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Where economics fits in the security debate

Where economics fits in the security debate
Published 22 Sep 2016   Follow @LeonBerkelmans

The relationship between the intelligence and strategic communities on the one hand, and economists on the other, has a rich and storied history. Nobel Laurette Thomas Schelling perhaps exemplifies the interactions at their best. Schelling’s work on game theory and strategy influenced US thinking profoundly, particularly in the context of the Cold War.

In Australia, at the moment, the relationship is somewhat frayed. In recent months we have seen a couple of decisions that have left some economists scratching their heads.

First, there was the submarine decision — in particular the decision to build part of them here, at significant extra cost. The key question is, what we are getting for that extra money? Perhaps some expertise? What expertise? Is it worth it? I haven’t been satisfied with the answers I’ve seen.

Then came the Ausgrid decision when Treasurer Scott Morrison prevented a Chinese state owned enterprise along with a Hong Kong listed partner from buying Ausgrid, a power supplier, on national security grounds.
What were these concerns? We don’t know. They won’t tell us. Perhaps it was some communication assets that Ausgrid owns, but we don’t know for sure. What are we left with? We are told to trust the Treasurer, and by extension the intelligence community who provided the advice. But trust can only get us so far.

Why? Well, I need to refer back to another economist: Daniel Ellsberg. After getting a PhD in economics, and leaving the legacy of the Ellsberg paradox for generations of economics graduate students to study, Ellsberg became a US military analyst. In 1971 Ellsberg leaked a Department of Defence study of the US Government’s involvement in Vietnam, known as the 'Pentagon Papers'. It contained embarrassing revelations, which the US Government tried, but failed, to suppress. [fold]

Ellsberg’s memoirs issue a loud warning to those in the intelligence community. Ellsberg wrote about the tendency of those with access to confidential information to dismiss the view of outsiders. Those with inside information can convince themselves that others just don’t understand. Groupthink takes over. Ellsberg viewed that as a big problem the US Government had in Vietnam. And it is one reason why we can’t take what we are told on blind faith every time.

I think, in the tradition of Shelling, there are broad lessons here from economics that should be considered. Take, for example, the treatment of risk, and risk mitigation.

Central bankers have to think about this all the time. There are concerns that current policy settings in many economies are increasing the probability of a crisis. But I’m with Ben Bernanke when he says 'use the right tool for the right job'. If you are worried about a crisis, it is better to use a well targeted policy, for example capital requirements, rather than jacking up interest rates (although this is by no means a consensus in the profession).

And so it is that you should use the right tool for the right job when worrying about security. If the problem is that Ausgrid has sensitive communications networks, then the right tool should be to carve those networks out, as some have suggested, and let the sale go through.

By using the blunt tool and blocking the sale, we incur costs. The most direct cost is the NSW Government misses out on some money. It also might damage our reputation as a destination for foreign investment more broadly. But it also might make us appear paranoid and scared to the Chinese. My boss, Michael Fullilove, makes the point that the Chinese don’t seem to respect weakness. I suspect they don’t respect fear either.

Over the last few decades, central banks have learnt the importance of communication and credibility. In the bad old days, central banks didn’t even announce whether they were tightening or loosening policy, leaving everyone to guess what was going on. It was a horrible way to conduct policy, but there was resistance to change.

In the end, communication and credibility were improved, and as a result policy became more effective. I wish there were better communication about the subs and Ausgrid decisions, it would help engender trust. I reckon that would help strategic policy.

Finally, one thing that does not engender trust or credibility is the ad hominem attack, or the snide comment. I’ve seen too much of that lately, and it has come from both sides. I’ll call out two publicly.

In a piece that I otherwise quite liked, Brian Toohey declared that the director of the Australian Strategic Policy Institute Peter Jennings 'had no better clue then the average lamp post'.

And Peter Hartcher remarkably labelled Bob Carr and the Australian Chinese Relations Institute (ACRI) a mouth-piece for the Chinese regime.

There are others as well. This should stop. If you don’t like someone’s argument, attack the argument. If you don’t like some piece of research from ACRI, what is it about the piece that is wrong?

These disagreements are only going to get more common. Chinese investment in Australia, while still small (it accounts for less than 5% of foreign direct investment in Australia, and 2.5% of total foreign investment), will grow. If we can’t handle these disagreements well, it’s going to become a problem. We are supposed to be on the same side, aren’t we?

Photo courtesy of Flickr user  Ausgrid

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