once produced. 

Sales of businesses to foreign owners generally incur a cost to the national economy that exceeds the benefit from the capital inflow.  Even in the cases where the new owner does not close the business, the business will be operated for the benefit of the owner not the national economy.

We are losers!

The sad state of the New Zealand Economy

The effects of our economic belief system on our balance of payments

The global economy relies on a set of rules to ensure fair and free trade.  The “Free Trade” nations rely on the “level playing field” that is they rely on all partners acting honestly and openly and according to the same set of rules.  This however is not the practice.  Only some countries abide by the rules.  The effect of the cheats versus the honest players is the same as in cards.  Cheats prosper.  One of the basic concepts of free trades is the floating exchange rate.  The floating exchange rate should in theory result in each country’s exchange rate moving to a point where its imports and exports balance because the value of its currency will move up when it’s export flows improve and down when its imports become excessive.  The result is that a country with a strong exchange rate will import more and a weak one will produce more internally.  The fundamental flaw in the world of trade is that not all parties do this.  If any one country can artificially fix its’ currency at an artificially low level then it will have a trading advantage that is equivalent to a tariff on imports and a subsidy on exports.  Conversely with a country like New Zealand where we have a severely over valued currency we are effectively subsidising imports and placing a tariff on exports.  Our indebtedness is a clear testimony to that.

The Central Intelligence Agency publishes an annual set of Country Reports and in 2008 its summary of nation’s current account balance had the greatest surpluses in the hands of the countries that are oil rich and have nationalised their oil resources, Saudi Arabia, Russia Norway and Kuwait, or that have currency controls and are centrally planned economies China, Japan Singapore and arguably Switzerland.  The beneficiary nations of the European Union also rank up there as the EU set permanent currency distortions with undervalued currencies for the northern European countries and over valued for the southern nations.

Rank	Country		Current account balance
1	China	Protectionist/undervalued	$ 363,300,000,000
2	Japan	Protectionist/undervalued	$ 195,900,000,000
3	Germany	Protectionist/undervalued	$ 185,100,000,000
4	Saudi Arabia	Oil/Nationalised	$ 88,890,000,000
5	Russia	Oil/Nationalised	$ 74,000,000,000
6	Switzerland	Protectionist/undervalued	$ 67,890,000,000
7	Netherlands	Protectionist/undervalued	$ 59,280,000,000
8	Norway	Protectionist/undervalued	$ 55,820,000,000
9	Kuwait	Oil/Nationalised	$ 51,490,000,000
10	Singapore	Central planned	$ 41,390,000,000

At the bottom of the list we have the global trade basket cases.  What is interesting to note is that most of the worst cases are governed by free market ideologies.  India has the same cheap labour pool advantages as China.  Australia has an equivalent natural resource wealth as Saudi Arabia.  

New Zealand is on a per capita basis one of the most well endowed countries on the planet.  But we are at the losing end of the global trade war.  Our indebtedness means that we are becoming ever poorer as the cheats at the game of global free trade take our money from us and use it to buy our assets.  This makes us poorer again.  Our indebtedness is a black hole and our fatal path into its’ depths is inexorable – under the current ideology.  

 

150	New Zealand	Resource rich free market	$ -9,973,000,000
151	Ireland	Free market/overvalued	$ -12,600,000,000
152	Poland	Free market/overvalued	$ -18,130,000,000
153	India		$ -18,530,000,000
154	Portugal		$ -18,530,000,000
155	South Africa	Resource rich free market	$ -20,060,000,000
156	Romania		$ -22,600,000,000
157	France	Free market/overvalued	$ -35,940,000,000
158	Turkey	Free market/overvalued	$ -36,270,000,000
159	Greece	Free market/overvalued	$ -36,400,000,000
160	Australia	Resource rich free market	$ -50,960,000,000
161	Italy	Free market/overvalued	$ -57,940,000,000
162	United Kingdom	Free market/overvalued	$ -111,000,000,000
163	Spain	Free market/overvalued	$ -126,300,000,000
164	United States	Resource rich free market	$ -747,100,000,000

Our free market ideology endows us with a victim mentality.   We can’t remove ourselves from the abuse and we applaud our abusers.

China, the worst offender doesn’t just cheat on the floating currency, it cheats on copyright, it cheats on employment and environment law and it subsidises energy. It also uses a wide range of non-tariff barriers to trade to protect its own domestic economy.  It also trades in our domestic market without having to meet all the costs of production that the domestic producer must face.  The more of our domestic production that imports displace, the fewer domestic producers remain to cover the social overhead of our domestic economy with the result that the domestic producer is either crushed by the overheads or shifts production to a place where these overheads don’t exist. 

China has seen the flaws in our ideology and is exploiting them.  China will end up owning us using our own money to buy us.  This is as inevitable as gravity.  The global trade imbalance is structural and it will persist and grow for as long as we its victims allow it to.  As resource owners we have the power, as the oil owning states that have nationalised their resources have already learned.   If we want to get out of this situation we need to learn from our abusers and stop listening to our fellow abused who can be identified on the CIA list along side us.  Several of these have already fallen into the economic black hole.  We are only being prevented from joining them because we are resource exporters and we have major capital inflows as our resources are removed from our ownership.  This is a temporary respite.  

We can escape from this situation but it will take a very different approach to trade and commerce and to finance to achieve it.