Tuesday, September 13, 2005

Whining Aussies - Poms are Innocent this Time

Graeme Philipson is back at whining for a protected, tax-break supported, IT industry in Australia, to close the $20 billion deficit in trade in the sector. To carry the Mercantile flag of protection on this occasion he reports the views of ex-IBM staffer, Lou Richard, now managing director of Newport Capital and one of the Australian IT industry's better-known figures, who “since his early days with IBM Australia he has held a number of senior marketing and management positions in Australia and Britain before moving into venture capital in the 1990s.”

In short: Lou Richard left IT for the more suitable role for him in investment, itself a common story, it seems, of talented people finding they can do better outside IT in Australia (it’s called finding their ‘comparative advantage’ of which more in a moment).

Graeme reports (Sydney Morning Herald, 13 September, www.smh.com.au) that Lou Richard, the venture capitalist, “dismisses the argument of comparative economic advantage, which says that some countries have a natural advantage in some areas.” Hold on Graeme, if Lou Richard ‘dismisses’ the theory of comparative advantage, he must be pretty smart; this theory is about the only unchallengeable theory in economics since David Ricardo (NOT Adam Smith!) advanced it in the early 19th century.

Graeme continues:

“Mr Richard says Adam Smith was a shill for the early multinationals and that the concept - that some countries are naturally suited to certain activities due to their culture or raw resources - was Olde England's way to exclusively franchise the "high-value, really interesting and lucrative occupations to themselves".

What a load of rubbish! The ‘early multinationals’ can only mean the chartered State monopolies, like the East India Company, granted a monopoly of trade on the age-old mercantile principles of government policies first followed by English, and later by British, governments. There were no equivalent international companies in the mid-1750s that Richard could possibly mean - they came later in the mid 19th century, long after Smith died (1790). Now to describe Adam Smith as a ‘shill’ for any of the chartered companies is breathtaking ignorance (apologies for the unscholarly language, but it is seldom I come across such ‘problematic’ statements – to put it more politely in scholarly tones).

Smith’s “Wealth of Nations” is a critique of Mercantile Political Economy, and a severely critical one at that. He considered them the worst examples of wrong-headed commercial practice; he railed against their perfidious behaviour, their mendacity and their outright criminality that, in the East India Company’s case, turned India into a poverty-stricken disaster, while enriching the shareholders back in what was now the UK.

Now, we should go back to your misattribution of the concept of ‘comparative advantage’ to Adam Smith. His actual contribution was to advance the idea of ‘absolute advantage’; some countries did have natural advantages – Scotland’s climate, he opined, (and Graeme with a Scottish spelling of your name, you must know something, if only from your grandparents, of Scotland’s climate) was less suitable for wine production than, say, France’s or Portugal’s (Australia when he wrote “Wealth of Nations”, 1776, was not yet settled: the “First Fleet” was 12 years later; the OZ wine trade another 15 years or so later). For Scotland to grow grapes (or bananas, mangoes and coconuts) it would take a massive investment in ‘hot houses’, wasting scarce ‘capital stock’ which was better put to other uses more suitable for Scotland, which could be traded for French wine. For as long as the absolute advantage remained this dictated the most effective trade, primitive as it sounds today.

Graeme continues his report of Lou Richard’s dismissal of David Ricardo’s theory of comparative advantage:

"Do we really believe Taiwan dominates the semiconductor manufacturing sector due to that country's massive reserves of sand? Does Volvo dominate the marine stern drive sector due to Sweden's access to the sea? Does Italy lead the global leather goods market due to an abundance of cows? It's all rubbish. The national will, driven by need, greed and self-interest, is the driver, plus a modicum of luck and government co-ordination."

The examples Lou quotes all contain the answer to his questions: semiconductors, marine stern driven engines, and leather goods, etc., can be produced anywhere on Earth where you have the enterprise, flair and determination to do so (though it helps in Italy’s case that they have access to cows!). These are mobile industries for which the countries concerned have developed a comparative advantage in producing and distributing the goods. They could also be produced elsewhere if the conditions are created – entrepreneurs are one necessary ingredient; trainable workforces another; innovation, design and marketing skills help too.
But the iron law remains: if country X (or firm Y) is comparatively better at the activity that country Z (of Firm Ω), which may have a slight comparative disadvantage of some kind, then country X (and Firm Y) will have more success than country X (and Firm Ω), for as long as they maintain their comparative advantages (please note the condition!).

No! says Lou Richards, supported by Graeme: Instead “The national will, driven by need, greed and self-interest, is the driver, plus a modicum of luck and government co-ordination”. But then Lou and Graeme fall into the trap of Smith’s “absolute disadvantage” – to overcome Ricardo’s comparative advantage the Mercantile idiocy of allocating capital stock to produce that which can be purchased more cheaply (and remember it is at high quality too) from abroad, thus diverting scarce capital from other more profitable activities within Australia.

Surely, this is the business that Lou Richard (along with the other ex-IT executives who have become venture capitalists too) is in: directing capital to their best uses for a profit? If Lou isn’t good at this, he’ll lose a packet.

India is successful at IT exports because IT technology is mobile, the workforce is available, and currently it enjoys cost advantages at a high quality of service. So does Taiwan (as long as it keeps out of war with the mainland). As for Italian leather goods; well there are plenty of cows in Australia, but, alas, no resident design flair comparable, let alone better, than found in Italy at this moment, and perhaps for the foreseeable future. Should that design flair develop in Australia it could challenge Italy; achieving that goal by forcing Australian consumers only to buy Oz leather products would be the height of folly.

Whining about these things is unseemly; spewing the usual guff about ‘Mother England’, the great excuse-all of every Australian feeling of inferiority (why I cannot guess, given its wonderful climate, people and society – that is what made it the ‘lucky country’), should be below Graeme and Lou’s dignity to display so wantonly.

In football (I am not mentioning cricket this morning) it is common for managers to address their players, after they have performed less well than they could: ‘go take a look at yourselves – you know you can do better.’ This might be good advice for those in Australia in IT to do the same.

Meanwhile leave Adam Smith’s legacy and reputation out of your misery.


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