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The irredeemable in pursuit of the insatiable

By Nicholas Gruen - posted Monday, 3 September 2018


And we've barely started on the project of trying to shed intellectual light on these issues in ways that might cash-out in practical improvements to the way our institutions work. We might have begun decades ago, if we'd understood reform as refurbishing the institutions of the mixed economy.

The scandal of royal commissions themselves, and beyond...

Let's start with the scandal of the royal commission itself. A Productivity Commission inquiry costs three or four million dollars - a figure that might double or quintuple if we include the costs of outside participants in the inquiry. The PC actually has discovery powers not unlike a royal commission's, though it's never used them and it wouldn't be the appropriate specialist body for searching out and pursuing wrongdoing. But it provides an indicative benchmark on the costs of a good look around. So too does the recent inquiry into the public service, which at around $10 million seems excessive to me but is similar.

Though I would expect its policy conclusions to be meagre - it is focused on misbehaviour - the royal commission is budgeted to cost government $57.5 million. Each of the major banks is spending around that on their favoured big law firm. Then there's external PR, lobbying, day-to-day "issues management," crisis and/or strategic issues management, and so on.

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Add to this substantial in-house expenditure on all these items. Smaller firms would be spending less, but there are many more of them - in banking, funds management and financial advice. Consistent with the adage "never let a good deed go unpunished," the industry super funds have also been drawn in, their solid investment returns and relative lack of scandals putting the big end of town to shame.

So half a billion dollars seems like a safe underestimate of the total cost of this exercise. Much of it goes on massively inflated salaries to top lawyers - think ten to fifteen thousand dollars a day. But more goes on sheer inefficiency. The legal system has virtually no regard for directing lawyers' efforts to where they're most valuable. So the commission sends out trawling requests for all records of all misconduct. This has at least uncovered lots of bad things, though many had already been reported to authorities and then kept quiet.

Still, this approach is prodigiously wasteful in other legal proceedings for reasons we'll discuss shortly. Sure enough, ASIC's gun-shyness in pursuing corporate wrongdoing arises partly from this wastefulness. It blew $20 million in legal costs going after OneTel and $30 million going after Andrew "Twiggy" Forrest. $30 million! Presumably total costs, including Twiggy's, exceeded this figure handsomely. But looking at the case notes, and even allowing for the inevitability of "gold plating" some processes when one is pursuing the potential wrongdoing of the wealthy, this is an extraordinary amount to determine a legal question. Oscar Wilde once described fox-hunting as the unspeakable in pursuit of the uneatable. Here we've sent in the irredeemable in pursuit of the insatiable.

Why we might have expected better: the professions

One theme of the economic reform playbook from the University of Chicago was the way the professions are just one genteel instance of Adam Smith's famous line, "People of the same trade seldom meet… even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

This should figure in any list of the unfinished business of economic reform. Policy reform has been all over this question in vocational training, with "competency based" training and certification. Reform in the professions does figure in the list of unfinished reforms Gary Banks compiled as chair of the Productivity Commission. But how often do we see high-profile champions of reform highlight the issue?

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And if it were to be taken seriously, there'd be so much more to successful reform than simple deregulation of barriers to entry. At both macro and micro levels, professions typically exert a huge influence on the demand for their services. The lawyers representing each side in a case effectively dominate legal procedure and will gold plate each stage of the process to an extraordinary degree. (Ask Twiggy Forrest or his adversary, ASIC.) Likewise, in the country where the market is least constrained by government acting as "informed purchaser" of health services for the community - the United States - health spending has surged to being half as large again as the health sectors of comparable countries, with worse health outcomes.

I've only highlighted financial aspects of reforming the professions. Making them truly responsive to our needs is a bigger prize. Imagine a market in which you might be able to find medicos, lawyers, investment advisers and managers in the way you can assess which restaurant suits you on TripAdvisor. Throw in consumer advocates, found in the same way, who help you navigate the maze of professional services to best meet your needs.

The analogy with TripAdvisor is facile, of course; and nor could the idea be dictated in a learned journal. It could only succeed if pursued iteratively, building the institutions in situ with co-design and dialogue between practitioners, their clients and disinterested experts guiding experiments to build better practice. The ideal is well expressed by businessperson Charlie Munger: "A seamless web of deserved trust." Where have we heard that, or anything like it, in the endless debates on "reform"?

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This article was first published by Inside Story.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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