Monday, August 21, 2017

What can be done about the "game of mates"?

What is wrong with looking after your mates? If you ask any Australian chosen at random the chances are that they will tell you that it is good to help friends and acquaintances. Yet, the same person would be likely to express disapproval of people who use powerful positions in politics, public service, business and unions to look after their mates at the expense of the broader public. That is a downside of the mateship culture.

In their book, The Game of Mates, How Favours Bleed the Nation, Cameron Murray and Paul Frijters explain that “the game of mates” also involves a strong element of self-interest. When people play that game, they look after their mates in the expectation that their mates will reciprocate. The game involves the exchange of “grey gifts” among groups of mates. Grey gifts arise from political and bureaucratic discretion in interpreting and enforcing regulation. The granting of such gifts differs from theft and bribery because it is difficult to identify as corrupt or illegal in any instance. Participants do not ask for direct trades and exchanges are spread out over time.

A typical example of the game of mates involves a politician or senior bureaucrat providing grey gifts to an industry or firm and then subsequently moving to take a well-remunerated position in that firm or industry. The most important attribute the appointee brings to the new position is his, or her, ability to reward the new employer by playing the game of mates with great expertise.

Murray and Frijters make the claim - exaggerated in my view - that the game of mates enables well-connected individuals to steal roughly half of “the real wealth” of the rest of the community – whom the authors refer to as the “champion Aussies”. They give the impression that the beneficiaries of the game are wealthy and the victims are relatively poor. However, they do admit that it is possible for an individual to benefit from the game with respect to some regulations and to be a victim with respect to others. Not much attention is given to the deadweight costs of the game of mates - everyone has less incentive to work, save and invest when a substantial part of the income produced ends up funding mates’ games.

Much of the book explains how the authors see the game of mates being played in different parts of the economy. In property development, there is a game involving rezoning of land for residential use. In transportation, the game involves negotiation of public private partnerships (PPPs) to fund infrastructure projects. There are also games involving granting of mining licenses, administration of superannuation funds, banking regulation, tax dodges, regulation of pharmacies, assistance to agriculture, undue restriction of taxi licences, dominant supermarkets influencing their regulatory environment, and even the control of public universities for the benefit of private interests.

Murray and Frijters offer some remedies to disrupt the game of mates. They show insight in their suggestion that the game can be tackled more effectively by reducing the value of grey gifts - by selling them or taxing them - rather than by adding additional layers of regulation. However, they don’t seem to recognise that the best way to reduce the value of grey gifts is to reduce the extent to which the economy is subject to government regulation, and the political and bureaucratic discretion associated with it.

Some of the authors’ proposed remedies seem bizarre. For example, they suggest that foreign experts be contracted to develop new laws and regulations for their specialist industries. I wonder how they would prevent the foreign experts from playing the game of mates to benefit their buddies and amigos at the expense of “champion Aussies”.

Another bizarre suggestion is to increase competition by creating public competitor companies in industries such as banking, land development and the universities. The fact that Australian universities are still largely government-owned might have caused the authors to think a little more about the likely effectiveness of that remedy. Political appointment of boards and chief executives, combined with vast discretion for allocation of grey gifts, make government-owned enterprises part of the problem rather than part of the solution.

In my view, the book’s ideologically blinkered approach favouring government enterprises is a major shortcoming. The authors ask:
“If governments believe that they are unable to efficiently construct school buildings, hospitals, roads, or powerlines, through their own departments or government-owned companies, what magical skills do they believe they possess in order to effectively negotiate with and regulate, the powerful private interests they are selling these assets to?”

Part of the answer to this question is that trade unions – major players in the game of mates whose role is barely recognised in this book – can exert more influence over government departments and government-owned companies, than over private enterprises. Public sector managers have a strong incentive to sacrifice productivity to maintain the appearance of industrial harmony because that is what their political masters expect of them in playing the game of mates.

Another part of the answer is that it is easier for governments to remove regulation protecting private firms from competition than to remove similar barriers protecting public enterprises. For example, it is unlikely that Australia Post’s monopoly on letter carriage would be maintained if that organisation was privatised and its community service obligations (more mates’ games) were converted into transparent subsidies for people living in remote areas.

I could go on for a few thousand more words discussing the shortcomings of this book – including its highly misleading claims about banks creating credit, and its view that sovereign risk is a “mysterious idea”. However, that might be boring.

The thought I want to leave you with is that despite its many shortcomings, this book raises disturbing issues that should not be lightly dismissed. The authors deserve to have their claims subjected to detailed scrutiny, but not by me! I could change my mind about that, of course, if one of my mates can come up with a sufficiently lucrative consultancy proposal to bring me out of retirement 😊