Making your own luck

Wandering through the library the other day I chanced upon Too Much Luck: The Mining Boom and Australia’s Future by Paul Cleary. I had thought to write a review but found the book so underwhelming I stopped reading at page 96.

Stephen Kirchner has struggled through the whole thing and his review is here. I particularly enjoyed Stephen’s take down of the sovereign wealth fund argument.

Cleary’s support for a sovereign wealth fund reflects his view that Australia’s resources are finite and that future generations will be left worse-off because the current generation will have exhausted these resources and spent the proceeds. The idea that resources are finite in any economically meaningful sense is fallacious because of productivity growth and long-run substitutability on both the demand and supply sides of commodity markets. The Australian economy is well diversified and not dependent on a single resource, unlike the economies of Norway or Timor-Leste that Cleary views as models for Australia. The so-called ‘resource curse’ is not a function of resources, but of weak institutional frameworks in some resource-rich developing countries. Australia, by contrast, scores very highly on comparative measures of institutional quality.

Australia does not need a sovereign wealth fund – we have rich institutions and we don’t rely on a single commodity.

Update: While on the topic of popular ideas that are just wrong, see Stephen King’s post on generic brands and cheap milk. If our friends in Canberra only read one blog post this month, let it be this one.

A bit of simple logic tells you that the last thing the major supermarkets want to do is put the manufacturers out of business. This would leave the supermarkets with fewer manufacturers to compete to produce home brand products and the other items that are stocked by those supermarkets. The supermarkets would face higher input costs and, while they will be able to pass some of these on to consumers, the higher costs will also mean lower profits for the supermarkets.

Even if the supermarkets fully pass on the input price rises, if demand slopes down then their profits will fall. So no ‘but if they pass it on then the supermarkets wont care’ claims unless you really believe that supermarkets face vertical long run demand for all their products.

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56 Responses to Making your own luck

  1. Adrien

    The idea that resources are finite in any economically meaningful sense is fallacious

    True but according to the laws of physics, resources are finite. There’s an assumption built into the dismissal of polemics concerned with finite resources that says that science will solve our problems before they become too acute. We are counting on things continuing to be as they were.

  2. Sinclair Davidson

    The biggest resource challenge we face isn’t that there is some physical limit to the amount of coal in the world. The resource challenge is that there are only 24 hours in a day.

  3. Infidel Tiger

    A bit of simple logic tells you that the last thing the major supermarkets want to do is put the manufacturers out of business. This would leave the supermarkets with fewer manufacturers to compete to produce home brand products and the other items that are stocked by those supermarkets. The supermarkets would face higher input costs and, while they will be able to pass some of these on to consumers, the higher costs will also mean lower profits for the supermarkets.

    Someone tell John Birmingham who has a massive rant about canned tomatoes going on today.

    http://www.smh.com.au/opinion/blogs/blunt-instrument/demise-of-the-killer-tomatoes-20111128-1o316.html

    The range of products at Coles and Woolies is shocking. I tried to find a decent sauerkraut the other day and was very disappointed.

  4. Sinclair Davidson

    a decent sauerkraut

    You find that right next to the tasty brussels sprouts. 🙂

  5. squawkbox

    There’s no such thing as a decent sauerkraut, IT.

  6. Samuel J

    Adrien – resources are not finite. E=mc2. Thus with sufficient energy one can produce any matter. More fundamentally entropy is the bigger challenge: as stated by the second law of thermodynamics in an isolated system entropy never decreases.

    As Professors Riess, Perlmutter and Schmidt have shown, the future of the universe is darkness as it continues to expand ultimately all stars will go through the cycle of converting hydrogen to helium (to iron or for sufficiently large stars through nova and supernova events creating elements with an atomic mass higher than iron) and so forth until ultimately they start cooling over tens of millions of years.

    The stone age did not end because of a lack of stone! Nor will the coal age end because of a lack of coal nor the oil age end because of a lack of oil.

  7. Chris M

    the last thing the major supermarkets want to do is put the manufacturers out of business.

    Nah, clever theory but in reality they simply don’t care that much.

  8. Mother Hubbard's Dog

    @Sinclair

    The resource challenge is that there are only 24 hours in a day.

    You just need to move faster, Sinc. Remember the twin paradox?

  9. daddy dave

    The problem with the supermarket ‘generic brands’ controversy I just want to say to the complainers: people, take a good look at yourselves. You’re getting angry because stores are selling stuff too cheap! That’s not exactly nefarious, collusive racketeering behaviour.

    If they were hiking prices and making them too expensive, you’d be complaining about that too. The difference is that there’d actually be something to complain about.

  10. Entropy

    I agree that this supermarket generic brands furor is just sour milk from some dairy farmers who still think they should be able to use government regulation to dictate a milk price that will give them a comfortable living, and think they can use discounted house brand milk as a stalking horse to get it reintroduced.

    But I must admit the thing I don’t like about generics is I have very little information about the product. I know the dairy farms and the countryside where that Tilba cheese came from. I don’t know where Coles
    Special selects upper duper premium cheese came from.

  11. Adrien

    Adrien – resources are not finite. E=mc2. Thus with sufficient energy one can produce any matter.

    This is the assumption about scientific progress is it not? You’re assuming that we will convert energy into matter. We haven’t an endless supply of energy.

    More fundamentally entropy is the bigger challenge

    We’re just monkeys on a rock. Sure I reckon we’ll get to the Star Trek stage and beyond but I doubt we’ll be able to stop the stars from dying or the Universe from falling apart or crunching. Isn’t that what Riess, Perlmutter and Schmidt are saying? Anyways, what relevance does that bear here?

    The stone age did not end because of a lack of stone!

    We didn’t run out of stone.

    I understand your point, I’m just saying there’s an assumption at play here.

  12. .

    How many billion years do we need to become ultra survivable?

    Another five billion years dude. Don’t be scared.

    I’d be more worried about NEOs.

  13. Rafe

    No decent sauerkraut?
    Let them eat truffles.
    Althought brussells sprouts are probably better for you!

  14. thefrollickingmole

    Adrien

    How the market for the traditional mainstay of Australian commerce nowdays?
    Ochre

    Was huge, now not.

    Coal, etc will go the same way one day.

  15. Pickles

    Half way through The Rush That Never Ended by Blainey. Puts nervous minds at rest.

  16. Winston Smith

    Who remembers the consternation about baby formulae and melamine in the Sanlu scandal?
    Australia has a traded commodity advantage here, and we should be developing the top end to cash in.

  17. Oh come on

    We are counting on things continuing to be as they were.

    And are at present. Furthermore, I don’t see why the assumption you mention is unreasonable, since the speed of progress is accelerating and there’s nothing to suggest that this trend will change anytime soon.

    There will be a time in the not-so-distant future (hopefully my lifetime) when we will be able to engineer at the molecular level and energy will be super abundant and, for all intensive purposes, free. And at that time, perhaps we’ll finally be able to get rid of Malthus once and for all.

    The greatest threat to the above transpiring is, of course, government meddling.

  18. daddy dave

    The problem with the “lucky country” theory is that Africa should be wealthy by now. They’ve got as much natural resources as Australia.

    Therefore, it’s not luck… or at least, not entirely.

  19. Winston Smith

    That’s true DD. The essential ingredient is good governance. And unfortunately as a rule of thumb, Tribalism is unable to provide it, only Nationalism.
    And even then, prosperity and a middle class is NOT a given.
    I doubt that luck has much more than a marginal effect on civil society.

  20. Louis Hissink

    Adrien

    What law of physics states that resources are finite?

  21. JamesK

    Apparently Adwien doesn’t realise that fusion is the reason for sunlight and the stars in the night sky.

    Nor that the Universe is expanding.

    Nor about entropy paradox.

  22. Louis Hissink

    Sinclair,

    the resource limit is not 24 hours in the day, it’s the ballooning costs that limit resource utilisation, and government interference, whether on the behalf of mercantilists, trade unions, or environmentalists. I hasten to add the OS & H regulations are also resource limiting.

    In fact, OS &H regulations are directly impacting on mineral exploration, especially in the field. It is becoming harder and more expensive to do field exploration, and costs increase each and every year. Bureaucratic impediments put in front of us are expected to surmounted by we becoming more innovative, (bloody Marxists dictating we ought to be more innovative!), as if this could be achieved by the turning of a tap.

    An ever increasing proportion of my exploration budget is directed to OS&H and enviro compliance. This means I need to increase my genius factor to locate new mineral deposits that might, if everything else remaining equal, turn into mines. However geniusosity cannot be willy-nilly switched on and off.

    My generation of geologists, and perhaps the ones following us, were the field focussed empiricists and mine finders. Our successors seem not to be, however, lacking even basic skills in geologising. As a colleague remarked yesterday, todays generation, young people in the late teens, early 20’s are skilled in the use of play stations and mobile phones, but unskilled in everything else; the joys of a progressive education. Hell, I recall snarky comments during the middle 1970’s when I was completing my undergraduate courses at Macquarie Uni, that freshman generally needed to attend remedial English classes! Even then we had to put up with the lame excuse, when some student was being tutored, of the “well, you know what mean” answer. Well, no. Evolutionise that attitude and you might have an explanation for the current unskilled ne’er do wells populating our unemployable demographics, especially “youf” in the 18-25 bracket.

    We are going to run out of mineral resources not from the mining and the depletion mineral deposits but from government interference in general.

    Running out of time is, however, silly.

  23. A bit of simple logic tells you that the last thing the major supermarkets want to do is put the manufacturers out of business. This would leave the supermarkets with fewer manufacturers to compete to produce home brand products and the other items that are stocked by those supermarkets.

    In my experience the supermarkets are so focused on competing with each other, and so accustomed to more suppliers popping up, they never stop to think whether they might be left with too few suppliers. Until that is the reality anyway.

    I’ve then known them to invest in manufacturing themselves or sponsor a manufacturer until they are capable of competing with the one or two still remaining. Then once they reach that stage, they start screwing them as badly as the others.

    In economic terms it’s all part of the competitive cycle and should be left to run its course. But it’s not all good news.

    Consumers benefit from lower prices but they miss out on a lot of innovation because it kills supplier profitability or the supermarkets insist that it be delivered at the same price.

    From a business management perspective it’s also unnecessary. The vast majority of customers are not price sensitive. If the supermarkets stuck with the innovative suppliers and offered a value proposition (along the lines of Costco), they’d do just as well.

  24. .

    David,

    I have a hard time viewing Woolworths as competitive. Have you seen what they have done in the liquor industry?

  25. Infidel Tiger

    If you go to a Wholefoods you’ll see an innovative supermarket. Freaking amazing what you can get to eat in there.

  26. JC

    If you go to a Wholefoods you’ll see an innovative supermarket. Freaking amazing what you can get to eat in there.

    I went into one recently. Not knowing a great deal about supermarkets and stuff like that I wasn’t dazzled. They have a rustic set up for some stuff like apples etc. giving them a buy in bulk look.

    What is the big deal?

  27. Louis Hissink

    JamesK

    Might be useful to read Michael Talbot’s book “The Holographic Universe”.

  28. Infidel Tiger

    The Wholefoods I went into had a mind blowing deli section, salad bar, meat emporium etc.

    Quality produce too.

  29. Sean

    Cleary = Voodoo economics.

    Who could have guessed that Norway would get a run. They have been held up as a model for:

    MRRT
    Pokies
    Press inquiry
    High income tax rates.

  30. Sean

    cleary = voodoo economics.

  31. Abu Chowdah

    Great corn chips selection.

  32. Lazlo

    But I must admit the thing I don’t like about generics is I have very little information about the product. I know the dairy farms and the countryside where that Tilba cheese came from. I don’t know where Coles
    Special selects upper duper premium cheese came from

    They have secret places where they kick cows in the head and shout MORE MILK YOU BOVINE BASTARDS!

  33. Sean

    generics would do ok in milk as it’s hard to distinguish between quality. In most generic brand options there is a noticable drop in quality/taste thus it’s harder to attract simply on price.

  34. Gowest

    Now that all levels of governmentium are dependant on mining taxes, they all have an interest in making mining profitable and easy – suck on that Bob – guess you will have to sacrifice a trees after all!

  35. Chris M

    I have trouble finding products which are not halal, you’d think this was the freaking middle east or something. I pay more for products that don’t have the halal mark as I consider it the symbol of a satanic cult. Supermarkets should do like they have in Malaysia, distinctly marked sections halal and non.

  36. Peter Patton

    Can someone explain how the ‘resources boom’ is somehow ‘artificial’ and must be subtracted from the metrics of our nation’s economic prosperity, as the socialists and luvvies insist? How is mining success any different than success in selling ice cream?

  37. Peter Patton

    Adrien

    Resources are NOT finite, let alone the ways they can be combined!

  38. Hey no worries we have net debt and high deficits at the moment unless you believe the shady surplus next year. So won’t have to worry about wealth for a while just paying debt.

  39. Sinclair Davidson

    Chris – a tad extreme don’t you think?

  40. Adrian

    there is nothing lucky about executing and managing a large mining operation. australia just happens to be very good at it. there are plenty of other countries that have large resource endowements that are not as rich. it requires highly technical skills in the areas of finance, project management, geology, a range of engineering disciplines, chemistry and pyhsics – to mention all the trade skills required.

  41. johno

    DD – Another problem with the supermarket ‘generic brands’ controversy is that I just don’t buy it – the generic brands, that is, because they all look the same.
    If I see the words ‘Coles’ or ‘Woolworths’ on a product, I think cheap, bland crap.
    Whereas, if I see the brand I usually buy, I think, that’s the product I know and I like.
    The more Coles and Woolies fill their shelves with their bland generic crap, the less often I will go there to buy my groceries.
    If enough people think like me (God forbid), then this latest push for generic branding will disappear again like it has in the past.

  42. Adrian “there is nothing lucky” Mining and getting massive wealth like now is pure luck. So if you were an iron ore miner between 1975 and 2004 you were stupid because was worth very little? So first bit of luck is right place right time. If you are searching for a rare commodity like gold is mostly luck if you find a good seam. You could say we are lucky to both have the resource and a stable government. The fact you are born into a country with a stable government is luck. If you were born in some war torn country you wouldn’t be lucky. At least 50% of any persons lifestyle and circumstances are luck.

  43. Adrian

    okay none of that makes any sense. at what point are you willing to accept that australia’s wealth is not due to a flip of a coin? it is not a serious argument to explain why some countries are wealthier than others.

  44. Henrick

    “As Professors Riess, Perlmutter and Schmidt have shown, the future of the universe is darkness as it continues to expand ultimately all stars will go through the cycle of converting hydrogen to helium (to iron or for sufficiently large stars through nova and supernova events creating elements with an atomic mass higher than iron) and so forth until ultimately they start cooling over tens of millions of years.”

    The problem is that this is all wrong from start to finish. No-one has begun to show any of this. All facts of reality dispute these findings. For example if higher massed elements were only produced in super novae, we would never have high-grade ores ever. Instead we have ore-grade lead, silver and gold being pumped directly out of deep-sea volcanoes.

    We may not be able to run out of resources. But we can certainly use up a lot of the close-to-hand stuff. One doesn’t want to be theoclassical about this. Our Greek-Nairu strategy is fundamentally irrational. If it were impossible, as a practical matter, to sell off our resources or to degrade them, then go tell it to Nairu. While you are at it, you can recommend to them to get into the international marketing of services. Another bit of theoclassical idiocy. Perhaps they can break into banking?

    Now we know that there will likely be massive deposits of methyl clathrates in the sea near to Nairu. But this didn’t save Nairu fro being pauperised when the bird-droppings ran out.

    The point being that Nairu had the ability to diversify when they had an income stream from their resources. But they followed a strategy almost as bad as the theoclassical one being jammed down our throats for Australia;

    All private debt is good, sell everything, we are useless and only get by because of stuff in the ground. Hardly sophistication in economics and finance.

  45. Henrick

    Everywhere we see the economics profession conspiring against this country. They are determined to believe that we will be better off producing less (without manufacturing) owing more, saving less, owning less. The exact opposite of the truth.

    The reality is that we are better off owning more, saving more, producing more, and so forth. So here in Australia we have a profession that is fundamentally irrational.

  46. Sinclair Davidson

    Henrick – what evidence do you have to show that we’re producing less? We’re producing more.

  47. Henrick

    Not with the help of theoclassical economists we aren’t. They are in denial about our need to reindustrialise and be massive manufacturers, as the only sustainable way to continual wealth-production.

  48. Sinclair Davidson

    What you talking about? Australian manufacturing is growing.

  49. Winston Smith

    Is that you again Bird?
    The argument – vague, jumbled and wandering, seems very familiar, even to a newbie.

  50. Henrick

    “What you talking about? Australian manufacturing is growing.”

    Not with any help from theoclassical economists it isn’t. They struggle on despite the irrationality of the economists.

  51. Henrick

    What exactly are you talking about Sinclair? Are you in denial about the economists being in denial about our need for massive deindustrialization? About manufacturing being the only sustainable path to ongoing wealth creation?

    You keep changing the subject. You keep noting that despite all the handicaps, the manufacturers struggle on, producing a little more in absolute terms.

  52. Sinclair Davidson

    Graeme – just can’t help yourself?

  53. jtfsoon

    jeez you guys are slow, I sounded the avian alert long ago

  54. Chris M

    Sinc possibly. But the point is there are a whole bunch of us who don’t want to / won’t buy halal – an opening for manufacturers and retails to label products as such.

  55. Adrian
    Australia has many more advantages. Part of the political stability is the fact we are an island. So even our location is a major advantage. If you were for arguements sake put Australia in the middle of Africa our way of life would very quickly dissapear. There would be refugees flowing accross our border and most likely military conflicts to go with it. So who your neighbours are and where they are is important and luck. The primary reason Australian’s care about debt is possibly that we realise nobody will bail us out. The ratings agencies are really tough on us remembering what Wayne Swan has just said this is the first time in history that all the ratings agencies have given us AAA. This is laughable considering when we had no net debt we didn’t have such a rating. So some level of discrimination against us has probably been good for us. With agriculture being an island is an advantage with quarantine because if we were land locked in Asia or Europe we would not have this. Having all our resources is the only thing that can sustain high wages if you look at all the major manufacturers of the world they have much lower basic wages.

    So no individual factor may be the result of our wealth but all the lucky components do add up to produce a lot of what we have.

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