One of these things is not like the others: why Facebook is beyond our control

What’s the difference between Google and Facebook?

One difference is that last week Google agreed to pay Australian news outlets for their content in the face of a threat of government action to force it to.

Facebook did not, temporarily removing Australian news sources from its feeds, a decision it only reversed after winning a range of concessions.

Another is the reason why.

It’s that Google faces competition, whereas Facebook really doesn’t.

In economists’ language, that’s because Facebook enjoys a rare “network effect”, Google scarcely at all.

If I want to switch from Google to another search engine (something I’ve done) it costs me next to nothing. I might find it hard to move my search history over (although there’s probably an app for that) but otherwise the new search engine will either be better, worse or about the same as the one I left. I’m free to find out.

Google faces competition

It means that Google is forced to defend itself from competition (or the threat of competition) by providing an extraordinarily good service.

Not so Facebook. Although a relatively new concept in economics, the idea of a network effect dates back to at least 1908 when the president of the American Telephone and Telegraph Company, Theodore Vail, spelled it out in a letter to stockholders.

“A telephone, without a connection at the other end of the line, is not even a toy or a scientific instrument,” he wrote. “It is one of the most useless things in the world. Its value depends on the connection with the other telephone — and increases with the number of connections.”

Facebook faces hardly any

The idea has since been expressed in a mathematical formula, but there’s no need to get into details. The world’s first telephone was indeed useless, the second allowed one household to reach only one other. But by the time there were millions, and almost every household had one, each telephone became incredibly valuable, allowing that household to reach almost every other household.

A startup that tried to compete with the phone system would be offering a very unappealing product. It wouldn’t be able to offer anything like the connections of the existing system until a huge proportion of the population signed up, meaning people would be reluctant to sign up, meaning it would stay unappealing.

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Read more: We allowed Facebook to grow big by worrying about the wrong thing

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Which is the point Vail was making. When it gets big enough, the telephone service is something close to a natural monopoly. There’s no point in anyone setting up a competing one (and in Australia we haven’t — the competing companies, Telstra, Optus and so on, share the one network).

The ASX stock exchange is another example, as is eBay. You could try to sell something on a different platform, but you wouldn’t reach nearly as many potential customers, so you mightn’t get as good a price.

The Australian Competition and Consumer Commission puts it this way in its report on Facebook: even if the government made it easier for a user to switch to another network, perhaps by mandating the transfer of data,

if none of the user’s friends or family are moving away from Facebook, that user would be unlikely to switch platforms

The “lock in” that happens when a network gets so big people feel they have to use it means it doesn’t have to treat them particularly well to get them to stay.

Seventeen million Australians use Facebook every four weeks — a huge proportion of the population, and an even bigger proportion of the population aged over 14 (80%).

Without Facebook, it would be hard to know what family and friends and long-lost classmates are up to — whether or not Facebook offers news. It doesn’t need to treat its users particularly well to get them to stay.

Facebook isn’t quite like the phone system. Young people find the fact that so many old people can use it to check up on them a turn-off and go elsewhere. But for the Australians already on it (that’s most Australians) it’s worth staying.

And there’s room for smaller specialised networks.

Linkedin has its own network for people concerned about the jobs market. If that’s the world you’re in, it’s wise to be on it because of the huge number of other such people who are on it. There’s not much point leaving it for something else.

Winner take all

It wasn’t always that way for Facebook. Fifteen years ago MySpace was how people connected, but not that many of them — it hadn’t grown to the point where network effects took over. When they did, there could be only one clear winner, and it happened to be Facebook.

Now not even its bad behaviour (Roy Morgan finds it is Australia’s least-trusted brand) can stop most people using it.

In the same way as people who want the lights on generally have to use the electricity company, people who want to catch trains generally have to use the railway and people who want to drive cars generally have to buy petrol, people who want to stay in touch generally have to use Facebook.

Which makes the government’s decision to remove its vaccination advertising campaign from Facebook silly. Facebook reaches 80% of its target audience.

Facebook has become a (trans-national) utility, unconcerned about its image. Attempts by one government, or even a coalition of governments, to force it to do anything are pretty much a lost cause.

No-one wanted it to be like this, and it’s not like this for Google. Facebook has moved beyond our control.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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The TV networks holding back Australia's future

If I offered you money for something, an offer you didn’t have to accept, would you call it a grab?

What if I actually owned the thing I offered you money for, and the offer was more of a gentle inquiry?

Welcome to the world of television, where the government (which actually owns the broadcast spectrum) can offer networks the opportunity to hand back a part of it, in return for generous compensation, and get accused of a “spectrum grab”.

If the minister, Paul Fletcher, hadn’t previously worked in the industry (he was a director at Optus) he wouldn’t have believed it.

Here’s what happened. The networks have been sitting on more broadcast spectrum (radio frequencies) than they need since 2001.

That’s when TV went digital in order to free up space for emerging uses such as mobile phones.

Pre-digital, each station needed a lot of spectrum — seven megahertz, plus another seven (and at times another seven) for fill-in transmitters in nearby areas.

It meant that in major cities it took far more spectrum to deliver the five TV channels than Telstra plans to use for its entire 5G phone and internet work.

Digital meant each channel would only need two megahertz to do what it did before, a huge saving Prime Minister John Howard was reluctant to pick up.

His own department told him there were

better ways of introducing digital television than by granting seven megahertz of spectrum to each of the five free-to-air broadcasters at no cost when a standard definition service of a higher quality than the current service could be provided with around two megahertz

His Office of Asset Sales labelled the idea of giving them the full seven a

de facto further grant of a valuable public asset to existing commercial interests

Seven, Nine and Ten got the de facto grant, and after an uninspiring half decade of using it to broadcast little-watched high definition versions of their main channels, used it instead to broadcast little-watched extra channels with names like 10 Shake, 9Rush and 7TWO.

Micro-channels are better delivered by the internet

TV broadcasts are actually a good use of spectrum where masses of people need to watch the same thing at once. They use less of broadcast bandwidth than would the same number of streams delivered through the air by services such as Netflix.

But when they are little-watched (10 Shake got 0.4% of the viewing audience in prime time last week, an average of about 10,000 people Australia-wide) the bandwidth is much better used allowing people to watch what they want.

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Read more: Broad reform of FTA television is needed to save the ABC

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It’s why the government is kicking community television off the air. Like 10 Shake, its viewers can be counted in thousands and easily serviced by the net.

The government’s last big auction of freed-up television spectrum in 2013 raised A$1.9 billion, and that was for leases, that expire in 2029.

Among the buyers were Telstra, Optus and TPG.

The successful bidders for leases on vacated television spectrum in 2013. Australian Communications and Media Authority

The money now on offer, and the exploding need for spectrum, is why last November Fletcher decided to have another go.

Rather than kick the networks off what they’ve been hogging (as he is doing with community TV) he offered them what on the face of it is an astoundingly generous deal.

Any networks that want to can agree to combine their allocations, using new compression technology to broadcast about as many channels as before from a shared facility, freeing up what might be a total of 84 megahertz for high-value communications. Any that don’t, don’t need to.

All the networks need to do is share

The deal would only go ahead if at least two commercial licence holders in each licence area signed up. At that point the ABC and SBS would combine their allocations and the commercial networks would be freed of the $41 million they currently pay in annual licence fees, forever.

That’s right. From then on, they would be guaranteed enough spectrum to do about what they did before, except for free, plus a range of other benefits

The near-instant reaction, in a letter signed by the heads of each of the regional networks, was to say no, they didn’t want to share. The plan was “simply a grab for spectrum to bolster the federal government’s coffers”.

And sharing’s not that hard

It’s not as if the networks own the spectrum (they don’t) and it’s not as if they are normally reluctant to share — they share just about everything.

For two decades they’ve shared their transmission towers, and for 18 months Nine and Seven have been playing out their programs from the same centre.

That’s right. Nine and Seven use the same computers, same operators, same desks, to play programs.

One day it is entirely possible that a Seven promo or ad will accidentally go to air on Nine, just as a few years back some pages from the Sydney Morning Herald were accidentally printed in the Daily Telegraph, whose printing plants it makes use of.

All the minister is asking is for them to share something else, what Australia’s treasury describes as a “scarce resource of high value to Australian society”.

There’s a good case for going further, taking almost all broadcasting off the air and putting it online, or sending it out by direct-to-home satellite, removing the need for bandwidth-hogging fill-in transmitters.

Seven, Nine and Ten have yet to respond. Indications are they’re not much more positive than their regional cousins, although more polite. They’re standing in the way of progress.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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The texts that could cost three government ministers their jobs

Rarely do we get to see how newspaper stories are made.

Nine days ago, across almost the entire width of its front page, The Australian published a headline that read: Exclusive: Judiciary "light on terrorism". 

They had been talking about a court case, the transcript of which we now know they hadn't read. All three were relying on no more than an ABC Online report, according to evidence given on their behalf by the Commonwealth Solicitor-General.

Each had sent a single text message to Simon Benson, national affairs editor of The Australian. One was sent at 12.36 pm on the Monday afternoon, one at 12.43 pm, and the last at 1.42 pm. They weren't sent in response to questions.

Hunt's text said: "Comments by senior members of the Victorian courts ­endorsing and embracing shorter sentences for terrorism offences are deeply concerning — deeply concerning." State courts should not be places for "ideological experiments".

Sukkar bemoaned "Labor's continued appointment of hard-left activist judges".

Alan Tudge, Michael Sukkar and Greg Hunt could be charged with contempt of court.CREDIT:ANDREW MEARES

Tudge said some were "­divorced from reality". They seemed "more concerned about the terrorists than the safety of the community".

Benson packaged their texts with quotes from judges at the hearing in question, all but one of which he took from the ABC website.

His lawyer confirmed that, like the ministers, he had no other source.

The Victorian Court of Appeal had been considering the sentence handed down for two men convicted of terrorism over a plan to run down and behead a police officer at an Anzac Day march in 2015.

What infuriated the judges was that they hadn't yet made a decision.

The minister's texts, amplified through The Australian, could be seen as an attempt to influence their decision. Much worse, they ran the risk of being damned whether they took account of them or not.

"On the one hand if we dismiss the appeals, then we will be accused of engaging in an ideological experiment or being hard-left activist judges, or on the other hand, if we increase the sentences ... the respondents may have an understandable grievance that we were doubtlessly affected by what three prominent ministers for the Crown had to say," Chief Justice Marilyn Warren said.

"Can I add to that?" added Justice Stephen Kaye. "If we dismiss the appeals, it may be said we are reacting, perhaps overreacting, against the content of what your client said."

The technical term is "scandalising the court". Justice Kaye said he had never seen anything like it in more than 40 years in the law. Warren and Justice Mark Weinberg agreed.

The three had invited the three ministers to appear before them on Friday to explain why they should not be tried for criminal contempt of court.

It was their last and only opportunity to put a case before the judges decided whether to refer their conduct to the Office of Public Prosecutions. None turned up. Instead, they sent the Commonwealth Solicitor-General Stephen Donaghue, QC, who made it clear he was representing them in their "role as ministers within our system of government".

He had his work cut out. The video shows him opening by reading a statement in which the ministers neither withdrew what they had said nor apologised.

Then after 39 minutes of excruciating questioning, he received his own text.

"I have just received instructions from Mr Sukkar that he is content to expressly withdraw the statement about hard left activist judges," he informed the court.

"Does he apologise for it? He doesn't apologise," Kaye noted, amid nervous laughter from the packed public gallery.

"Sounds like somebody's on the telephone," Weinberg observed, before adding: "Could I ask whether any of your three clients are lawyers or legal practitioners with any experience in the law at all?"

All three were lawyers. None had turned up.

"In other instances where these kinds of developments have occurred, the minister has taken the opportunity to retract the statement and apologised to the Court," the Chief Justice pointed out.

And then another text, amid more nervous laughter. "My instructions have evolved somewhat in the course of the morning," Donaghue stammered. "I can convey to the Court that I have received instructions to withdraw three of the statements in the article."

"Ideological experiments" and "divorced from reality" were also withdrawn.

And, on further questioning, the statement about the judges being appointed by Labor governments was withdrawn.

They had "multiple appointments to judicial offices for governments of both the Coalition and Labor," Warren pointed out.

Hunt, Sukkar, and Tudge may have left it too late for an apology. If it goes to trial and they are convicted, they could lose their seats.

But there's a potential upside. They would most likely be replaced by ministers with a clearer knowledge of the law who devoted attention to health, housing and Centrelink.

In The Age and Sydney Morning Herald

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You'd think the networks owned the airwaves

You'd think our commercial networks owned the airwaves.

When Communications Minister Malcolm Turnbull cut back the ABC and SBS last week he also gave notice of a minor rule change that sent them into convulsions.

Henceforth, the SBS would be able to broadcast up to 10 minutes of advertising each peak hour instead of the usual five.

The networks acted as if he had attacked their right to exist.

"This government was elected as being pro-business," thundered Seven Network chief executive Tim Worner. "It shouldn't be making decisions that harm Australian businesses."

"I am surprised the government is prepared to compete against and inflict damage on Australian commercial broadcasters," wailed Nine's David Gyngell.

What was proposed was "directly at odds with the government's claim that Australia is open for business," said Free TV Australia chair Harold Mitchell.

What was proposed was competition.

Australian television networks don't believe they are like other businesses. Banks have to put up with competitors muscling in on their turf, supermarket chains have had to cede ground to Aldi, carmakers have had to compete or go under, but the spoiled children of Australian industry want to be forever protected from competition on the airwaves as everything changes around them.

The biggest change is that broadcast spectrum has become incredibly valuable for mobile communications. Yet the networks sit on it.

Another is that much less spectrum is needed to broadcast a TV program than before.

Yet the networks sit on it. During the switch to digital in the 1990s, rather than broadcasting what they had before using much less spectrum (the whole point of the exercise) they said they needed more spectrum in order to broadcast in full high definition. That way it couldn't be used by anyone that might want to start a competing network. They produced dodgy-looking research saying Australians didn't want extra channels - they wanted the same channels in high definition.

Prime Minister John Howard bought their line against the recommendations of his advisers.

The Office of Asset Sales labelled it "a de facto further grant of a valuable public asset to existing commercial interests".

His department said there were "better ways of introducing digital television than by granting seven megahertz of spectrum to each of the five free-to-air broadcasters at no cost when a standard definition service of a higher quality than the current service could be provided with around two megahertz".

They were given it on the condition that they could only use it for broadcasting their existing channels in high definition.

When after some years it became apparent that Australians weren't going to switch to digital if all they got was the same channels (invalidating the networks' dodgy looking research) the networks said they could better use the excess spectrum for extra channels themselves.

Each still maintains a token commitment to high definition on one of its channels (it's actually degraded high definition to make way for the extra channels) but no one much notices. Much of the time those channels don't carry high definition content. The spectrum is wasted, but no one else has it. That's how the networks think.

And the minister is on to them.

He has already picked on the easiest target. The poorly watched community channels in Melbourne, Geelong, Sydney, Brisbane Adelaide and Perth will be kicked off their spectrum at the end of 2015. They'll have to use the internet. After the freed-up spectrum is used to test new technologies it'll be made available to the highest bidders, almost certainly mobile phone and data companies.

The next step will be grabbing back spectrum from the ABC and SBS. That's fairly easy - cut their budgets, let them use a new compression technology called MPEG-4 that halves the amount of spectrum they need and tell them they can save on transmission costs and give the other half back.

The commercial networks require more subtle handling. The minister has launched an inquiry - the spectrum review -  to work out how to "maximise the economic and social return from spectrum". Its preferred approach is auctions, with the winning bidders limited to 15 years at a time and the department given the right to take the spectrum off them (with compensation) if it's not fully used.

The treasury describes spectrum as a scarce resource in its submission. It says it should be allocated to the highest value uses.

"To be clear, this includes both commercial and non-commercial applications," it says - making a pointed reference to two of the biggest hogs of spectrum, our armed forces and our police and emergency services.

Defence will, at the very least, have to justify what it needs and hand some back. Police and emergency services might be able to hand back a lot with the proviso that in a real emergency they get it to use it again, with the mobile communications company that has bought it agreeing to degrade its service to give emergency services priority.

And the networks. Turnbull will probably get it off them by being nice. Using new compression technology, they will need only half as much and be able to sell the excess to someone who wants it more. It's far more than they deserve, but at least their spectrum will be better used.

It'd make a nice little earner for whoever buys Channel Ten and a really good earner if the new owner sold the lot and closed the station down.

Mobile communication is increasingly important to us. Network television is not.

In The Age and Sydney Morning Herald

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Rupert moves minds? Sure, if you already agree with him

ABC 891 Adelaide September 18 2013 Right click to download




Ray Hadley holds two apparently contradictory views.

On one hand the 2GB jock thinks it’s important to tell people what he thinks. During the campaign he said Labor’s David Bradbury a dill, a sycophant and a lapdog.

On the other he thinks what he says makes no difference. He told Four Corners: “I can enunciate how I feel about David Bradbury, but at the end of the day the voters of Lindsay, I mean they're not going to take any notice of a shock jock and what he thinks of David Bradbury, they'll form their own assumptions”.

It’s the kind of get-out-of-jail-free card used by Fox News in the US. One of its slogans is “We report, you decide”. But if Fox News is right and it doesn’t sway opinions, it’s worth asking why it tries so hard - unless it’s for entertainment. It’s also worth asking the same question about Sydney’s Daily Telegraph. Was it merely trying to entertain us with its front page depicting Kevin Rudd as a Nazi prison camp commandant, or was it trying to shift votes.

Rudd thought so. He said News Corp was in a coalition with the Coalition to bring him down.

Economists are inclined to side with Hadley. They don’t think slanted coverage matters. They think we are rational. Here’s how a paper from the National Bureau of Economic Research puts it:

“A media source injects bias into its coverage of a political candidate. A rational viewer, knowing the exact extent of the bias, realises that often times bad news is not reported and good news is exaggerated. If the viewer has a good sense of the degree of the media source’s bias, she will take into account the media source’s bias and discount the news.”

Nifty, eh? Actually, it’s pretty much how we think it works when it comes to ourselves. We are not swayed by biased coverage, only others are.

It’s a hard proposition to test...

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In the case of Rupert Murdoch it is widely believed he backs whichever leader is are likely to win anyway, pocketing an undeserved reputation for swinging the vote.

But an usual occurrence at the turn of the century allowed two researchers to try. Stefano Della Vigna and Ethan Kaplan noticed that Murdoch’s Fox News channel was being rolled out to some towns ahead of others. In otherwise identical towns next to each other, one had Fox News, the other did not.

Comparing those towns they calculated that in the 2000 George Bush - John Kerry contest Fox News managed to persuade 3 to 8 pc of its viewers to change their votes, a shift that may “have been decisive”.

A more recent reexamination of the data reached a less alarming conclusion. Fox News was indeed persuasive in getting Republican-leaning voters to actually vote Republican, but had no effect (if anything an anti-Bush effect) on voters likely to vote Democratic.

It’s hard to change opinions, easy to reinforce them. And this is where it gets personal. Newspapers such as this one (our slogan is Independent, Always) ought to work against polarisation. We report the views of people all sides. Except they don’t. The latest research suggests that reporting a range of views actually hardens pre existing positions.

Harvard University economists Edward Glaeser and Cass Sunstein outline it in a paper entitled Why does balanced news produce unbalanced views?

One of the studies involved capital punishment. People were asked to read arguments both in favor of and against. Both supporters and opponents hardened their opinions.

Another involved reports that attempted to settle questions (fact checking). People were shown arguments about the proposition that cutting taxes is so effective at boosting economic growth it actually lifts government revenue. Then they were shown evidence that it did not. Those who believed the claim to start with “ended up believing this claim more fervently” after seeing the refuting evidence.

People shown both good news and bad news about themselves or people like them (intelligence, attractiveness, the likelihood of getting cancer) took the good news on board, but downplayed or forgot the bad.

Ray Hadley might be more correct than you might think (and probably as correct as he thinks). He can’t much influence the people of western Sydney, unless its in the direction they were likely to move anyway. And I can’t much influence you (even when I am checking facts) unless its in the direction you were heading anyway.

I don’t like it, but then I’m not inclined to like it. I’m hard to convince.

In The Canberra Times and The Sydney Morning Herald


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Do facts matter?

New research suggests they matter more than we let on

Imagine an election without facts. What if that’s where we are heading?

Both the ABC and politifact.com.au have set up “fact checking units,” innovations that would have once been welcomed. After all, without facts, how can you work out how to vote? But the new institutions have been met with scorn. The Australian newspaper has run commentary asking whether the units will check facts from a “green-left” or “so-called progressive” point of view. A Coalition senator has pointed to tweets once made by the man who now heads the ABC’s unit and asked how he can check facts when he has attacked the Coalition.

It is as if facts don’t exist independently of views - as if there are green-left facts, pro-market facts, pro-business facts, but not simply facts, able to be dug up by anyone regardless of their political persuasion.

It is true that Labor voters give pollsters a very different account of economic facts to Coalition voters.

The Melbourne Institute has been surveying consumer sentiment for decades. Among the questions it asks is whether economic conditions are improving or getting worse. Every month without exception for six years now Labor voters have been reporting brighter conditions than have Coalition voters.

But if you look back to just a month before Rudd was elected you see something remarkable. For every month under John Howard as far back as the eye can see the Labor voters reported worse conditions than the Coalition voters. The two switched their perception of the economy as soon as their side took (or lost) office.

It can’t be because the economy suddenly changed. The switch is too dramatic. And if the facts had suddenly changed the perceptions of voters on both sides of politics would most probably have moved in the same direction.

We are increasingly self-selecting our ‘news’. Whereas once one single set of news was presented to the nation each night at 7.00pm and just a couple of sets each morning in the newspapers, these days we are tailoring our own news feeds, relying heavily on twitter, web searches and sometimes openly partisan newspapers and radio stations.

Does that give us even less of handle on reality? There are worrying signs that it does.

The US went down the tailored news road early with Fox News, an openly partisan cable news channel completely unlike Sky News in Australia.

The ‘facts’ that its viewers outline to pollsters are far more likely to be false than those who rely on old-style media...

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After the initial phase of the Iraq War in 2003 Americans were asked whether or not US forces had found the much talked about Iraqi weapons of mass destruction.

An astounding 33 per cent of those who relied on Fox News falsely said they had. Among those who relied on the traditional networks the proportion was only 20 per cent. Among those who relied on public broadcasting it was just 11 per cent.

Other findings in the survey suggest that the more an American watches Fox News the more likely she or he is to believe things that are false.

It would be deeply concerning, were it not for the findings of an ingenious new survey released in May.

Researchers from Yale University and the University of California San Diego wondered whether the Americans reporting false beliefs really held them or were just ‘barracking’, having a lend of the surveyors to make a political point.

Their genius was to pay for correct answers.

Without payments, Republicans and Democrats were sharply divided in their responses to factual questions such as whether American deaths in Iraq were increasing and whether or not the world was warming.

But with small payments ($1 for the correct answer and 33 cents for using the option “don’t know”) almost all of the gap disappeared.

The proportion admitting they didn’t know became huge, up to 50 per cent.

When tested with money Americans appear to have a surprisingly good idea about what they don’t know, and when they do take a stab at something they are likely to guess the truth, even when it conflicts with their political positions.

The researchers disparage polling of the kind conducted in Australia saying “just as people enjoy rooting for their favorite sports team and arguing that their team’s players are superior even when they are not, surveys give citizens an opportunity to cheer for their partisan team”.

There’s a chance that deep down we are hardwired to know what is a fact and what is not, even if we don’t let on. There’s a chance we will take seriously the work of the fact checking units even if some of the barrackers say they will not.

In today's Sun Herald 



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Murdoch fears another Murdoch

"This is the first government outside of war time that is contemplating government-sanctioned journalism."

- News Limited Australian CEO Kim Williams

Murdoch's man raised an interesting point this week.

But he didn't explain what did happen during the second world war, and who tried to push it through.

Here's Bruce Page in his 2003 book The Murdoch Archipelago.

The Murdoch he refers to is Rupert father, Keith Murdoch, then chief executive of the Herald and Weekly Times. Theodore Fink is Murdoch's predecessor as chief executive, by then the company's chairman. The prime minister was Robert Menzies.

He is talking here about Keith Murdoch:


"In June 1940, undertaking to relinquish all
his editorial powers meanwhile, he became Menzies'
Director-General of Information. He then asked Menzies for the
means to correct media 'mis-statements', and received sweeping
authority over the content of newspapers, magazines, radio and
theatre. Outrage was universal — except among the Herald
papers, allegedly now disconnected from Murdoch. They remained
silent. Theodore Fink, eighty-five and unwell, called on the
Herald directors to protest. Principles of editorial
independence would be eroded, they said, were they to do so.

Dissociating himself from his own company's behaviour, Fink
called the Murdoch regulations 'an infringement of the rights
and liberties of the public'. His words were published
everywhere — except in the 'Murdoch press'. Public opinion
fiercely supported Fink, and Menzies jettisoned the
Director-General's astonishing programme. Murdoch resigned in
November and rejoined the board — perhaps a bittersweet victory
for Fink, as its swiftness minimised the damage to Murdoch's
reputation."

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RM Younger provides a more detailed acount.

It's in Keith Murdoch, Founder of a Media Empire, also published in 2003:


"KM's appointment earlier in June had coincided with what was
widely seen at that time as Australia's gravest hour, but he
believed it could be Australia's greatest hour if 'decisions
and events ... forge our spirit and weld our heart and mind
into a greater and better nation'...

The brief gave KM access to confidential military
material and included the opportunity for him to attend War
Cabinet meetings. He detached himself from The Herald and
worked from government offices in Melbourne and Canberra.

The post's responsibilities included not only direction of positive
aspects of morale-building but also censorship — a dichotomy
which was to cause insurmountable problems. Nevertheless, he
took up the task buoyant and optimistic, thinking only of the
positives:

"The department will exist to serve the people, and for no other
reason. There will be no conceivable bias or selfish interest,
but only utter devotion to Australia ... everything that can be
done will be done to give the people [a close understanding of
the facts of the war situation] ... As the days pass there will
be a great and clear call to action for very many people, and I
would say that there would be a call to everybody if humble but
necessary national duties get their due honour. By this I mean
that guarding by each person of his or her share of Australia's
indivisible soul, proud encouragement of the fighting man, and
contribution of money or humble toil will be honoured in their
true light as important to Australia's effort.

"...We will try to make all the facts of Australia's own effort
known as soon as they can be told, and we hope that these facts
are in the minds of people before they make their criticisms or
judgements. It is, of course, in nobody's mind that criticism
is to be stifled, but we want constructive criticism based on
actualities."

In accepting the post, no doubt Murdoch was influenced by his
memories of what the leading London newspapermen — especially
Northcliffe — had done in World War I, when they directed
important national morale-building efforts within the British
Ministry of Information. However, two of his close friends had
contrasting views about the wisdom of his step. Former Herald
journalist Sir Henry Gullett, now a member of the War Cabinet
and the minister assisting Menzies on information matters,
believed KM uniquely suited to the difficult morale-building
task and encouraged him to take up the position, but Lionel
Lindsay, a worldly personal friend with whom KM had maintained
a long association, pointed out to him that it was almost
certain rival newspaper proprietors would resent his
appointment and would mount destructive opposition.

KM was aware of the likely difficulties. 'The War Cabinet has given me
an affrighting list of duties, but, of course, we can only
serve the great efforts of the people themselves,' he told The
Argus. He had a philosophy about the part newspapers would be
called upon to play, and he expressed it when he spoke at a
farewell gathering of HWT executives:

"The work of a newspaper is of paramount importance in a
democracy in wartime, and if it were not for [the fact] that I
am going to serve newspapers outside I certainly would not be
leaving you now ...

"In the policy-making and direction of the
Department of Information, my tasks are going to be of a
peculiarly unpleasant type. It is not an easy job to find and
stir the inner thoughts of men, or go deeper and try to touch
the spirit. It is very difficult, and of course carries with it
a considerable share of danger."

In outlining his ideas to the War Cabinet on 19 June, KM said
his conception of the Department of Information was that 'it
should be a Department of expression, except in respect of
information of use to the enemy. If criticism would be damaging
to the national war effort, it should be suppressed.' In a
suggestion that foreshadowed his later move to bring
opinion-polling to The Herald, Murdoch said it would be
valuable to establish a service for ascertaining what a typical
cross-section of the public mind is thinking on important
questions'.

It was important, he also told the War Cabinet,
that a regulation should be passed 'to insist on a journal
publishing the truth in an appropriate form if required to do
so'. He submitted proposals for active campaigns covering radio
and the print media. The essential thrust of these proposals
was that he would have the right to insist that a publication
or a broadcasting station present the facts to correct any
misleading or inaccurate information. After the War Cabinet had
endorsed the plan, on 1 July KM convened a conference with
newspaper editors to draw out their views.The editors were
vocal on the shortcomings of censorship, but they were wary of
the proposal for enforced publication of 'corrections'. KM
explained that he was concerned about 'wilfully biased' news
and put the view that it would be better to adopt the
corrections method than to install an elaborate regime of
censorship. The newspapers remained unimpressed; it was one
thing to designate what they should not publish, another to
compel publication of particular material. Even Sir George
Knowles, the government chief law officer, saw some
difficulties in the new plan. He told KM the regulation 'is
going a long way' and although he did not doubt that it would
not be operated to demand excessive space, he nevertheless felt
that 'if made in the form suggested, its verbiage may be
criticised'. In spite of the warning, KM decided to let the
regulation stand.

Clearly the dominant issue at stake was the
newspapers' belief that their contents could come under
government control — and all KM's denials that this was the
intention or the implication were swept aside.

Meanwhile, the practical difficulties of developing a sound
organisation were quickly apparent. As well as having a small
staff in the department's editorial division, KM was anxious to
enlist the best available help in presenting authentic
material, and wrote to Professor Copland, the Commonwealth
Prices Commissioner, asking him how best the department could
help publicise the significance of the war on the economic
front.

Copland provided him with notes setting out a program to
achieve this aim, but the difficulties facing the department in
getting things done meant that it would be six months before
the plan was taken up. After two months in the post, KM became
aware of the mounting pressures he faced, and in his reply to
Copland he wrote: 'I am still immersed in a labyrinth of vested
interests which make it extremely difficult to be effective.'

Those vested interests were to be found both in the bureaucracy of
established departments and, most potently, among the major
newspaper proprietors, who were not happy with the Government's
choice of KM. to exercise some degree of authority over their
exclusive domain.

The most contentious phase of the Murdoch
administration began when drastic powers were assumed under
national security regulations gazetted with his authority on 17
July to force the publication by newspapers of any matter
'necessary or expedient for the defence of Australia or the
efficient prosecution of the war'. Similar powers were given to
him as Director-General over all radio stations and cinemas.
The only opposition to the regulations came from the
newspapers.

An explanatory statement by Prime Minister Menzies
said the regulations made the Director-General's decision final
regarding which particular position, space or time was to be
allotted to the corrective item to be published, broadcast or
exhibited. Menzies gave an assurance that although the powers
were broad they would be sparingly used and applied only in
cases in which a newspaper was guilty of persisting in blatant
misrepresentation of the true position. John Curtin, as Leader
of the Opposition, was cautious in his comment that use of the
new powers called for the Opposition's 'utmost watchfulness'.
Others were less restrained: the NSW Minister of Justice,
Vernon Treatt, said he viewed . such powers with concern, while
the Premier of Victoria, Albert Dunstan, declared: 'This is
establishing a dictatorship.'

In explaining the reasons for the
regulations, KM said the purpose was to get a wide publication
and understanding of the truth about the war and Australia's
national position and problems. He added:

"As regards publications, the censorship lies within this
department's duty but I hate suppression as we all do, and
would much prefer when possible to correct some bad position by
a statement of the truth which will answer and destroy the
untruth. The regulations give us the right to require a journal
to publish our statements in the type and position which will
adequately and comparatively present the truth as against the
untruth which we are chasing. I should think we would use this
power little, if at all, because reputable newspapers take
pains to avoid untruth, and when they fall
into mistakes correct them ... I believe this is better than
suppression by censorship. I believe in freedom of the Press,
and I am trying to preserve that freedom as against censorship."

In spite of Murdoch's assurances, there was virtually
unanimous condemnation by newspaper proprietors of the sweeping
powers assumed under the regulations. Most were opposed in
principle to any limitation on the independence of newspapers
in deciding contents; The Sydney Morning Herald considered the
regulation's power to control the use of space as an
abrogation of property rights. The paper splashed its
front-page report of KM's 'drastic powers to compel the
publication by newspapers of any matter necessary or expedient
for the defence of Australia or the efficient prosecution of
the war'. These powers, the headline suggested, conferred on
the Government the 'power to commandeer space'. Next day, the
paper's editorial, entitled 'A bludgeon for the press',
thundered against what it dubbed 'the creation of a Propaganda
Department designed to remedy supposed deficiencies in the
win-the-war spirit of the public'. Drawing upon the
leader-writer's most vituperative rhetoric, the editorial saw
the regulation as 'a betrayal of that trust which has already
done the Government incalculable harm and may end in doing it
irreparable injury, if the mischief is not corrected in time'

The most hurtful attack came from within the HWT, when KM.'s
own chairman used the issue as a weapon in internal company
power play. Sir Keith's place as managing director at HWT had
been filled by Lloyd Dumas, managing director of The
Advertiser, who was quick to take a leading role in trying to
calm the fears of the other newspapers over the regulations.
Dumas considered that these 'regulations to control newspapers'
were unfortunately worded, but he understood that Murdoch's
objective was 'to make it possible for the Government to get
statements, particularly correcting statements, into certain
publications which were anti-Government and in some cases,
anti-war'. Dumas believed the regulations had been made broader
than intended; he prepared an editorial for The Herald saying
that it was an unnecessary piece of interference with the press
but it obviously had been drawn up hurriedly to meet some need.

Most damagingly for KM, the octogenarian HWT chairman, Theodore
Fink, immediately expressed his dissatisfaction with the
paper's editorial stance. He told Dumas that The Herald must
wholeheartedly attack the regulations in the same way The Age
and The Argus had been doing. Instead, Dumas found support
within the HWT board for his more conciliatory view; The Herald/i>
then ran an editorial urging that the regulation be withdrawn
and redrafted. In an effort to further his compromise Dumas
phoned Murdoch in Canberra, as well as the main Sydney
proprietors and The Age and The Argus in Melbourne, before
finally preparing a revised version of the regulations that
would still give the Government the power of correction it
sought but would give no other powers of control over the
press. His effort appeared to succeed when the newspapers
agreed to accept his draft proposal. Next morning The Age and
The Argus suggested the confrontation was over. In its
editorial headed 'Retrieving a blunder' The Sydney Morning
Herald revisited what it described as 'a nation-wide outburst
of alarm and resentment' and added a touch of hyperbole in
seeing the withdrawal of this 'autocratic attack upon the
corner-stone of the free civilisation which [the war] is
designed to save' as a necessary part of checking 'the
pretensions of bureaucrats'.'

However, no one had realised the
extent to which Theodore Fink would go to upset this
arrangement. Two days later he wrote an article, which he
signed as chairman of the Australian section of the
Commonwealth Press Union, and submitted it to The Age and
Argus, both of which published it. A copy of the article was
also handed to George Taylor, editor of The Sun News-Pictorial,
by Fink's son, Thorold, but after discussion with HWT board
members Harry Giddy and George Caro, it was decided at an
executive level to withhold its publication.

Further complications arose when the Sydney newspapers picked up the
Fink statement that he `wish[ed] to dissociate [himself] from
the views expressed in HWT publications in favour of the
regulations'. The Herald board met, with Thorold Fink
deputising for his father, who was confined to his bed; it was
agreed the Dumas version should run as The Herald's editorial
view. However, the differences ran deep, and the unpleasantness
that developed over the issue lingered, as Dumas recalled when
he wrote: 'Mr Fink tried in other ways to undermine Sir Keith
while he was out of the office and I was deputising for him'.

After considerable difficulty a new regulation was drafted
with provision that an offending newspaper could avoid
compulsory correction by complying voluntarily with a request for
publication of 'a statement correcting the statement previously
made [by it]'.

Despite the dust settling over the
regulations, behind the scenes resistance simmered among
Australia's powerful family proprietors Fairfax, Packer and
Norton in Sydney and Syme in Melbourne). Chance weakened KM's
position when Sir Henry Gullett, who was assisting Menzies on
information matters, was among three ministers killed in an air
accident in Canberra in October 1940, leaving KM without his
most stalwart ally in federal Cabinet.

Murdoch was concerned that the Department had so quickly become caught
up in political gamesmanship. A chief protagonist of the attack
was Arthur Calwell, who entered the federal Parliament in 1940
after a quarter of a century as a political activist steeped in
socialist dogma while working within Victoria's public service.
Calwell had spent years in preparation for a parliamentary
career by understudying the federal member for Melbourne, whose
political heir he became. Calwell had a long-standing grudge
against Murdoch dating back to 1934 when he agreed to the
settlement of an untried libel action following a slighting
reference to him; soon after taking his parliamentary seat
Calwell railed against Sir Keith's role as Director-General of
Information.

In the face of increasing pressure of newspaper
opinion, Menzies withdrew his support. By October Murdoch
realised his position was untenable, and decided to resign. He
advised a meeting of the War Advisory Council on 30 October
that this was his intent. Shedden's pencilled Minutes noted:

"Retirement of D.G. — reason given by Sir K. Murdoch:-

Sir K Murdoch's influence. and work can be greater in his
group of papers than as DG.

Opposition of Sydney press."

He consoled himself that the editorial division of the
Department of Information had gained a reasonably sound
footing. Menzies made a public statement on 14 November
expressing appreciation of Murdoch's 'generous and honorary
work' and acknowledging that his experience, ability and energy
had been invaluable.' The prime minister noted that Sir Keith
would remain associated with the department in an advisory capacity,
particularly in relation to its overseas activities in the
establishment of representation offices abroad.

Out of the controversy questions had been
raised about the value of the information service. When KM
reviewed the work of the department at a session of the War
Advisory Council, it expressed approval, of the extensive
reorganisation he had initiated. Wider and more intensive
activities were expected to include greater extension overseas,
especially in the United States. Some months later, as a result
of KM's initiative, the Australian News and Information Bureau
was established in New York to provide material to the media
that would strengthen understanding of Australia's viewpoint
and promote knowledge of Australia among Americans.

In his public appreciation of KM's work Menzies took a laudatory
approach:

"The work of the department has been completely reorganised and
is now well established. Sir Keith Murdoch, who came in to
assist the government in this reorganisation, now feels that he
could, in future, make a more effective contribution to the
strengthening of public opinion and the winning of the war by
resuming active association with his newspaper interests.

"Ministers have expressed the keenest appreciation of the work
done by Sir Keith and were naturally anxious for him to
continue. They have, however, as a result of discussion, agreed
that the future work of the department can proceed on lines
which are now largely settled and with machinery which is
running smoothly, and that in the circumstances [he] should be
released ...

"I desire to say how greatly the Government has
appreciated Sir Keith Murdoch's generous and entirely honorary
work. He is one of the outstanding newspapermen of the British
Empire and his great experience, ability and energy have been
invaluable to us."



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Too much economic news? Too much for our own good?

Former RBA governor Ian Macfarlane thinks so.

He has been listening to Nate Silver

Here is his Charles Goode Oration at the Melbourne Business School Thursday night:




Tonight I want to ponder on a few thoughts that came to me in my previous
occupation, and have developed further in my more recent work in the
investment community.

Specifically, I hope to answer two questions and make one historical
observation. The questions are:

• Do our media concentrate too much on short-term economic news,
and do they do so more than in other countries?

• Does it make us happier and better able to do our jobs and invest our
savings?

• And finally I want to make an observation abou some really important
long run price developments and their implications for Australia.

(1) Do we get too much economic news?

People with jobs like I had have always been at the receiving end of a lot of
economic information, most often from official sources like the Australian Bureau
of Statistics, but increasingly now from private providers of survey information.
Over the past couple of decades the general public has also been inundated with
this type of information.

The newspapers and magazines are full of economic news, as is radio and
television, where there are special programs devoted to it. This is a world-wide
phenomenon, and you can turn on a television set in a hotel in the US, Europe or
Asia and hear someone holding forth on the latest movement in exchange rates,
share prices or bond yields at any time of day or night.

While it is a world-wide phenomenon, it is more pronounced in newspaper
coverage in Australia than elsewhere. I have often heard foreign visitors or new
arrivals express surprise at how much economic coverage there is in Australian
papers, particularly on the front page.

We did a comparison at the Reserve Bank a few years ago of how much coverage
was given to a particular piece of economic news, namely central bank monetary
policy decisions. We looked at it in Australia and the UK and the US (the latter two
being the financial capitals of the world). We took three comparable newspapers
in each country; in the UK, the Financial Times, the Times and the Independent:
in the US, the Wall Street Journal, the New York Times and the Washington Post;
and in Australia, the Financial Review, the Australian and the Sydney Morning
Herald (The Age would have been similar).

We added up the number of articles in these papers in the three days surrounding
two successive monthly monetary policy meetings. Our findings were as follows...

In the US, 35 articles;

In the UK, 46 articles;

In Australia, 131 articles.

Then we looked at how many of these articles were on the front page. The
results;

In the US, 1 article

In the UK, 1 article

In Australia, 14 articles.

Why is there so much more coverage in Australia than elsewhere?

One explanation I have heard is that there is not as much other news to report.
We are not an international power or trouble spot, we are not engaged in major
wars, we do not have racial riots, civil insurrections, or sectarian violence, and
the private lives of our politicians are not as lurid as British one (or a recent
American president). So instead our newspapers are taken up with recent figures
on employment, interest rates, the CPI or the Budget.

With the media competing so strongly against each other, there is inevitably
a bias towards sensationalism. While Australia has a few experienced and
thoughtful economic commentators who are world class, it also has a multitude
of eager beavers who are mainly concerned with tomorrow’s headlines. They
try to extract the maximum amount of coverage out of each ephemeral piece of
news – monthly or even daily figures are invested with a significance well beyond
their actual information content.

Interest rates do not merely rise, they ”soar”, the exchange rate “dives”
or “plunges”, Budgets “blow-out”. The reader is left with the impression of
constant action and turmoil. The recurring television image is of people in dealing
rooms or on the floors of futures exchanges shouting at each other.

Another feature is the tendency to concentrate on pessimistic news. It is the
nature of all journalism – not just economic – that its practitioners seek to expose
a disaster or a conspiracy. No one ever wins a prize in journalism by pointing
out that things are proceeding relatively smoothly and uneventfully, hence the
tendency to find bad news, mistakes in policy and to label every minor glitch as a
crisis (the most over-worked word in journalism).

At the margin I believe all this news tends to make us less confident, less secure
and less happy than if we had less of it.

(2) Does all this economic news make us better at doing our jobs or investing
our savings?

The normal first response would be to say of course it must. More information
must be better than less, that is what the whole information revolution is about.
It is hard to argue with this point of view in terms of most of the decisions we
make in everyday life. Certainly a broad range of information is better than a
narrower one. But is more frequent information about a particular economic
variable better than less frequent information?

Is it possible that if we are inundated with more information than we need, we
may not be able, as the old saying goes, to see the wood for the trees? Or another
way of saying this is that we may be on top of the detail but lose perspective, or
as T.S.Eliot said rather more eloquently:

. “Where is the life we have lost in living?

. Where is the wisdom we have lost in knowledge?

. Where is the knowledge we have lost in information?

I am not sure what the first line means, but the latter two are pretty clear.

Another way of expressing this thought is given by Nate Silver in his recent
book – “The Signal and the Noise” where he warns “We face danger whenever
information growth outpaces our understanding of how to process it”

Another reason we should question the value of frequent information is that
it is subject to a distortion known as the “narrative fallacy”. This is the need to
be able to tell a story as to why a movement in an economic variable occurred,
even if it is a very short-term movement. Every day the exchange rate changes,
so does the share price index, and every day you will be told why they changed,
i.e. what caused them to rise or fall even if they only moved by a few tenths of
one percent. Do we really know the reasons behind these small daily moves, or
do we just make up a story because we can’t bear to say that we don’t know why
they moved? It is often just random noise, but we can’t say that. Similarly, each
movement in a monthly statistic such as retail sales, employment or business
confidence has to be explained by some other economic or political development,
although in many cases the movement is just due to sampling error. Incidentally,
not only do we think we can explain past events that we can’t, but we also think
we can forecast future ones that we can’t, but that is another story for another
day.

I want to now turn to the question of whether more frequent information
enables us to become better decision makers, in particular whether it makes
us better or worse investors. Let me start by mentioning that several financial
advisors I worked with told me that, among their clients who run self-managed
super funds, those that spent the most time tracking daily movements in their
portfolio achieved worse investment results than those who reviewed theirs’ less
frequently. This is, of course, only hearsay, but it sounded plausible to me for
several reasons. Let me elaborate.

It has been established from a lot of experimental research that most investors
exhibit “loss aversion” That is they experience more unhappiness from losing
$100 than they gain in happiness from acquiring $100 (approximately twice as
much according to the evidence). So the more often they are made aware of a
loss the more unhappy they become.

If the stock market rises by 6 per cent per annum, that, plus dividends is a
reasonable return and should not be a cause of unhappiness. But given the
variability of daily movements, on average about 47 per cent of days the
market would fall, and on 53 per cent it would rise. Since we experience more
unhappiness from the falls than happiness from the rises, this daily flow of
information would result in a net fall in happiness. If we reviewed the market
on a monthly basis, there would be a smaller proportion of losses, and a larger
proportion of gains, so we would be happier. What this shows is that more
frequent information makes us less happy, but it does not necessarily mean we
become worse investors.

However there is a body of research in behavioural finance conducted by
experimental psychologists that shows that it also makes us worse investors.
This is because we tend to suffer from myopia (reading too much into short-
term movements) and loss aversion (already described). This research concluded
that ”investors who got the most frequent feedback (and thus the most
information) took the least risk and thus earned the least money.” This is very
serious research. Economists usually don’t like being lectured to by psychologists,
but the two who conducted this research – Kahneman and Tversky were the only
two non-economists ever to win the Nobel Prize in Economics (unfortunately
the latter died before he could receive it). These experiments are done with real
people and real money, and I will give a brief summary of how they worked.

In the experiment the subjects are able to invest in two asset classes – one, which
we may call equities, which has a higher average return, but more short-term
variability, and one, which we may call bonds, which has lower return and lower
variability. The investors in the experiment who receive daily information avoid
short term losses by buying more bonds and less equities than those who receive
monthly or quarterly information, and so as a result earn a lower return over the
long run.

A similar finding results even if the subjects are confined to investing in equities.
Those who receive daily information are inclined to act on it and over- trade. The
resulting increase in transaction costs lowers their return relative to those who
receive less frequent information.

So I think we can conclude that too much information, or more correctly, too
frequent receipt of economic and financial information, reduces the recipients
happiness and leads them to make inferior investment decisions.

(3) What of the Long-run?

I would now like to shift away from the problems of the short-run to look at some
really long run changes – changes that take decades, generations or centuries.
This is mainly of historical interest as it is probably impossible for an investor to
make money out of such changes.

Have you ever wondered how it was possible a century ago for so many
magnificent homesteads to be built in rural Australia (the National Trust has
produced several excellent books on the subject). Why were some farmers a
century ago able to build these mansions? The answer is that the price of wool
was so high that the owner of a large sheep station could afford to build a
mansion and to staff it with servants.

It turns out that changes in the prices of what we produce can explain a lot about
how economies and countries evolve. The example I gave above is a relatively
small one; there are other much bigger ones that almost defy comprehension.

• In 1667, under the Treaty of Breda, the Dutch government gave up
their claim on Manhattan to the English in order to retain the island of
Run (how many people know where that is – it is in Indonesia). Why
did they prefer the island of Run? Because it was the world’s main
source of nutmeg, which was highly-prized in Europe and extremely
expensive. (I wonder how many of you have consumed nutmeg in the
last week – you can buy a thirty gram jar of it at Woolies for $2.50).

• In the late eighteenth century, France had only enough armed forces
to protect one of its two major possessions in the Americas. It had to
choose between Canada and Haiti. It chose Haiti. Why? Because the
price of sugar was so high that more wealth could be extracted from
Haiti than the whole of Canada.

What is the significance of this sort of long run development for Australia? We
touched on it before when we observed the magnificent rural homesteads of the
late nineteenth century. Unfortunately that type of wealth did not last because
the real price of wool fell (like the real price of sugar and nutmeg).

From about 1900, the trend of prices for what we exported – mainly agricultural
and mineral products either fell, or at least did not rise as fast as the prices of
the goods we imported – mainly manufactures. This was because the supply of
agricultural and mineral products could easily be expanded by bringing new areas
on stream or by raising productivity. In economic parlance, Australia experienced
a trend fall in its terms of trade, and this made the country less wealthy than it
otherwise would have been.

Now as we all know from our daily papers, that has all changed. The terms of
trade have risen to an all time high, the mining sector is booming and agriculture
is looking up. Is this just a cyclical event, or has something more fundamental
changed that means it is more permanent. A famous investor said the four most
dangerous words in investing are “it’s different this time”. Is he right and should
we expect to return to the old pattern, or is it different now?

Well I think it really is different now. The long decline in the terms of trade ended
in about 1985, and a hesitant upward trend commenced. Then, over the past
half dozen years, notwithstanding the financial crisis, the terms of trade have
gone through the roof. Why has the downward trend of eighty years been so
comprehensively reversed? Essentially it is because of the emergence of the
developing countries as a major economic force. First it was Taiwan, Korea, Hong
Kong and Singapore, then Malaysia, Thailand and Indonesia. And finally the big
one – China, followed by India. Now it is the price of manufactured goods which
are falling as it is easy to expand their supply by bringing into production the
massive rural populations of China and India. This simultaneously provides us with
cheap manufactured goods to buy, and increases the demand for our exports as
inputs into their manufacturing processes.

Of course, it could all fall apart, but I don’t think that is likely. It is relatively easy
for countries to keep growth going when starting from a low base and being able
to adopt technology that has already been invented by others. Besides a world
where China and India play a major role is not really new: it is a return to earlier
times. Until the industrial revolution in the late 1700s, China and India accounted
for most of the worlds GDP, and their incomes per head were similar to those in

Europe. Looking back in a hundred years’ time, we may view the 1800s and the
1900s as an aberration when some countries with relatively small populations in
Europe and North America outpaced their larger rivals for a time.

I want to conclude now by asking where does all this leave Australia? In a very
favourable position I would say. It doesn’t mean that we won’t see some future
falls in export prices – that is already occurring – but on average they should
still remain high by historical standards. It also doesn’t mean that the current
expansion will continue indefinitely – the business cycle will re-assert itself at
some point. But, by the standards of other developed countries, we will remain in
a favourable position.

Just as all the short term economic data I talked about earlier reduced our
happiness and confused us as investors, this long term change in the world’s
centre of gravity should be a source of satisfaction to us. It has opened up many
opportunities already, and will open up many more in future years. That is why
I have been more optimistic than most observers despite the still remaining
damage caused by the 2008 financial crisis.



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