Virginia Postrel has an interesting piece on the work of Chicago economists Rajan and Zingales saving capitalism from the capitalists. Essentially, their claim is that where that where finance is allocated on the basis of personal relationships, it becomes a tool for creating and protecting monopoly. This is what they call “relationship capitalism”. Others have used the more pejorative phrase “crony capitalism”.

Postrel uses these ideas to attack the idealised, and largely mythical, small-town bankers of the past in favor of today’s more impersonal system. It’s certainly true for retail borrowers that relationships with bankers are no longer important. But she misses the irony that while distancing themselves from most of their customers, members of the financial sector have gathered together ever more closely in centres like New York and London.

As I observed a couple of weeks ago, quoting Adam Smith from memory

Men of the same trade seldom gather together, even for innocent merriment, but the meeting ends in some conspiracy against the public.

The work that financial institutions are supposed to perform, trading assets and allocating risk in transparent markets, can be done anywhere on the planet. It’s the stuff they want to do without any inconvenient records, and with the kind of trust that’s needed for conspiracy that requires clustering in a central location where social bonds can be cemented by eating, drinking and sleeping together.

A few days ago, I argued that of the (generally unattractive) outcomes that could arise in Iraq, the one with the best chance was a two-state solution, in which a Shiite majority ruled Iraq as a whole, while the Kurds maintained the effective autonomy they have now.

Now that Ayatollah Sistani has spoken, I think the probability of this outcome is very high. The announcement that power will be handed to an Iraqi government on a set date (July next year) has created a dynamic over which they have no control, and which naturally leads in the direction of a majority vote rather than the convoluted system of caucuses proposed by the occupying authorities. The latter is typical of what an absolute ruler comes up with when seeking to provide a democratic facade while maintaining control over the outcome, and has rarely worked. Either the process is carried through, but has zero credibility, or it leads to genuine democratisation and the overthrow of the ruler (the French revolution provides the template).

In the case of Iraq, it’s clear that all Sistani has to do from now is hold his ground. The caucuses can’t go ahead with substantial Shiite opposition and the occupiers can’t sustain for long a position in which they are arguing for rigged elections and against democracy. Hence, I foresee an outcome in which Shiite parties win something close to an outright majority and in which Islam is enshrined as the official religion.

* As I understand things (I’m drawing on Juan Cole here), it won’t be an Iran-style theocracy, because Sistani doesn’t favor the idea of clerics exercising political power directly.

How will all this turn out? Obviously, there are a lot of problems. First, if the government overreaches itself in terms of monopolising power or avenging past injuries, things could really bad. Second, even assuming good sense on the part of the government, it’s difficult to run a country well when the capital and the administrative class are strongly hostile, which is bound to be the case. Third, the guerilla war will only intensify, and the counterinsurgency measures adopted by an Iraqi government are bound to be more brutal (but probably more effective) than those of the Americans. Fourth, there could be problems with the Kurds, though these are likely to be less with a government whose support base is among southern Shiites (who, I imagine, don’t care that much about the distribution of power in the north) than with a more broad-based coalition, Finally, there will be a lot of pressure on both sides for a quick US pullout. In particular, the neocons will, I imagine, lose interest in the whole project once it becomes clear that the nation they are building is, at best, a more moderate version of Iran.

Despite all these problems, this is the approach that has the best chance of producing a stable, and at least partially democratic, Iraq, and of permitting the withdrawal of most US troops without a descent into chaos. In response to the objection that the odds are not what we might want, I can only paraphrase the Irish farmer in the story “In that case, we shouldn’t be starting from here”.

Update 1/12 The dynamic is working even more rapidly than I expected. Judging by this report from the NYT, the caucus plan is already dead.

Further update 4/12The occupation authority isn’t doing itself or the cause of democracy any good with dishonest evasions about the impracticality of a proper democratic elections. These claims were false and both Iraqis and Americans have known it for some time. Any government “elected” under the caucus system will have the same credibility as the current Governing Council, less six months more erosion caused by the inevitable unpopularity of occupation. That comes to less than zero in my judgement.

If Bremer thinks Iraqis are not ready for democracy (and it’s obvious he does think that) he’d be better off imposing a constitution with undemocratic safeguards such as a nominated upper house or a requirement for predetermined ethnic power-sharing than going ahead with the charade he has proposed. And if Bush doesn’t agree with Bremer why is he still there? Jay Garner was sacked after one month, and that was about the best month the occupation forces have had.

Yet further update 5/12 After asking his readers Are you sitting down?, Thomas Friedman restates most of the argument of the original post above.

The use of Public-Private Partnerships, modelled on the British Private Finance Initiative has been all the rage in Australia lately, with Victoria leading the way. As Ken Davidson reports, a review undertaken by the Victorian Government has issued a draft report which, if it is accepted, will confine PPPs to a very minor role. You can get the report (PDF file) from the Partnerships Victoria website.

The crucial point in the report is that it recommends using the governments actual cost of capital (the real bond rate) and explicitly adjusting it for project risks rather than a notional private discount rate derived from the Capital Asset Pricing Model. The result will be to recognise the cost advantage in financing infrastructure assets using public debt rather than private equity. As a result, PPP projects are likely to show up as beneficial only for innovative, high-risk projects and not for routine public procurement of things like schools and hospitals. This has been the big growth area in the UK despite a string of negative reports.

The Victorian draft report quotes a lot of UK evidence, raising the possibility that there will be some flow of ideas back to the UK leading, perhaps, to a scaling down of the PFI there. This would mark a big step for the Blair government away from “The Third Way” and towards a modernised social democracy.

Coincidentally, I’ll be speaking at a conference on PPPs in Sydney next week. I believe Peter Fitzgerald, the report’s author will also be attending. It should be interesting.

While Kremlinology remains a dark art, it now seems unlikely that Russia will ratify the Kyoto Protocol. This means that, barring a reversal by the United States, the Protocol will not come into force. Obviously, this isn’t going to happen before the 2004 election at the earliest.

This is pretty grim news, but I’ll do my best to extract a silver lining from the clouds. A lot of critics of Kyoto, including Bjorn Lomborg and Warwick McKibbin, along with the Australian and US governments have not denied the reality of global warming but have argued that alternative policies could yield better outcomes. Now they have their chance to show that their policies represent both politically realistic and economically and ecologically sustainable alternatives to Kyoto. If governments that have opposed Kyoto are serious about alternatives, this is their chance.

I am not too optimistic about the alternatives – my guess is that, whatever their merits, the governments that have rejected Kyoto will continue with business as usual. But I’d be happy to be surprised.

As expected, the Reserve Bank has increased official interest rates again by 0.25 per cent. It seems safe to predict that, unless the housing bubble turns rapidly to a bust, there will be two more instalments in the New Year, bringing interest rates back to a ‘neutral’ position with a real rate for borrowers of around 5 per cent.

These prospects and the collapse of leveraged-investment promoter Henry Kaye should be enough to end the boom in house and unit prices. The question is, can current prices be sustained in the absence of prospects for capital gains, or the fear of being left behind by a rising market, and in a situation where renting is so much cheaper than buying.

I’m a notorious Cassandra on such matters, so feel free to ignore my prediction that Sydney prices are set to fall by 30 or 40 per cent, with less dramatic, but still substantial, falls in other capital cities.

Latham’s victory seems to have been reasonably well-received, and there are certainly a number of positives. First, while I’m not a fan of activism and innovation for its own sake, Australian politics is certainly in need of some new ideas.

The leaders on both sides of Australian politics have been people whose ideas were formed in the 1980s, and who haven’t seen much need for thinking since. Ross Gittins made this point about Howard a couple of days ago, but its true more generally. When they find that 1980s ideas won’t wash with the electorate, their instinct is to go back to the 1950s (this is particularly true of Howard and explains his long dalliance with Hansonism).

Although age obviously matters, it’s not the sole determinant here. Peter Costello is only a few years older than Latham, but his political views, formed in the unionbusting days of the Dollar Sweets dispute are even more anchored in the past than those of Crean and Beazley, who at least recognised the issues even if they did not come up with much in the way of new responses.

The big issue for the 21st century is that of balancing the needs of a knowledge-based economy, which naturally implies greater demand for publicly-funded services like health and education with the obvious problems of raising additional government revenue. In parallel with this is the conflict between the gift-exchange/common property model that has been the source of most of the productivity growth associated with the Internet and the demands of corporations for tighter control of ‘intellectual property’. In trying to respond to these issues, Latham has flailed about a bit, but at least he is trying.

A more tenuous ground for optimism is that Latham’s election might mark the last gasp of the faction system, at least at the level of the Federal Parliamentary Party. As Dave Ricardo pointed out in a comments thread, the factions in the ALP are now comparable to those that dominated the Japanese Liberal Democratic Party for decades. Any ideological element is long gone, replaced by personal power bases, typically cemented by family ties and inherited leadership positions.

Gerard Henderson usually puts forward historical arguments that are at least plausible. But his claim that Whitlam and Chifley were exponents of the small-target strategy is (literally) incredible.

Labor has had only four prime ministers since the end of World War II – Ben Chifley, Gough Whitlam, Bob Hawke and Paul Keating. Each won his inaugural election – in 1946, 1972, 1983 and 1993 respectively – on what today would be called a small target strategy.

Chifley, Whitlam and Keating subsequently threw the political switch to the big picture – and lost in 1949, 1975 and 1996 respectively. Hawke, ever the pragmatist, was not defeated in an election.

Whitlam’s It’s Time program was one of the most detailed and ambitious ever put forward by an Opposition and, contrary to Henderson’s claim, his government was in full retreat in 1975, following the Hayden Budget. Chifley was campaigning on the basis of, among other things, the White Paper on Full Employment which, for the first time, committed governments to maintaining full employment. More importantly, considering the whole period of the Curtin-Chifley government it was one which managed a radical transformation of the role of government. Hawke ran on the basis of the Accord which was a radical (though not radical left) approach to macroeconomic policy.

It’s only the 1993 and 1996 election that give real credence to small-target theory. Even here, it’s strange to focus on Keating who simply took the line that seemed most likely to deliver a win in the face of huge resentment arising from ‘the recession we had to have’. It was Hewson who failed with a big target (Fightback!) and Howard who succeeded with a small one.

In fairness, I suppose 1949 also counts as a defeat for big-picture politics, but there were quite a few factors working against Labor by then.

Update I’ve been wondering what on earth Henderson could have been thinking in imputing a ‘small target’ strategy to Whitlam and I think it must be the fact that Whitlam was a moderate on issues like Vietnam and state aid to private schools, compared to the dogmatic purism of, for example, the Victorian branch. But this reasoning excludes any possibility of serious political debate or of a substantial political program that takes political reality into account. Whitlam fought on the issues, but he focused on the issues that were winners for Labor. By contrast, Beazley ducked anything that would create any sort of trouble.

The vote is under way, and the Caucus members have entered the Party room. I can think of at least half a dozen members of the Caucus I’d prefer to either of the candidates. Nevertheless, of the two I’d prefer to go with the erratic Latham in the hope that he’ll somehow turn up trumps as leader.

On the main issue of disagreement between the two, tax cuts vs public spending, I agree with Beazley not Latham. But I think Beazley had his chance to take a firm stand on this in 2001 and, as on every other issue, muffed it.

For those who’d like a little mental exercise, and are interested in road safety, here’s an analysis of road safety that misses an obvious source of spurious correlation. I got it from the SMH, but to make life easy I’ve lifted the whole story. First to spot the obvious error gets a free mention in the update to this post (not much of a prize, but it’s an easy contest). My judgement is final, but, this being the blogosphere, lengthy flame wars will be entered into.

The popular stereotype of the dumb blonde could be shattered if accident statistics are any guide.

Insurance company Suncorp yesterday released a survey that shows blondes could be the nation’s best drivers.

The nationwide study of car accident trends found that people who described themselves as blonde had fewer crashes than others.

They were also less likely to be the victims of road rage and second least likely to feel rage against other drivers.

But the study found fiery redheads lived up to their reputation with red-haired women admitting they were the most likely of all respondents to feel fury on the road.

“As a group, blonde men and women came out on top in the driving stakes,” Suncorp personal insurance spokesman Warren Duke said.

“But the best drivers of all were black-haired women with only 47 per cent stating they had ever been involved in an accident.

“Red and black-haired men tied for the title of the most car accident prone.”

Mr Duke said Suncorp had decided to take a lighthearted look at a range of car crash data and found only 56 per cent of blonde respondents had ever been in a crash.

Update The winner is Kinich Gatsky, who observes that women are likely to be over-represented in the blonde group, and also to have lower accident rates. Runner-up is Derrida Derider.

When Crean’s resignation was obviously imminent, I wrote

Leaving that aside, the choice is, I hope, a no-brainer. Beazley and Latham both had lots of strikes against them anyway, and they’ve spent the last six months bagging each other. Excluding a bunch of candidates who might be good but who don’t have the profile to score a win, we’re left with Rudd.

Rudd’s failure to gather enough support for a run has left me to conclude that the Caucus has no collective brains.

It appears that Caucus will go for Beazley and near-certain (but hopefully not disastrous) defeat, rather than take a risk with Latham. Rudd has supposedly made some sort of succession deal with Beazley, but this will count for nothing after Labor is defeated and Beazley resigns. So we’ll probably get Beazley, then Latham, a depressing prospect for those of us who’d like to see this government defeated.

Surprisingly, no one seems to have pointed out what a gift Beazley’s election will be to the Greens. For Caucus members in ‘safe’ (that is, safe from the Liberals) seats, this, and not the supposed fickleness of aspirational voters, is what they should be worried about.