Profit motive drives business to bend rules

Sometimes I think economists are people who believe fervently in private enterprise and the profit motive, but have never actually met a business person.

That doesn't apply to economists working for business, obviously, but it applies very much to the econocrats who give advice on economic policy and even, I suspect, academic economists.

Living in Canberra doesn't help.

One of the advantages of spending your entire career in the private sector, as I have, is that it disabuses you of the notion of business people as model economic agents rather than hugely fallible human beings.

The economists' neo-classical model has an anti-government ideology hidden within it, which leads economists working in the public sector to idealise business people. They're rational operators and when they seem not to be that's only because governments have distorted the incentives they face.

Business people rational? Oh, you mean like the bosses at Fairfax Media? You mean the period when we had chief executives in and out the door in the space of a year or so? The stories I won't tell.

Business people don't have any better fix on what the future holds than anyone else, so often make decisions that turn out to be dumb. But they'll often realise that long before they pull the plug. And when they do they invariably blame the economy or government policy.

The economists' model and methodology lead them to ignore all motivations bar monetary incentives. Since most people have plenty of other motives – worthy and unworthy – for the things they do, this leads the economists to a host of wrong predictions.

But business bosses – from big outfits or small – would have to be the most money-motivated among us. Success is judged by the size of your package (even if it leaves you with no time to spend the stuff). Managers learn when they realise their staff isn't as money-hungry as they are.

Public sector economists say they believe in the profit motive, but they have no conception of what a powerful force it is and what unpleasant surprises it can give you when you unleash it.

It turns business bosses into short-term maximisers, willing to risk their company's future to make a quick buck. Alan Greenspan confessed that "those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief".

Years ago economists realised that public companies have an "agency problem" because the incentives facing the agents of its shareholder owners (otherwise known as chief executives) can conflict with the interests of those owners.

The economists decided the answer was to use incentives such as share options and performance bonuses to align the interests of agents and principals. It's been downhill ever since.

Why? Because money-hungry managers haven't been able to resist the temptation to game the system. It has probably done more harm than good.

Business people are so motivated by the profit motive they're always looking for loopholes and bending the rules.

This year's revelations about the behaviour of seemingly respectable firms in the way they pay casual employees suggests they may even go further than that – and that the designated regulators are mighty slow in doing their job of policing the regulations.

The econocrats don't seem to have realised that when you give people a chance to put their hand in the government's pocket, they go as crazy as people who take home all the shampoo and soap sachets from the motels they visit.

In the rush to get new homes built before the goods and services tax was imposed on them in July 2000, punters pushed up home prices by a lot more than the 10 per cent tax they were avoiding.

For an example of business people doing crazy, destructive things to get into the government's coffers, look at the operators willing to risk the lives of the kids installing pink batts.

This kind of money-madness seems to happen every time the other-worldly econocrats persuade the government to "contract out" the provision of some government service and invite private businesses in on the act.

The latest is for-profit providers of vocational education exploiting the government's HECS loan scheme by offering students a free laptop if they sign up for dubious courses.

By now, such an outcome was eminently predictable. Government incentives often induce people, whether punters or profit-seekers, to do greedy, dishonest and even self-destructive things.

Working for government seems to convince economists that, if they couldn't only get to meet a business person, he or she would be a wonderful, caring human being.

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Reprint from1995: Economics of the Dreamtime

Showing for one night only: Aboriginal Economics. Have you ever wondered what the Australian economy was like before all the whities arrived?

I've just been reading a book by our great economic historian, the late Professor Noel Butlin of the Australian National University - Economics and the Dreamtime: a Hypothetical History, published posthumously by Cambridge University Press in 1993.

Though for many years it was believed there were only about 300,000 Aborigines in the land before the First Fleet arrived in 1788, Professor Butlin calculates that it was much higher: between 1 million and 1.5 million.

They lived as bands of hunters and gatherers, ranging in size up to about 40 people. So did they have what you could call an economy? Of course they did - though, naturally, it was very different to ours. There was no money or markets and not much trade between the bands.

But decisions were made about production and consumption, there were rules of distribution, forms of property rights, a division of labour and efforts to raise productivity.

One researcher, Marshall Sahlins, has argued that Aborigines deliberately sought a low standard of living in terms of food, shelter and clothing. But, accepting this, they were "the original affluent society".

Reports from the early explorers suggest that Aboriginal bands hunted and gathered for only four to six hours a day, but frequently appeared to have plenty of food in their camps. They seemed to spend a great deal of their time gossiping, playing or sleeping.

Sahlins's purpose was to combat the modern assumption that material wants are infinite and the old view that hunter-gatherers were exposed to continuous risks of starvation and needed to work long hours each day.

That's fine, but Professor Butlin rejects the corollary that Aborigines failed to develop an advanced culture because of idleness. His argument is that what may seem to be leisure or idleness to Western eyes was actually economic activity to the Aborigines.

For one thing, in a culture without writing, talking is the main way of communicating information. A lot of talking has to take place to preserve and pass on the group's knowledge of how the world works.

He speculates that much of the "gossip" could have been meetings of the band's production planning committee: discussions about what game to hunt, what food to gather, where to look for it, when to move on and so forth.

What has been seen by Europeans as merely leisure-time activities, in which children participate in games of skill and agility, is important as education. "Reputed games of a form of 'football', organised throwing of small spears or boomerangs, climbing and wrestling could all transmit skills; and adult oversight of these activities could appear to be indolence," he says.

And time spent in ritual and ceremony was accorded far more value than mere leisure. Ceremonial activity served the purpose of preserving identity and order within the group, and so preserved economic efficiency and equity.

The general division of labour was that men hunted and women gathered. This fitted their "comparative advantage" since women were responsible for carrying or caring for children. Certain styles of hunting, by tracking and chasing larger animals or by tree climbing and chopping, required the hunter to be unencumbered. Gathering of plants, seafoods or eggs was more suitable for encumbered members of the group.

Some production, including fishing, occurred at night - which would explain why "shift-workers" slept during the day.

Production of capital goods was limited and they were often nondurable. Even so, there was a demand for clothing, bedding, stone tools and myriad wooden and fibre implements, as well as items needed for long-stay and short-stay dwellings, canoes or rafts.

On occasions when the bands joined in tribal meetings, large numbers of men (maybe several hundred), together with dogs, took part in great kangaroo hunting drives. "Efficiency derived from the ability to contain animal movements, more quickly capture wounded animals, share in transportation back to camp and so on," he says.

So this is an example of the pursuit of economies of scale in production. The most striking example of the use of capital equipment to increase production was the development in Western Victoria of massive networks of eel canals, directing and restricting the movement of eels in rivers.

The provision and maintenance of this asset, which entailed a great deal of communal effort, not only increased the yield per person but also enhanced the supply.

Another production technique was "fire-stick farming". The burning of limited areas (which required great skill and effort to limit the area) was used to capture game (in conjunction with net fences) or to expose other foods, including eggs, slow-moving creatures and yam fields.

It can be argued that burning raised the productivity of the land and this is part of Professor Butlin's claim that the Aborigines weren't just hunters and gatherers but "resource managers".

Their moving from place to place was partly dictated by seasonal crops and by drought. But "Aborigines appear to have been concerned with long-term viability and with a degree of resource management that would ensure their ability to return to any location, not merely to 'mine' one and leave it".

There is evidence also of technological advance. Stone tools became smaller, finer and possibly more precise. The exploitation of fine stone spear tips would have improved killing efficiency.

The advent of the hafted fine-stone chisel or adze greatly improved efficiency in the hollowing of logs, the shaping of spear-throwers, the construction of shields and the removal of bark for canoes, housing or artistic products, including all forms of carving.

One technological breakthrough, however, was imported. The dingo arrived with the trepang fishermen from Sulawesi. It appears to have spread rapidly throughout Australia and enabled a great increase in hunting efficiency.

What does all this prove? Well, just for once, it doesn't have to prove anything. But it does show that, to an economist, economics is everywhere.

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How many Aboriginals died after the colonialists arrived?

If we can't lift our minds from earnest discussion of the economy and its discontents between Christmas and New Year's Day, when can we? So let's take a summer squiz at the work of the rapidly diminishing band of economic historians.

One of the most interesting things they do is try to piece together economic statistics covering the years before much official effort was devoted to measuring the economy. The United States didn't start publishing figures for gross domestic product until 1947; we didn't start until 1960.

The global doyen of economic historians was the Netherlands-based Scot, Professor Angus Maddison, who devoted his career to "backcasting" GDP to 1820 for all the major economies and regions of the world.

Despite all the unavoidable and debatable assumptions involved, Maddison's estimates are still widely used. They're a reminder that, before Europe's Industrial Revolution, the two biggest economies were China and India.

Australia's most distinguished economic historians were Noel Butlin, of the Australian National University, and his older brother, Syd, of Sydney University (after whom its Butlin Avenue is named).

Noel backcast Australia's GDP to 1861, then began researching what the Australian economy must have been like before white settlement. He wrote up his findings in Economics and the Dreamtime: A Hypothetical History (which I wrote up in a column on April 5, 1995).

As part of this research Butlin devoted much effort to estimating the size of the Aboriginal population before 1788. The anthropologist Alfred Radcliffe-Brown wrote in the Commonwealth Yearbook of 1930 that it would have been more than 250,000, maybe even more than 300,000.

But Butlin's piecing together of the evidence told him this was way too low. He wrote in 1983 that it would have been 1 million or 1.5 million.

Then in 1988 some of Australia's leading archaeologists, led by John Mulvaney, argued that a more accurate estimate would be between 750,000 and 800,000. This has become accepted as "the Mulvaney consensus".

Now enter Dr Boyd Hunter, of the Centre for Aboriginal Economic Policy Research at ANU. With Professor John Carmody, a physiologist at Sydney University, he published this year in the Australian Economic History Review a long paper reviewing Butlin's population estimates.

The point, of course, is that the Aboriginal population declined dramatically in the early days of white settlement. We can be reasonably confident that, by 1850, the Indigenous population was only about 200,000.

Thus backcasting the figures to 1788 involves determining the main factors that led to the loss of Aboriginal lives and estimating how many lives they took, then adding them back. So the paper is a kind of whodunit.

One factor springing to the modern mind is that the unilateral appropriation of Aboriginal land led to much frontier violence, which started shortly after the arrival of the First Fleet and persisted well into the 20th century.

"Like any war, declared or otherwise, the conflict led to many deaths on both sides," the authors say. But even the controversial historian, Henry Reynolds, estimated the number of violent Aboriginal deaths at as many as 20,000, making this only a small part of the explanation.

Butlin allows for Aboriginal "resource loss", where tribes' loss of productive members and land used for sustenance led to people dying of "starvation or dietary-related diseases". Butlin's calculation implies this factor would have involved as many as 120,000 people.

That's still not the biggest part of the story. No, the big factor is the spread of introduced diseases. Such as? Tuberculosis, bronchitis and pneumonia, not to mention venereal disease.

But the big one is smallpox. Butlin and others have assumed that it spread rapidly around Australia along the extensive pre-existing Aboriginal trading routes after its first recorded outbreak in Port Jackson in April 1789.

In 2002, however, the former ANU historian Judy Campbell argued in her book, Invisible Invaders, that it was brought to Northern Australia by the Macassan coastal traders following its outbreak in Sumatra in 1780, then spread across the continent, reaching Port Jackson by early 1789.

This is where Hunter – no doubt relying heavily on the expertise of Carmody – brings to bear modern medical understanding of the infectiousness and mortality rates of various diseases. Although smallpox has a high rate of mortality – between 30 and 60 per cent of those who contract it – it's not highly infectious.

This means it happens most in densely populated areas and doesn't spread rapidly to distant areas. This casts doubt on Campbell's theory that smallpox spread rapidly from lightly populated Northern Australia to densely populated NSW.

But it also casts doubt on Butlin's theory that smallpox spread rapidly from Sydney to the rest of Australia via Aboriginal trading routes.

So what's Hunter and Carmody's theory? Are you sitting down? Gathering all the suspects in a room, detective Hunter deftly turns the finger of guilt from smallpox to the so-far unsuspected chickenpox.

The two are quite separate diseases, but this wasn't well-known in the 1780s. And since they both give rise to rashes or spots around parts of the body, many people may not have been able to tell the difference.

The point, however, is that chickenpox is about five times more infectious than smallpox, meaning it could spread a lot faster. It can recur in adults as shingles, which is also highly infectious. When adults contract chickenpox it can be fatal.

When the authors use chickenpox to do their backcast, assuming a low mortality rate of 30 per cent and also taking account of resource loss, they get a pre-contact Indigenous population (including up to 10,000 Torres Strait Islanders and up to 10,000 original Tasmanians) of about 800,000 – which by chance fits with the Mulvaney consensus.

If so, colonialists didn't outnumber the (much diminished) Aboriginal population until the mid-1840s. And by 1850 the total Australian population was still 25 per cent smaller than it was before colonisation.

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