1. My 2025 retrospective, in which listener of the show Zac Gross interviews me. At the bottom of this email, I've included three excerpts.
2. Dan Wang's annual letter.
3. The Thinking Game, documentary about DeepMind.
4. Financial Times interview with Yann LeCun.
5. How does Gavin Newsom memorise policy details while having dyslexia?
6. Josh Gans on using AI for research.
7. Brian Potter on modular housing.
8. Joe Carlsmith on fake thinking and real thinking.

Thanks, and best wishes for the year ahead,‌
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Joe

Three excerpts from my 2025 retrospective

1. How will podcasts change?

ZAC GROSS: Derek Thompson, formerly of The Atlantic, now at Substack, I believe, outlined an interesting theory that basically all media is becoming television.

For a bit of behind the scenes — we actually spent much more time on the cameras and the lights here than on the microphones, so that you can all see us. And that’s a reflection of the fact that all podcasts are moving to video. The pivot to video is happening.

How has that affected the business of making a podcast?

JOSEPH WALKER: For me, in two ways.

The first — and most obvious — is just doing video, and needing to do video to grow the show. So I started doing video for every episode last year, and I publish video on YouTube, Substack, and X (formerly known as Twitter).

That has turned out to be kind of mandatory if you’re trying to grow a podcast, because you have access to the upside of those algorithms on those platforms. The discoverability on a platform like YouTube or X is just qualitatively different to the discoverability through a podcast app like Apple Podcasts or Spotify.

I don’t remember the last time I ever used Apple Podcasts or Spotify to find a new podcast. Usually you just learn about stuff through word of mouth, and then subscribe through those apps and keep listening to your same stable of shows. But you don’t use those apps to find new things.

I think the second way in which I’ve noticed the “everything is television” thesis apply to my show is doing ads in more creative ways. And I think this will be a theme for podcasts that we’ll see intensify over the next few years.

It’s no longer enough to just do a read where you’re reading the script the sponsor’s given you and you’re just plugging a product. I think ads will get increasingly more creative, much more personalised to the host and the show, and much more seamlessly integrated into the show.

And that, I think, has been facilitated and driven by the video medium, because there’s so much more you can do with the ads when you’ve got that video dimension.

One example from my show this year was an employer-branding ad for Eucalyptus, which appeared in the Hugh White episode. So I interviewed someone who’s a long-time listener of the show who now works at Eucalyptus.

Instead of me just singing the praises of working at Eucalyptus, the ad was a mini-interview: a two-minute interview where I interviewed that person, Jae, about what it was like to work at Eucalyptus and why they chose to work there.

So that’s an example. We’ll see more and more of that. And I think that’s a special case of the “everything is television” phenomenon applied to podcasts.

GROSS: And it even extended to having a live studio audience this year. Do you see more of that as well in the podcast future?

WALKER: Yeah, I think so.

And I think we’ll start to see a lot of innovation around what a podcast is. So it won’t just be a sit-down interview. There’ll be other elements blended in. It will become more sort of documentary-esque.

GROSS: So like maybe charts in the background, or—

WALKER: Exactly.

GROSS: Flashbacks to a previous episode.

WALKER: Exactly.

One thing I’ve been wanting to do for a while is: podcasts aren’t always the best medium to explore very difficult ideas. And having someone speak extemporaneously about a topic is a very challenging exercise for them. And there’s only so much you can do.

Wouldn’t it be cool if you could cut in other explainers? Or if you were talking to a guest about a very technical topic, maybe you could step aside and they could explain it on a whiteboard or something — and then you could cut that in. That kind of stuff.

I think we’ll start to see the definition of what a podcast interview is start to blur and change and morph.

2. The "dark matter" of Australian state capacity

GROSS: There’s a famous study in economics that looks at the correlation between height and performance amongst NBA players. And perhaps surprisingly — at least surprisingly for a non-expert like myself — they actually find a negative correlation: that within the NBA, shorter players tend to have slightly higher performance than taller players.

And this is not to say that height isn’t important in basketball — obviously that’s not true — but it’s an example of what’s known as selecting on the regressor.

If you only look at a portion of the sample that’s at the top of the field, you might be missing dynamics that filter through the rest of the population.

And so one question I had was: has the series of investigations into state capacity suffered from a similar issue? Because we’re looking all about Australia. We’re looking at the NBA of high state capacity.

Is it possible that instead of comparing, say, different prime ministers, different states, different departments, we might have come up with different answers if we’d looked at, say, the whole OECD and said: what makes Australia so much better than the UK, for example, the US, or France?

WALKER: Yeah, I think that’s a really fair criticism.

Peter Bowers and I, in our literature review on Australian state capacity, did a bit of comparative analysis where we looked at Australia against other OECD countries. So I feel like, outside of the podcast, I’ve thought about that.

But yeah — it’s dangerous to select on the regressor.

GROSS: Always risky.

And this is perhaps a bit more speculative, but: if you were to think about what is the “height” of state capacity — what is the one thing about Australia that it’s so ubiquitous, we have it so deeply, which makes us a fairly well-run country — but it’s so ubiquitous that we don’t even notice it’s there?

Do you have any thoughts about what such a thing could be?

WALKER: So what is “height” for Australian state capacity?

For me, the “dark matter” (to use a physics metaphor) of Australian state capacity is the political culture of faith in the administrative state and obedience towards impersonal authority. Maybe you could summarise all that in one word as statism…

When political scientists look at state capacity, they usually differentiate three different dimensions.

First, extractive capacity: how well can the state extract resources to do what it wants to do — through things like taxation.

Second, coordination capacity, which refers to the kind of Weberian bureaucracy.

And then finally, compliance capacity.

We’ve got a lot of all of those, but the compliance capacity really stands out. There’s a population that trusts its government, that complies with its government.

You know better than me from the Victorian lockdown experience. But when the government asks things of the population in Australia, people tend to go along and make things easy.

That would be the first thing I would think of. How does that sit with you?

GROSS: I think that makes a lot of sense to me.

In fact, I was thinking about how would we multidimensionalise state capacity as a concept. And I think when you look at the body of work you’ve done, there are some aspects that Australia is clearly a world leader at.

So one aspect that I think we do well at is big, technologically complicated projects — such as Single Touch Payroll, or the whole myGov system — which I think actually work really well.

I’ve lived in the UK, and we do much better than them at all these sorts of big technological projects. The Reserve Bank’s payment system, I would add to that.

One area where I think we probably fall down — and this is probably the flip side of that high compliance — is that sometimes we set up a bunch of experts to run public policy and we don’t question them if they start to go off and start making policy errors or start making mistakes.

The examples I’d cite for this are like the planning system. We’ve devolved planning to a whole bunch of architects and urban planners, and I think it took decades for us to wake up to the fact that they were probably stoking a massive housing shortage.

I could tell similar stories — and some of your guests have — about the Reserve Bank making mistakes and taking a long time to be corrected.

So I guess: it’s great to have a compliant population when you want to put them in lockdown, but perhaps the severe cost of that is: when you say, “Look, the experts have it right — don’t bother questioning them,” then even when they make mistakes, it takes a long time to pick up on them.

WALKER: Yeah, yeah. I think that’s a good point.

GROSS: So maybe this podcast is part of the antibody to that — because what you want to do is have experts like Richard Holden and Steven Hamilton on. They’re very good at shouting out when experts are making the wrong decision about, I guess, vaccine procurement.

And giving them a bigger microphone is part of trying to right the balance of that ship, I guess.

WALKER: Yeah, exactly.

3. My biggest intellectual update via the podcast in 2025

WALKER: The Peter Tulip episode was the site of my biggest intellectual update this year.

GROSS: All right. Tell me more.

WALKER: So for me, this was like a huge red-pill moment. No-one else seemed to pick up on it.

This was the highlight I pulled out in my “Eight Things I Learned” roundup of the policy salon series.

But the question I put to Peter was: if we could implement a maximally ambitious deregulatory agenda — so get rid of all of the kinds of planning restrictions he’s worried about — how long would it take for supply to accumulate sufficient to bring prices in Sydney and Melbourne down by, say, 30 to 40% relative to [today’s prices]?

And you can argue whether 30 to 40% should be the goal, but I guess on common measures of affordability, that is what you would want to aim for to make housing affordable in Australia.

And Peter’s answer was: 10 to 20 years. And he kind of extrapolated that using his and Trent Saunders’ rule of thumb around: a 1% increase in supply reduces prices by 2.5%, or something like that.

That was a huge red-pill moment for me because I think it showed me that this problem is not going to be solved any time soon — maybe even within our lifetimes, realistically.

And that was on a maximally ambitious deregulatory agenda, which is much more than the National Cabinet’s target of 1.2 million homes over five years — and even that we’re not going to achieve that. That is a very ambitious goal.

So that just showed me, I think YIMBY is good at the margin, we need more homes, we’ve got to do this. But a lot of the rhetoric around the YIMBY agenda as this being the solution or silver bullet to the housing crisis, I think is wrong.

And if we actually view this as something we need to solve urgently… You don’t want to solve it too quickly, right? Because then you can have—

GROSS: House prices falling by 20%.

WALKER: Exactly — you don’t want too much negative equity.

GROSS: Well, not falling by 20% again.

WALKER: Exactly, so you don’t want to solve it too quickly because you can cause those macroeconomic problems and financial instability. 

But say you wanted to solve it in, I don’t know, three political terms or something — I don’t think you can do that under a YIMBY program.

I’m trying to write something on this.

But I think: all of these questions, like all of the things holding us back economically, things holding back our productivity growth — housing would probably be the first cab off the rank, right? — have much more urgency in a world in which Australia doesn’t have a great-power protector.

And that sounds like such a crazy kind of longbow, but I think all these debates — the stakes are going to become much higher. And you want to act now, when you still have the option, because [strategically] we’ll be isolated. We’ll be in a region where the [dominant] power is not an ally of ours. And you want to have a really strong, growing economy.

We should be aiming to solve things quickly.

And we’re not going to solve the housing crisis quickly.

GROSS: No.

If I could channel Peter Tulip for a second—

WALKER: Yeah, please.

GROSS: Bear with me while I get out my divining forks.

I think he would say: look, if a policy lever is relatively weak, that just means you have to pull it all the harder.

And so to the extent that full YIMBYism only gets you maybe half the problem solved, well then you better not dilly-dally around half YIMBYism. You better go full YIMBYism, and then investigate what other policies and fixes might be required on top of that.

And the second point I’d add, aside from my channeling of Peter: the Grattan Institute’s actually got a new report out that looks at the costs of housing, and especially in Melbourne, where the prices are substantially lower, they actually find that a lot of projects don’t pencil out. The economics, even with planning approval, often doesn’t stack up in a lot of different parts of Melbourne.

And so perhaps the companion piece of that full YIMBYism is a real examination of what are the costs going into our construction sector, and how we can bring those down.

But yeah — I guess that’s a podcast for another day.

WALKER: Yeah.

And one of the first questions I asked Greg and Michael in the podcast I did with them was: how big of a lever for supply is productivity?

Because if removing planning regulation is only going to get us so far, what other levers do we have?

GROSS: Yeah.

We reflect on what I learned on the podcast in 2025 and what I changed my mind about. We also discuss the behind-the-scenes work of running the show, and my plans for 2026.

Video

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Transcript

JOSEPH WALKER: This is a special kind of episode. Today the tables are turned: I’m in the hot seat, and I’m going to be interviewed by a listener of the podcast.

I’ll introduce him in a moment, but just to provide a bit more context: we’re continuing a tradition I started in 2023. I wanted to do an end-of-year retrospective — reflect on the year, both in terms of the content of the episodes, but also the behind-the-scenes aspects of the podcast itself.

But I didn’t have anyone to interview me — no producer. It’s a one-man show. So I thought: wouldn’t it be fun to invite my listeners to apply to interview me?

It’s probably my only original contribution to the field of podcasting: having a listener interview the host. I don’t remember seeing that idea anywhere else, but I really enjoyed the experience. It was a nice way of drawing out and synthesising the lessons from the year, and also a good way to develop empathy for my guests and become a more thoughtful interviewer.

So about a month ago, in early December, I put out a call on Twitter and through my mailing list looking for listeners to interview me. I received a bunch of excellent applications, but the best was Zac Gross, who’s interviewing me today.

So, Zac — we were talking before we started recording. I think you first found the podcast maybe six or so years ago.

ZAC GROSS: Yeah about that.

WALKER: To introduce you briefly: you’re an Australian macroeconomist. You worked at the Reserve Bank of Australia, you worked as a lecturer at Oxford, and you’re currently an assistant professor at Monash University.

So it’s the afternoon of the 30th of December. We’re doing this in Melbourne. And thank you so much for doing this with me.

GROSS: No worries. Happy to be here.

WALKER: Over to you.

GROSS: Great, thanks, Joe.

At the end of your last [end-of-year retrospective] interview, you mentioned that you were going to take the podcast to the UK — back to the motherland — for ease of access to the intellectual environment that is London, and perhaps even closer access to the US.

I wanted to ask you how it went, and what’s been happening with the podcast, location-wise.

WALKER: So we never actually moved. Which hopefully is evident to people who follow me on Twitter and watch the podcast on YouTube, given the amount of Australian content I’ve done this year.

GROSS: I did think you must be racking up a lot of frequent flyer miles with the amount of Australian content.

WALKER: So the story is: we were on the brink of moving. I’d even got my British passport — we were ready to go. 

And then we realised that the US was much more attainable; a US visa was much more attainable than I’d been led to believe.

The US was frankly always plan A, and the UK was plan B. Once we realised that, we sort of pivoted. Generally, I’d much rather live in the US than the UK.

That move has kind of been delayed. So I stayed in Australia because there was a lot I wanted to do in Australia first, in terms of the Australian content.

But I guess I don’t feel sufficiently famous that I need to update my audience on my movements. So I was in this weird position where that plan slipped out in the 2023 retrospective, and then I didn’t really have another chance to update people; didn’t feel like I needed to.

So I’m conscious that about half my audience probably thinks I’m in the UK right now. I haven’t been in the UK since a short trip in 2023.

GROSS: Oh, great. There goes all my questions on fish and chips and the London housing market. But we’ll see if we can pivot and make this work.

So that’s a big update on location — maybe the US in the future. Do you have any idea of which coast? Which side?

WALKER: West Coast.

But having learned my lesson with the UK experience, I don’t want to release too much before I’ve got boots on the ground.

GROSS: Fair enough. We’ll watch and find out.

Okay, well, let’s chat a bit about the podcast behind the scenes, and then we’ll dive into some of the more detailed content. So perhaps for those who aren’t interested in a two-hour serenade on Australian state capacity, you don’t have to stay to the bitter end.

First question: you’re a podcast, you’re running a business. Who do you see as your top three competitors in the industry?

WALKER: I try not to think in terms of competitors. It’s a very Zen kind of thing where I try to keep them out of my consciousness, because I think thinking in terms of your competition, or people you want to copy or emulate, can be quite toxic.

I want to maintain my independence. I don’t even listen to that many podcasts in my personal life.

One way to answer the question might be: my competitors are newspapers, or Substack, or anything else people could be doing to consume intellectual content.

GROSS: I was going to say: is a podcast even the competition or is it another app on someone’s phone?

WALKER: Yeah, it might be.

I think the direct competitors would be podcasts. But we try not to think about competition. [laughs]

GROSS: Fair enough.

Well, speaking of other podcasts: Derek Thompson, formerly of The Atlantic, now at Substack, I believe, outlined an interesting theory that basically all media is becoming television.

For a bit of behind the scenes — we actually spent much more time on the cameras and the lights here than on the microphones, so that you can all see us. And that’s a reflection of the fact that all podcasts are moving to video. The pivot to video is happening.

How has that affected the business of making a podcast?

WALKER: For me, in two ways.

The first — and most obvious — is just doing video, and needing to do video to grow the show. So I started doing video for every episode last year, and I publish video on YouTube, Substack, and X (formerly known as Twitter).

That has turned out to be kind of mandatory if you’re trying to grow a podcast, because you have access to the upside of those algorithms on those platforms. The discoverability on a platform like YouTube or X is just qualitatively different to the discoverability through a podcast app like Apple Podcasts or Spotify.

I don’t remember the last time I ever used Apple Podcasts or Spotify to find a new podcast. Usually you just learn about stuff through word of mouth, and then subscribe through those apps and keep listening to your same stable of shows. But you don’t use those apps to find new things.

I think the second way in which I’ve noticed the “everything is television” thesis apply to my show is doing ads in more creative ways. And I think this will be a theme for podcasts that we’ll see intensify over the next few years.

It’s no longer enough to just do a read where you’re reading the script the sponsor’s given you and you’re just plugging a product. I think ads will get increasingly more creative, much more personalised to the host and the show, and much more seamlessly integrated into the show.

And that, I think, has been facilitated and driven by the video medium, because there’s so much more you can do with the ads when you’ve got that video dimension.

One example from my show this year was an employer-branding ad for Eucalyptus, which appeared in the Hugh White episode. So I interviewed someone who’s a long-time listener of the show who now works at Eucalyptus.

Instead of me just singing the praises of working at Eucalyptus, the ad was a mini-interview: a two-minute interview where I interviewed that person, Jae, about what it was like to work at Eucalyptus and why they chose to work there.

So that’s an example. We’ll see more and more of that. And I think that’s a special case of the “everything is television” phenomenon applied to podcasts.

GROSS: And it even extended to having a live studio audience this year. Do you see more of that as well in the podcast future?

WALKER: Yeah, I think so.

And I think we’ll start to see a lot of innovation around what a podcast is. So it won’t just be a sit-down interview. There’ll be other elements blended in. It will become more sort of documentary-esque.

GROSS: So like maybe charts in the background, or—

WALKER: Exactly.

GROSS: Flashbacks to a previous episode.

WALKER: Exactly.

One thing I’ve been wanting to do for a while is: podcasts aren’t always the best medium to explore very difficult ideas. And having someone speak extemporaneously about a topic is a very challenging exercise for them. And there’s only so much you can do.

Wouldn’t it be cool if you could cut in other explainers? Or if you were talking to a guest about a very technical topic, maybe you could step aside and they could explain it on a whiteboard or something — and then you could cut that in. That kind of stuff.

I think we’ll start to see the definition of what a podcast interview is start to blur and change and morph.

GROSS: How much prep time do you usually give your interviewees?

Because obviously for some of them — you did a medical test on one, which I imagine required some preparation. Though I feel like some of the economists, you might ask them a question like, “What’s the effect size of this?” And I was always told never differentiate in public as a maths student, and I suspect most economists, unless they’ve spent their entire life studying this particular equation, would struggle — or at least be cautious about doing it on the fly.

So is that something that you’ll look to do more in the future?

WALKER: Wait — what was the question?

GROSS: How much prep do you give your interviewees?

WALKER: It’s very case-by-case. Generally, none.

I’ll let them know by email: these are the kinds of topics I want to discuss. But I don’t send them a list of the questions — partly because I don’t finish writing my questions until a few hours before, or the night before, the interview — but also because I like the spontaneity of it feeling like a real conversation. I don’t want them to rehearse their answers.

Sometimes I’ll send them a more detailed list beforehand if I think they might need it. Sometimes I’ll do some kind of intermediate approach where maybe I just send them the first question or something like that, so they can start the interview on a strong foot and go from there.

But it really varies.

GROSS: Fair enough.

It seems that every podcast has pivoted towards talking about AI these days; it's the only issue that people want to talk about.

But you seem to be an exception. With maybe one episode aside, you haven’t really dived into the AI takeoff — whether it’s going to take over the world or destroy it.

And I found this particularly odd, as you actually mentioned it in your 2023 [retrospective]: you were sort of like, “Oh yeah — have to get onto this.” But you managed to resist the temptation.

Personally, from my own interests, I actually think that’s a good thing. But I was wondering why you chose to stay pure.

WALKER: So in 2023 I said this is an important thing that I wish I did more of. In 2025, it’s been pretty undertreated on the podcast. So how do you reconcile that contradiction?

The reason is: the guiding principle of the podcast, in terms of guest and topic selection and then question-crafting, is: can I create as much counterfactual value as possible?

And in 2023 — I mean, this was when, if you remember, there was some point at which The New York Times still hadn’t written an article about ChatGPT or something. At that point AI was super underrated, and I felt like screaming from the rooftops: people need to take this more seriously.

At this point [in December 2025], I think there’s not as much counterfactual value I can have by doing anything on it.

Also, the preparation — from a technical perspective, in terms of trying to get myself up to a basic level of competence around LLMs and whatnot — is quite daunting. I don’t think I want to interview a leader of an AI lab without having done [what] might be three or four weeks of prep or something.

Also, [I’ve had] a general and dawning scepticism around LLMs and the scaling paradigm as the thing that will deliver artificial general intelligence. And I say this as a complete rank amateur, so people can take this opinion with a grain of salt.

But I’ve just been a bit sceptical… AI is both underrated and overrated, depending on which circle you’re operating in. And in the circles you and I probably tend to operate in on Twitter, I think I’ve been a bit sceptical of some of the hype.

And that’s been reflected in the podcast programming.

GROSS: I think that’s fair enough.

As I said, certainly not my interest. And I’m going to extrapolate that, as a single audience member, the rest of the audience feels the same.

But I thought it was worth asking, because it does seem to be ubiquitous — certainly on many other podcasts.

WALKER: I mean, it’s still a massive deal as a technological revolution.

GROSS: Do you use it at all in the production of the podcast?

WALKER: Absolutely. For every episode, in various ways.

GROSS: Just for transcripts and research?

WALKER: Definitely for polishing transcripts. Also for research.

And say I’m preparing for an episode — maybe I’m driving to the gym or driving to get groceries or something — I can be talking to the AI in voice mode about particular concepts I’m trying to learn.

I use it in all sorts of ways.

GROSS: Oh, great.

Well, it certainly seems to have increased your productivity, even if it hasn’t taken over the content mill.

So a lot of Australian podcasts — obviously they want to have an international audience — but I feel like they struggle to constantly maintain the balance. Like, “I’m going to interview this Australian thought leader,” but I’ve constantly got to introduce them or talk about what HECS is in an aside to keep the international listeners on board, or at least clued up to the context.

You’ve leaned very hard on the Australian side of that divide this year. I was wondering: was that a deliberate decision, purely financial, because of what your interests are?

WALKER: Definitely not a financial decision.

Originally it was: we had the election coming up. I was planning to, at some point, leave Australia and move (now) to the US. And I thought, in a very grandiose way, this policy series I did could be my sort of parting gift to Australia. [laughs]

GROSS: Swansong.

WALKER: Exactly.

And I felt uniquely well placed — in terms of my network and just general knowledge about Australia and Australian policy issues — to do that.

And I guess from there it’s kind of carried on, because I quickly realised this is very underserved. No-one’s really doing… I mean, I can’t really think of anyone who’s doing those kind of conversations in Australia, and I should keep serving that niche.

I guess the conundrum I’m facing at the moment is: do I continue down the Australian public policy path, or revert back to the general sort of intellectual path which obviously has international appeal?

And maybe this is kind of a cop-out, but I’ve decided to do both.

GROSS: Far be it for me to criticise, but I think it’s definitely reasonable to spend time on the Australian market.

Like many aspects in life: we might be 15% of the American market, but we get far less than 15% of local content produced that is specific to our region.

It does feel to me like it’s one of those classic public goods where, you know, if the ABC was fulfilling its mandate, this is the sort of content they should produce: sit-down, long-form interviews with Australia’s best and brightest.

And at least to my knowledge, they don’t seem to be doing it. Neither do any universities.

Would you be open to any partnerships with them — to help get some official branding, or more support — and sort of make an honest podcast out of you?

WALKER: [laughs] I’ve flirted with the idea.

I think the thing I struggle with is I’m pathologically independent [intellectually], and I don’t want to be part of any institution where I feel like my opinions need to be edited or censored.

I’m not sure that’s necessarily a massive problem working with an institution like the ABC or a university, but even just the niggling thought of that — or the prospect, the spectre of that — is enough to kind of turn me off and ruin my mojo.

This year I was quite lucky to receive some very generous support in the second half of the year from a long-time listener of the show — Bill Manos and his foundation. So that’s been incredibly helpful.

That’s probably the kind of thing that’s better suited to my temperament and preferences.

GROSS: And I guess, wrapping up the podcast section: on the quality-versus-quantity spectrum, you definitely lean much harder on the former.

WALKER: Yep.

GROSS: Is there a financial reason for that? Is it purely your interests?

Because I could imagine, if you’re doing a weekly cadence and you’re crawling through every professor who’s had a bright idea at some point, that might make it harder to get those superstar guests — as opposed to what it is now, where I wouldn’t say a Nobel Prize is compulsory to be on the podcast, but certainly quite helpful.

Has that played into your thinking in terms of how many guests to book?

WALKER: Yeah — if I was purely optimising for profit, I would be publishing a lot more and reducing the quality.

But temperamentally, I’m not going to do that. I’ll probably be dead in 70 or 80 years. I haven’t been put on the earth to create midwit slop. I’m not going to do that. [laughs]

GROSS: 80 years! Maybe we’ll get to life extension in a moment — but you’re certainly optimistic.

WALKER: [laughs] But one thing I will say is: I’m not at the kind of frontier where there’s a strict trade-off between quality and quantity.

I could be publishing so much more at the same, or even higher, level of quality. My big bottleneck is post-production.

So spending one to two weeks [cycle time] on average editing and producing and then marketing the episodes — that’s been killing me at the moment. That’s the main thing I need to solve right now.

And solving that requires hiring a talented editor or producer who understands my taste, and the kind of editorial decisions I would make — has extreme attention to detail — and then I’m compensating them appropriately to spend the time getting the episode right.

Because I think this year I must have trialled five to 10 different editors. I don’t think the bottleneck there is necessarily talent. I think it’s more funding.

If I had the money, I could probably get the right person.

This is the goal for next year: I should be publishing biweekly or weekly.

And with the right producer or editor, I can do that.

The three things I need to be spending most of my time on are booking the guests (which is a big task), researching for the interviews (which is the biggest task), and then recording the interviews.

And from when I press stop on the recording, ideally I’d outsource as much of that as possible.

GROSS: Yeah, I mean, makes sense from a comparative advantage point of view.

So stretching the definition of the year a little bit: one of your last episodes of 2024 had Nassim Taleb, and that went somewhat viral — at least viral in my neck of the Twitter woods. Although for not entirely positive reasons, I would say — something to do with negative probability. We don’t need to go into that here.

But I was interested: from the business side of you, is that a positive moment for you — going viral — even if it’s maybe not for the right reasons?

WALKER: I guess so. I mean, I guess it’s the “any press is good press” thing.

But there are better and worse forms of going viral for the wrong reasons. If it’s going viral because I’ve said something crazy, that’s probably the wrong reason. 

GROSS: Save it for part three of the podcast.

WALKER: Yeah. [laughs]

WALKER: If it’s going viral because it’s sparking a conversation on Twitter about negative probability— 

GROSS: I’m not going to lie, it was pretty niche, even for my tastes.

WALKER: It's not the worst scandal anyone’s ever been adjacent to.

GROSS: No, fair enough.

All right, well, I thought we’d go over the episode numbers. I think you’ve got the total — is it listeners, downloads, minutes listened?

WALKER: Yep. So this is the one segment where I’ll—

GROSS: I’m handing over control back to Joe.

WALKER: That’s right.

So this is, for each episode, the total downloads across all platforms. That’s audio, Substack, Twitter, and YouTube.

So I thought maybe I could just share the top three episodes this year in terms of downloads and views.

GROSS: Sure.

WALKER: Firstly, can you guess what they might be, in order?

GROSS: I would assume number one is Francis Fukuyama.

In terms of second and third, probably Ken Henry, because I know he was popular when he was last on the podcast.

And then, in terms of the third: I think this is where it gets down to the brass tacks of which Australian you like the most. But I would say potentially the Hugh White walk through history, as having a fairly universal appeal.

WALKER: So you got one out of three.

GROSS: Oof, that’s terrible. Which one was I right on?

WALKER: You were right on Hugh White. Although not the ranking.

So the third most popular was the Greg Kaplan and Michael Brennan episode on productivity.

The second most popular was Hugh White.

And the most popular — which was a dark horse, and actually only became the most popular in the last month or so — was Barry Marshall.

GROSS: Really?

WALKER: Yeah.

GROSS: There you go. Yeah, that was a good talk. But obviously outside of the theme for the year.

WALKER: Yeah.

GROSS: Do you have any sense of what made that one shoot up the leaderboards?

WALKER: Yeah.

It had a second wind on Twitter, where Steven Pinker shared it and a bunch of other people wrote fulsome endorsements and shared it. And so that drew a lot more attention to it.

GROSS: So it really can be as much as one or two superstars retweeting you, and then it’s off to the races.

WALKER: Sadly, yes.

So that was probably in the bottom half of episodes in terms of popularity until that happened. Now it’s number one.

I mean, it obviously does have a kind of international appeal, and it’s a great story. And, you know, 50% of the human population has H. pylori.

There’s obviously also a bias towards episodes that have been published a longer time ago. So I think Hugh White might eventually overtake the Barry Marshall one. But at the moment, that’s the top three.

GROSS: All right, well, let’s dive into the content of the interviews. And maybe around the halfway mark, we’ll keep things a bit more lively with a game of ‘Overrated or Underrated’ — to steal an innovation from Tyler Cowen.

So look: a big theme — probably the big theme of the year — was trying to explain Australia’s exceptionalism.

WALKER: Mm.

GROSS: Having listened to 30 — probably more than that — hours now, I kind of feel like I’ve got more questions than answers.

I guess the main answers seem to be: have a good culture, and maybe a side helping of “it’s good to have a lot of land”. Is that a satisfactory conclusion for you?

WALKER: What role do you see the large amount of land playing?

GROSS: I think in terms of having the wealth from mining, the wealth from housing.

WALKER: Okay, got it. Yep.

GROSS: The fact that we had the ability to add that as a factor of production into our production function helps explain a lot of our wealth, especially early on with the agricultural side of things.

Obviously we managed to avoid a commodity curse, which we might not have in a different universe. But certainly the good-culture thing stands out as practically the strongest explanatory factor — which in turn just says: well, what causes good culture?

WALKER: Yeah, exactly.

Unfortunately it’s a pretty boring explanation, but I think it’s some combination of those two things.

Obviously the good culture is upstream of a lot of more interesting proximate causes, like the good economic management and whatnot. 

But yeah, as a first approximation, I can’t really do better than that.

GROSS: No, it’s fair enough. It seems like a big question mark itself — which at least you’ve got plenty more podcasts left to unpack it.

There’s a famous study in economics that looks at the correlation between height and performance amongst NBA players. And perhaps surprisingly — at least surprisingly for a non-expert like myself — they actually find a negative correlation: that within the NBA, shorter players tend to have slightly higher performance than taller players.

And this is not to say that height isn’t important in basketball — obviously that’s not true — but it’s an example of what’s known as selecting on the regressor.

If you only look at a portion of the sample that’s at the top of the field, you might be missing dynamics that filter through the rest of the population.

And so one question I had was: has the series of investigations into state capacity suffered from a similar issue? Because we’re looking all about Australia. We’re looking at the NBA of high state capacity.

Is it possible that instead of comparing, say, different prime ministers, different states, different departments, we might have come up with different answers if we’d looked at, say, the whole OECD and said: what makes Australia so much better than the UK, for example, the US, or France?

WALKER: Yeah, I think that’s a really fair criticism.

Peter Bowers and I, in our literature review on Australian state capacity, did a bit of comparative analysis where we looked at Australia against other OECD countries. So I feel like, outside of the podcast, I’ve thought about that.

But yeah — it’s dangerous to select on the regressor.

GROSS: Always risky.

And this is perhaps a bit more speculative, but: if you were to think about what is the “height” of state capacity — what is the one thing about Australia that it’s so ubiquitous, we have it so deeply, which makes us a fairly well-run country — but it’s so ubiquitous that we don’t even notice it’s there?

Do you have any thoughts about what such a thing could be?

WALKER: So what is “height” for Australian state capacity?

For me, the “dark matter” (to use a physics metaphor) of Australian state capacity is the political culture of faith in the administrative state and obedience towards impersonal authority. Maybe you could summarise all that in one word as statism…

When political scientists look at state capacity, they usually differentiate three different dimensions.

First, extractive capacity: how well can the state extract resources to do what it wants to do — through things like taxation.

Second, coordination capacity, which refers to the kind of Weberian bureaucracy.

And then finally, compliance capacity.

We’ve got a lot of all of those, but the compliance capacity really stands out. There’s a population that trusts its government, that complies with its government.

You know better than me from the Victorian lockdown experience. But when the government asks things of the population in Australia, people tend to go along and make things easy.

That would be the first thing I would think of. How does that sit with you?

GROSS: I think that makes a lot of sense to me.

In fact, I was thinking about how would we multidimensionalise state capacity as a concept. And I think when you look at the body of work you’ve done, there are some aspects that Australia is clearly a world leader at.

So one aspect that I think we do well at is big, technologically complicated projects — such as Single Touch Payroll, or the whole myGov system — which I think actually work really well.

I’ve lived in the UK, and we do much better than them at all these sorts of big technological projects. The Reserve Bank’s payment system, I would add to that.

One area where I think we probably fall down — and this is probably the flip side of that high compliance — is that sometimes we set up a bunch of experts to run public policy and we don’t question them if they start to go off and start making policy errors or start making mistakes.

The examples I’d cite for this are like the planning system. We’ve devolved planning to a whole bunch of architects and urban planners, and I think it took decades for us to wake up to the fact that they were probably stoking a massive housing shortage.

I could tell similar stories — and some of your guests have — about the Reserve Bank making mistakes and taking a long time to be corrected.

So I guess: it’s great to have a compliant population when you want to put them in lockdown, but perhaps the severe cost of that is: when you say, “Look, the experts have it right — don’t bother questioning them,” then even when they make mistakes, it takes a long time to pick up on them.

WALKER: Yeah, yeah. I think that’s a good point.

GROSS: So maybe this podcast is part of the antibody to that — because what you want to do is have experts like Richard Holden and Steven Hamilton on. They’re very good at shouting out when experts are making the wrong decision about, I guess, vaccine procurement.

And giving them a bigger microphone is part of trying to right the balance of that ship, I guess.

WALKER: Yeah, exactly.

GROSS: Several of your guests — Greg Kaplan and Ken Henry come to mind — seem quite concerned about congestion effects potentially outweighing the agglomeration effects that big cities provide.

I was wondering what your thoughts were on that. Because when I reflect: I used to live in high-density housing in an apartment in South Yarra, which is sort of the YIMBYism perfect dream world of lots of apartment buildings. I feel like I actually added very little to congestion, because I rode, walked, or maybe caught the train everywhere, and suffered very little from congestion in return.

So how do you think about that trade-off between agglomeration versus congestion?

WALKER: Yeah, I was always prima facie kind of sceptical of that claim.

Obviously it’s an empirical question and I’d love to see more research on this. This has been on my long list of things to go deeper on ever since those two interviews you mentioned.

The reason I’m prima facie sceptical is: firstly, for the reason you mentioned, which is in those higher-density environments, you’re getting around through walking or cycling or whatever.

Secondly, maybe it would be a congestion effect, on net, if you held infrastructure equal... But you don’t have to hold infrastructure equal. You can increase infrastructure as well.

GROSS: And that’s easy to do in a dense inner city.

WALKER: Yeah, exactly — because of the economies of scale.

So I would be surprised if the congestion effects outweigh the agglomeration effects. But I would love to see some empirical research on this.

Are you aware of any?

GROSS: Look, I did do a bit of a Google when I was thinking about this question. I wouldn’t say I saw… There were no studies on Australian cities, that’s for sure — that suggest that Sydney is too big for its boots and we need to send everyone out to Port Macquarie.

But what literature I did find about the US suggests that there’s still — if you scale it roughly to Australia — plenty of room to grow and benefit from those agglomeration benefits.

And if you do the urban planning right and you put the houses in the right place, congestion doesn’t seem like an insurmountable problem.

I guess stepping back: if we’re talking about Ken Henry and Greg Kaplan — probably two of the smartest economists Australia has produced in quite a while — is it tough to push back when you’re like, “Geez, I don’t know, my gut feels this is wrong”?

But in the space of a real-time interview, how do you push back on some of the smartest people certainly in the room?

WALKER: Ken was a bit different because it was a live event and we had time constraints, and there were a lot of questions you want to get through. And that’s one of the shortcomings of the live-event format.

I think with Greg it’s more just: this is an empirical question and I don’t have the information. So it’s one of those things that you just let go through to the keeper and then make a mental note to do some more research on that.

I will say, though — and I think this is interesting to talk about — I think there are potentially other good reasons for the “let’s densify other cities like Canberra” and potentially even build new major cities [argument].

One might be: we talk about the benefits of federalism and the laboratories of democracy. We don’t really have… It’s kind of a sham version of that here. I mean, really, it’s sort of an “n of 2”.

Just from a kind of Hayekian, “let people vote with their feet” perspective, it would be cool if we had more major cities.

And then secondly, following on from that: it would be cool if we had more major cities so that cities could be more specialised.

But push back on me.

GROSS: Yeah, no — I’ll take the opportunity.

I mean, we’ve done that with Canberra with no holds barred. We’ve given them half the APS, the army headquarters, the National Institute of basically everything is situated in Canberra.

WALKER: It’s in such a bad location, though.

GROSS: Well, blame the planners and not the free market economists.

WALKER: But imagine if Canberra had been in a better location.

GROSS: Look, I’m sure you can improve the location of Canberra. I can’t argue with that.

But I just feel like we’ve given Canberra so much and it’s still, what, half a million people?

I guess it depends on where you want to draw the line of what is a city. But I think if you’re optimistically saying we want 10 new cities of a million people — which I think Ken Henry sort of mentioned off the cuff at one point — it would be hard to think of a place that’s got more support than Canberra and is still, I would say, essentially still a government town — a one-industry town.

It's hard to fight against the fact that people want to live with other people. And it’s hard to convince a million people to set up shop somewhere completely new and trust that everyone else will do the same.

WALKER: Yeah.

And again, this is something best answered not through a podcast conversation, but I think we’d want to be a bit careful about how we interpret the Canberra example.

So for a long time the federal bureaucracy was housed in Melbourne, right? And then the size of the Commonwealth bureaucracy relative to the general population has maybe had a point of inflection in the postwar era. So maybe you want to start the clock from there or something.

And then if you think about Canberra’s population growth from that point, maybe it is actually a success story.

GROSS: Yeah, I mean, I suppose we shouldn’t be too harsh on Canberra. A lot of very fine people live there.

WALKER: Given a few more decades, could Canberra hit a million? Or what’s its growth rate? I don’t know.

GROSS: It’s a good question.

We could pause the podcast here, consult the ABS tables, and find out.

Look, there’s no doubt that Canberra now is at least a town and it will always be there — and I guess continue to grow.

I guess one question I have is: how much can the government do to change that?

I know the UK — this is coming from all my cut UK questions — but they’re trying to do a similar thing with perhaps an even more extreme problem. Instead of an n of two, they’ve got an n of one, which is London.

And I think they moved their national statistical agency out to Cardiff. And from talking to British economists, they say everyone was upset by this, except for the half a dozen Welsh statisticians who were like, “This is great — I’m moving home and keeping my fantastic job at the Office for National Statistics.”

So I don’t know. I feel like we’re always willing to undersell the benefits of big cities.

You want to move to a big city — an even bigger city than Sydney — whether it’s the UK or the US. I used to live in London. It was fantastic. Lots of aspects of London life that are better than what Melbourne and Sydney can offer, even with the UK’s low state capacity.

And I think those benefits are really real, and we should be careful before we throw them all away and say, “No, no — we’re going to sail completely upwind and start something fresh.”

Obviously cities can specialise, but you know what? Some of the most specialised industries are in the biggest cities of the world: the New Yorks, the Londons, the LAs.

I just think sometimes you’ve got to trust the people — and the people want to move to a big city. Not everyone, but quite a lot of people.

WALKER: And for the record, I’m on your side.

I just think it’s interesting to entertain the opposing arguments and really stress-test the idea.

GROSS: Yeah.

Well, look — I don’t think Canberra is going to be abolished any time soon, so we’ll always have that guinea pig out there.

So, for context for the other audience members: Joe and I first met in 2019 on Twitter, arguing over whether house prices were a bubble or not. Perhaps the most Australian way to meet someone.

WALKER: Just missing the barbecue.

GROSS: That’s right.

But I think in your policy salon with Peter Tulip, you confessed that you’d changed your mind — or at least admitted that that 2019 forecast was not right.

What else have you changed your mind about this year, based on the talks you’ve done?

And I guess if I could focus it down: has it changed how you vote, invest, or live your life in any other way?

WALKER: And I should say: at the start of that conversation with Peter, I gave a kind of mea culpa and expressed my gratitude to him for changing my mind on this.

You should be one of the other people on that short list of people who’ve changed my mind on that point.

So the question is: what else have I changed my mind on as a result of episodes done this year?

Okay. Let me pull up the list of episodes and look through them.

There’s stuff that doesn’t neatly fit into the category of “what have I changed my mind on”, but it’s stuff that’s a big update, or something new I learned.

So, for example, with the Abul Rizvi episode, I didn’t realise how much weight our policymakers had placed on slowing the rate of population ageing as a rationale for immigration policy. That was the main motivation for the 2001 changes.

GROSS: Right. Definitely undersold as a message to the people, in terms of the justification.

WALKER: Yeah, absolutely.

And I want to do some more on that; I’m planning to do some stuff on immigration early next year.

I just don’t know how much the population-ageing stuff really matters. It’s often framed in these kind of eschatological terms — as if there’s this impending judgement day where we’re not going to be able to support ourselves fiscally. And I just don’t know.

GROSS: One of the great things about demographics is you can accurately forecast them many years in advance. The problem is you can’t forecast almost any other aspect of society.

WALKER: Productivity growth.

GROSS: Exactly — AI, or just general demand.

So look: I think it’s reasonable to be concerned about an ageing society and the demands that might place on our healthcare system and residential system.

I think there is evidence — or mathematics — to show that migration slows that process down. But obviously can’t reverse it, because as people come here, they age themselves.

So, to be honest, it’s not clear to me whether that’s the best way of optimising our immigration system. I suspect it’s not optimal in a number of ways. But maybe we’ll find out more next year.

WALKER: Yeah.

The Peter Tulip episode was the site of my biggest intellectual update this year.

GROSS: All right. Tell me more.

WALKER: So for me, this was like a huge red-pill moment. No-one else seemed to pick up on it.

This was the highlight I pulled out in my “Eight Things I Learned” roundup of the policy salon series.

But the question I put to Peter was: if we could implement a maximally ambitious deregulatory agenda — so get rid of all of the kinds of planning restrictions he’s worried about — how long would it take for supply to accumulate sufficient to bring prices in Sydney and Melbourne down by, say, 30 to 40% relative to [today’s prices]?

And you can argue whether 30 to 40% should be the goal, but I guess on common measures of affordability, that is what you would want to aim for to make housing affordable in Australia.

And Peter’s answer was: 10 to 20 years. And he kind of extrapolated that using his and Trent Saunders’ rule of thumb around: a 1% increase in supply reduces prices by 2.5%, or something like that.

That was a huge red-pill moment for me because I think it showed me that this problem is not going to be solved any time soon — maybe even within our lifetimes, realistically.

And that was on a maximally ambitious deregulatory agenda, which is much more than the National Cabinet’s target of 1.2 million homes over five years — and even that we’re not going to achieve that. That is a very ambitious goal.

So that just showed me, I think YIMBY is good at the margin, we need more homes, we’ve got to do this. But a lot of the rhetoric around the YIMBY agenda as this being the solution or silver bullet to the housing crisis, I think is wrong.

And if we actually view this as something we need to solve urgently… You don’t want to solve it too quickly, right? Because then you can have—

GROSS: House prices falling by 20%.

WALKER: Exactly — you don’t want too much negative equity.

GROSS: Well, not falling by 20% again.

WALKER: Exactly, so you don’t want to solve it too quickly because you can cause those macroeconomic problems and financial instability. 

But say you wanted to solve it in, I don’t know, three political terms or something — I don’t think you can do that under a YIMBY program.

I’m trying to write something on this.

But I think: all of these questions, all of the things holding us back economically, things holding back our productivity growth — housing would probably be the first cab off the rank, right? — have much more urgency in a world in which Australia doesn’t have a great-power protector.

And that sounds like such a crazy kind of longbow, but I think all these debates — the stakes are going to become much higher. And you want to act now, when you still have the option, because geopolitically we’ll be isolated. We’ll be in a region where the great power is not an ally of ours. And you want to have a really strong, growing economy.

We should be aiming to solve things quickly.

And we’re not going to solve the housing crisis quickly.

GROSS: No.

If I could channel Peter Tulip for a second—

WALKER: Yeah, please.

GROSS: Bear with me while I get out my divining forks.

I think he would say: look, if a policy lever is relatively weak, that just means you have to pull it all the harder.

And so to the extent that full YIMBYism only gets you maybe half the problem solved, well then you better not dilly-dally around half YIMBYism. You better go full YIMBYism, and then investigate what other policies and fixes might be required on top of that.

And the second point I’d add, aside from my channeling of Peter: the Grattan Institute’s actually got a new report out that looks at the costs of housing, and especially in Melbourne, where the prices are substantially lower, they actually find that a lot of projects don’t pencil out. The economics, even with planning approval, often doesn’t stack up in a lot of different parts of Melbourne.

And so perhaps the companion piece of that full YIMBYism is a real examination of what are the costs going into our construction sector, and how we can bring those down.

But yeah — I guess that’s a podcast for another day.

WALKER: Yeah.

And one of the first questions I asked Greg and Michael in the podcast I did with them was: how big of a lever for supply is [construction] productivity?

Because if removing planning regulation is only going to get us so far, what other levers do we have?

GROSS: Yeah.

WALKER: There weren’t too many other big updates.

I always learn things through meeting guests and consuming the interview.

GROSS: I mean, in many ways, it’s an iterative process of learning, obviously.

WALKER: Yeah.

And I learned things about the guests, and the kinds of people who end up in the positions that the guests held or hold.

But maybe one interesting one with Fukuyama was that he’s working at Stanford, one of the major, if not the biggest, technological revolution of our times is happening right under his nose — and he hadn’t given much thought at that point to the implications it has for his work.

And it just shows: even our greatest public intellectuals can be slow to update on things.

GROSS: The ivory tower can be very high and very high up in the sky.

WALKER: Yeah. [laughs]

I think he’s since done a lot more stuff on AI. And maybe I’m being unfair to him because he is very sceptical about the concept of AGI generally. So if he were here, he might fairly push back on me.

But at least that was a thing I learned talking with him.

GROSS: On the topic of transparency: I feel like we got two different takes from Peter Costello and Ken Henry on the reform of the GST.

Because Peter Costello came up and said, “Look, you really have to restrict information. You have to keep everything bottled up. Once Cabinet is ready to be told, we’ll tell Cabinet, and then we’ll spiral it out from there,” and really control the flow of information.

Whereas Ken Henry placed a lot more emphasis on needing long-term legitimacy coming through transparency and institutional trust — which seemed a bit in tension [to] me.

You’ve got a treasurer who just wants to jam things through and orchestrate the whole show, whereas Ken Henry seemed to want to value the buy-in from both the broader population and, I guess, other actors in the government.

To what extent do you think these are in conflict — these two views?

WALKER: Probably not much. I think it’s a sequencing thing.

So you want buy-in from the general public at a conceptual level — in this case, around a broad-based consumption tax. And that started as early as the Asprey Review, which was tabled in 1975.

But then obviously we had Keating and Option C at the tax summit in 1985. And so for two and a half decades this idea had been socialised with the public, at a conceptual level.

I think Costello’s point is more around a specific tax change proposal. And yeah — I do think you want to keep that pretty bottled up until you’re ready, because otherwise you have what we saw with Turnbull, where before they could even consider that policy, they had to rule it out because it was leaked.

Remember the proposed change to the— maybe they were thinking about increasing it to 15% or something? And ScoMo was for that, and he might have leaked it from Cabinet. And so then they had to rule it out.

I might be getting the facts wrong, but I think that’s what happened.

GROSS: Sounds messy.

All right — let’s shake things up a bit with a game of ‘overrated or underrated’.

WALKER: All right. Credit to Tyler.

GROSS: Yeah, credit to Tyler.

Feel free to interpret the context as opposed to the baseline — up to you — and we’ll otherwise go through them.

All right: AUKUS. Overrated or underrated?

WALKER: Overrated.

GROSS: Overrated. Why?

WALKER: Probably underrated — or rightly rated — within my circles, but overrated generally.

Because I think the critics, including guests I’ve interviewed this year — like Sam Roggeveen and Hugh White — are probably right that the US isn’t going to make good on its promise. And the analysis there is pretty compelling.

GROSS: Fair enough.

London — I can only assume overrated, since you did not move there.

WALKER: I think it’s now pretty underrated.

Having travelled there, I think it’s one of the great cities of the world.

GROSS: I can’t disagree with that.

WALKER: Maybe better to visit than to live.

GROSS: Maybe visit during summer and then it’s perfection.

WALKER: Yeah.

GROSS: Productivity statistics. Overrated or underrated?

WALKER: Oh — slightly overrated.

GROSS: Yeah. I mean, I think obviously politicians like to talk about them, and journalists like to talk about them, but especially once you see how the sausage is made—

WALKER: Exactly.

GROSS: I suspect it’s hard to put as much importance on them as a lot of the talking heads do.

WALKER: Yep, yep.

GROSS: The likelihood of a US–China conflict. Overrated or underrated?

WALKER: Underrated, in the sense that public intellectuals should be worrying about this a lot more.

GROSS: Yeah, that seems reasonable.

Self-experimentation. Underrated or overrated?

WALKER: Underrated.

GROSS: Okay. I won’t inquire any further.

WALKER: The obvious critique is ‘n of one’, but I think there’s actually a lot you can learn through self-experimentation. There are a lot of hypotheses you can generate as well.

GROSS: It certainly helps with the paperwork.

WALKER: Yeah. Barry Marshall being a great example.

GROSS: The baby bonus. Underrated or overrated?

WALKER: Underrated.

GROSS: Why is that?

WALKER: This is one of the few instances of a developed country increasing its total fertility rate. And fertility declines are one of the great problems of our time.

We should be taking much more interest in policies to move the fertility rate.

GROSS: Australia’s use of international students as a migration pipeline. Underrated or overrated?

WALKER: A bit overrated now.

It’s obviously caused a lot of — and you would know this better than me — issues at universities around the quality of education. 

I think we also have a problem where the vision was: these people would ultimately be put on a path to permanent residency and then citizenship. I think that doesn’t happen for a lot of them, and it’s kind of just a glorified form of cheap labour.

Obviously that doesn’t describe the majority of these migrants. So that’s why I’ll say only slightly overrated.

GROSS: Fair enough.

WALKER: What do you think?

GROSS: Look, there’s a lot of heterogeneity in terms of different universities, different courses.

I think as a way of filtering out the best and brightest, it’s still got a lot of value-add.

WALKER: Yep.

GROSS: I guess, as an economist, you always say: what’s the alternative? I don’t think we’re going to take the hundreds of thousands of students we get every year and cut to zero.

I guess the question is: could you do it another way? Possibly.

But in terms of attracting people who are both smart and willing to fund our universities, that at least ticks a few boxes — even if it maybe technically breaks the Tinbergen rule.

WALKER: I think at the time it was a stroke of policy genius to do it.

But I think it’s caused a lot of problems.

The thing with immigration policy is you have to manage perceptions as well, not just the reality.

GROSS: Which I think is something that Australia gets a lot of credit for in terms of — well, they don’t let illegal immigration — they clamp down on that through a lot of legally and morally dubious methods.

But that, at least historically, has managed to correlate with high support for legal immigration. Now, maybe that was just luck, but a lot of people argue that the former leads to the latter.

So I agree. National buy-in is important. And in some ways we were lucky it didn’t fall apart at the last election.

WALKER: National buy-in is how you get more immigration in the future.

GROSS: Yeah, I agree.

Australia’s National Cabinet. Underrated or overrated?

WALKER: The National Cabinet obviously referring to the group of the prime minister and premiers.

I think at the moment it’s a bit underrated.

It’s proven to be a really effective decision-making forum, and it’s still in its early days.

GROSS: That’s true. Hopefully plenty more crises to come that will get our best and brightest together.

WALKER: [laughs] Prove its worth.

GROSS: The Commonwealth Treasury. Underrated or overrated?

WALKER: Commonwealth Treasury.

GROSS: Or you could substitute this with ‘The Treasury View’. 

WALKER: Yeah. My kind of inner wonk wants to say slightly underrated.

GROSS: The correct answer for someone who wants to interview more treasury secretaries.

WALKER: Because obviously the Treasury view is not always taken at the cabinet level.

GROSS: That’s true.

Maybe you could have different ratings for their microeconomics versus their macroeconomics. I think it was Terry Moran who loved his macroeconomists and was a little less enthusiastic about microeconomics. So I feel like that might be a perfectly respectable view as well.

WALKER: Saying this as a macroeconomist of course.

GROSS: Yep, completely unbiased.

The advent of AGI. Underrated or overrated?

WALKER: What do you mean?

GROSS: The fact that it’s imminently going to appear in the next couple of years and transform the world. Is that idea underrated or overrated as a probability?

WALKER: As a probability — overrated.

GROSS: Is that because you don’t think it will happen, or you don’t think it will transform the economy and society even if it does happen?

WALKER: A little bit of both.

I would be surprised if it happened by the end of the decade — very surprised.

Even if it did, I don’t think you see a shift to utopia overnight, for some of the reasons we’ve talked about on the podcast in the last couple of years — the Baumol’s cost disease-type arguments — but also all of the human, social, and institutional constraints.

For people who don’t have any context on this: there’s a distinction between coming up with a new technology, and then that technology diffusing through society and us finding ways to harness it economically.

GROSS: We’re already seeing very slow spread of AI in terms of the labour market and job loss. So I think that’s likely to continue.

WALKER: I mean, that’s what economic history teaches us, right?

GROSS: Yeah.

Although I guess every revolution, every crisis is different.

WALKER: That’s right.

Maybe there’s something about AI which helps with the diffusion itself.

GROSS: Mm. A self-diffusing technology.

WALKER: Yeah.

And it’s noteworthy that I think ChatGPT was one of the fastest-growing internet consumer products in history or whatever.

But yeah — I think it’s still not going to diffuse as rapidly as some people think.

GROSS: Life extension. Underrated or overrated?

WALKER: Underrated.

GROSS: Why is that?

WALKER: People are way too accepting of death.

GROSS: Do you think you’ll get that extra 80 years that you claimed at the top of the episode?

WALKER: Hopefully longer.

But yeah — the idea of trying to extend life and have agency over your death is still weirdly taboo in normal society. I think it’s quite normal in places like San Francisco.

But yeah — I think it’s underrated.

GROSS: Fair enough.

Nuclear weapons for liberal democracies such as Australia and Japan. Underrated or overrated?

WALKER: Becoming less overrated.

GROSS: So: was a bad idea, but maybe less of a bad idea today.

Is that just because of the rise of China and they’re using their conventional forces in the region?

WALKER: It’s becoming increasingly less credible that America’s extended deterrence — the nuclear umbrella — would be a credible deterrent for us, for anyone looking to attack us.

And I think in that world, you’ve got to make really hard choices.

GROSS: Fair enough.

The Thucydides Trap. Underrated or overrated?

WALKER: Probably overrated.

GROSS: And is that just because times have changed and we’re in a new paradigm?

WALKER: I think there are dynamics, and it’s pointing at a pattern in history, which is that where a rising power threatens the position of an incumbent power, that usually results in war.

Obviously the name “Thucydides Trap” refers to the Peloponnesian War between Athens and Sparta, where Athens was the rising power and Sparta was the incumbent.

But I think, as Hugh said in the interview I did with him, there’s just so much contingency involved in these decisions and events that anyone who thinks too deterministically about history and geopolitics is making a mistake.

So for the reference group I have in mind, I think it’s a bit overrated.

GROSS: And finally — and I kind of don’t know how this could be overrated at all — the Australian Cabinet Handbook.

I would say, prior to listening to your podcast, it would have received the lowest possible rating. And I’m guessing you think it should be higher.

WALKER: Massively underrated.

Doing that interview with Glyn and Terry gave me a renewed love for the cabinet system of government.

It’s beautifully malleable. I think it can adapt well to crises, and I think it’s maybe one of the explanatory factors for our high level of state capacity relative to other countries.

The functions of cabinet and the prime minister are not found in the Constitution or in legislation. But we’ve documented them through the Cabinet Handbook, and it’s just so interesting.

The government cops a lot of flak for being inefficient or whatever, and people always talk about how the government should be learning from the private sector.

It’s interesting to flip that lens and look at what can we learn from this institution that’s evolved over a century. It’s served us through times of crisis, through world wars — surely it has some pretty robust processes and things we could learn.

And all of that is documented in plain English in about 40 to 50 pages available online: the Cabinet Handbook.

It’s just so interesting.

Even questions like: if the prime minister’s role and functions aren’t defined anywhere, what is the actual institutional source of their power? It’s not just social influence over their colleagues. When push comes to shove, what are the actual levers available to the prime minister to exert their power?

And you learn through the Cabinet Handbook that some of the main levers are the ability, in virtue of being chair of cabinet, to determine the agenda. Because obviously stuff that doesn’t get put on the agenda can’t be decided upon.

And secondly, probably their ability to determine the cabinet committees. Because some of those committees — at the moment, the Parliamentary Business Committee and the National Security Committee — can make decisions without needing cabinet approval. But also: the prime minister can take a divide-and-conquer approach. You can set up these smaller committees, you can work on things in the margins of the committee, come to agreement, and the committee does all that decision-making, and then the full cabinet is kind of just a clearinghouse for a lot of work that’s already been done. So that’s another way the PM can kind of get their way.

That’s all really interesting stuff — and that’s what you learn through reading the Cabinet Handbook. Very underrated.

GROSS: [laughs] It was interesting in your chat on the cabinet process — I think it was Glyn Davis — mentioned that the cabinet system reforms around every prime minister.

But I’m guessing that their power within their party, or their ministry, also varies and fluctuates over time. So, you know, Anthony Albanese today is a lot more powerful than he was, say, just after the Voice referendum. And that presumably is reflected in his ability to set that agenda and rule things in or out.

I was wondering: did you talk about that with any of your interview subjects — how it fluctuates over time?

WALKER: How it fluctuates not just between prime ministerships, but within prime ministerships?

No. It’s a good question. We didn’t look at that.

But yeah, that sounds plausible.

I’m trying to think through examples from reading cabinet diaries and reading Pat Weller’s stuff on Malcolm Fraser’s prime ministership. I can’t think of ways in which prime ministerial power changed over time, but surely it’s happened.

It’s crazy, isn’t it, how there’s no induction, there’s no course. You just get thrust into this. So surely, even just from the perspective of learning on the job, you would think they would gain power.

GROSS: Well, you’d hope that Shadow Cabinet at least offers some sort of training ground — even if it’s obviously devoid of all power and responsibility.

At least the process with decisions, improving policies that you’re taking to the next election offers some insight. But obviously you’re still diving in on the deep end once you get sworn in.

WALKER: Yeah.

GROSS: Francis Fukuyama stated in his chat with you that the most dysfunctional organisations are the ones that don’t delegate enough authority.

But then when Richard Holden was citing examples of the many ways that the US is terrible — such as at the DMV or with pothole repair — they were all examples of institutions where it seemed like the local managers were either out to lunch or at least somewhat corrupt.

These two views seem in direct tension with each other.

Is it just the case that we’re never going to come up with a theory of state capacity that’s universal in nature, and we sort of should just analyse each situation — each country — with a different lens?

WALKER: I don’t think they’re necessarily in tension, because you’ve only stated half of Fukuyama’s principle.

This is straining my memory a little bit, but I think he said something like: the most effective organisations are the ones that delegate decision-making to the extent that you have capable individuals that you can delegate to.

So, for example, the Fed or the Reserve Bank of Australia can do a lot of delegation because you have a crazy proportion of PhD economists in the organisation. Maybe if you’re the DMV, you can’t delegate as much because you don’t have teams of PhD economists working in your organisation.

So I don’t think those are in tension.

But with respect to your general question about: can we have a general theory of state capacity? Probably not as much as we would like.

I think there are definitely some general principles that would apply across countries, but so much of it is tied to the culture — the “dark matter” that we’ve spoken about — and path dependency and historical contingency...

For example, to go back to that obedience-towards-government cultural trait that seems to be present in Australia: America’s just in a totally different equilibrium. You can’t just transplant Australian institutions and features of state capacity into America and expect them to work.

GROSS: I think that’s right. So if an abundance-pilled US governor was to call you up tomorrow and say, “What are the secrets of your high-capacity state of Australia?” — what would you tell them?

WALKER: Switch to a Westminster system. [laughs]

GROSS: [laughs] Break out the constitutional reform immediately.

WALKER: No, it might be something around evidence-based policy-making. We do that really well here.

Whereas so many of their think tanks are a case of “whoever pays the piper determines the tune”.

When Pete Bowers and I were writing that literature review, there was a kind of funny example of a gambling reform debate happening in America. And in the policy debate they’re citing evidence from the New South Wales or the national Productivity Commission in Australia, because they just don’t have many independent policy organisations they can trust over there.

So yeah — it might be something around setting up more independent institutions that can produce evidence-based policy.

GROSS: It’s funny — you wouldn’t usually think that America lacks for think tanks and policy wonks.

WALKER: Yeah.

GROSS: I would say historically something that Australia lacks — and we’ve got a few now that are relatively new that I think do really good work.

WALKER: But do they have an equivalent of something like the Productivity Commission?

GROSS: I’m not sure about an in-house research think tank.

There are plenty of PhD economists who do work in the US. The Federal Reserve is full of them. Whether they’re churning out those sorts of products—

I guess they’ve got the GAO — the Government Accountability Organisation — I might have the wrong acronym there — but they produce government reports.

I’m not sure if they hold up to Productivity Commission reports.

And I don’t think they get the sort of referrals from a treasurer who says, “Study X,” and, “I will hopefully implement some version of X,” which I think is also important.

Yes, you want reports to be written, but there are people everywhere churning out ideas of varying quality. You need a culture of treasurers saying: “If the Productivity Commission says something, I’ll listen to them seriously. I won’t accept everything, but I’ll definitely give them the time of day.”

WALKER: Yeah.

GROSS: And that’s something I think Australia definitely does have. That maybe is part of the reason why we’ve got that high state capacity.

WALKER: Yeah. It’s a good question, though. I don’t know what else you do. It’s a bit sad, isn’t it?

GROSS: Well, it’s tough. I mean, it’s very hard to turn a ship on a dime.

But there are clearly examples from Australia out there that other countries, I’d like to think, would be able to learn from — just as we constantly look at America and learn what to do, what not to do.

WALKER: The big problem I think they have is the risk aversion in the bureaucracy, and the kind of procedural fetish — which is a function, in part, of the risk aversion, because everyone’s trying to protect themselves legally. It’s obviously a much more adversarial legal environment. 

But I don’t know how you change that.

GROSS: Was it Terry Moran who wistfully complained about being ruled by economists in Canberra?

I think the only thing worse than being ruled by economists is being ruled by lawyers.

So maybe the solution is to hire a few less lawyers and hire a few more economists.

Although I can’t vouch for the effects once you end up getting sued under the US legal system. It could get a bit hairy there.

All right — well, I think that brings us to the end of looking back.

Are there any other aspects of the interviews you wanted to touch on? Did you have a favourite — or a least-unfavourite child — you wanted to reminisce upon?

WALKER: Hard to pick a favourite child. I think I enjoyed all of them.

GROSS: And yet I’m going to ask you to do so.

I do feel like some of them didn’t get a full guernsey in the chat because someone like Andrew Leigh answers your question with information completely, and then the answer is fully formed and complete and citing Australian data, and you’re like: “Well, that’s the answer. Moving on.”

WALKER: Yeah, he’s pretty amazing like that.

I particularly enjoyed preparing for the Hugh White episode, and trying to read all of those 11 books — which I didn’t get to do, but I read a lot — because there’s just no other context in which that would be a responsible use of my time.

But I feel like it set me up with a lot of intellectual capital, sadly, to understand the next couple of decades.

GROSS: All right — let’s move on to the year ahead.

So I think you’ve already mentioned you’re planning to up the tempo of episodes hopefully.

WALKER: Yeah, if I can solve this bottleneck.

GROSS: And what sort of guests? Do you have any on the docket already? Or who would your dream guest be for 2026?

WALKER: Someone I’ve been trying to get for a while is Paul Keating, because I think we could do a great interview. And he’s in his early 80s now, so I want to do that as soon as possible.

I’ve got a few kind of on the cards. I probably won’t announce them, because things can happen.

GROSS: Not until the file’s in the can.

WALKER: Yeah, exactly.

But generally I’m going to do the mix of Australian public policy content and then the general intellectual stuff, and just see how far I can take that kind of bifurcated approach.

And I’ll have a labelling system where I differentiate those two kinds of content on the podcast — different numbering system or something.

So I’m going to keep doing both.

But yeah — I won’t give too much away about guests booked in. But PJK is definitely someone I’ve been working at for a while, and hopefully I can pull that off in 2026.

GROSS: I’m sure he’d have a lot of strongly held opinions.

WALKER: Absolutely.

GROSS: So I think this chat has been at least quite cathartic for one listener.

Have you ever considered adding, like, a listener’s rant to either the end of the episode, or maybe as a separate drop, or even as a Substack?

Because I feel like you’ve probably got a pretty smart audience — thinking about a sample size of one.

And many of these questions came from me listening on the train and thinking: God, can’t believe they said that. Outrageous. If only I had an outlet for my frustrations.

Fortunately you’ve afforded me one today, but I was wondering: have you given any thought to opening up and maybe either you summarise — perhaps even an AI summary summarising — how listeners react to the episode?

Obviously you don’t want to completely rubbish your guests, but I feel like that would certainly add to the dialogue.

WALKER: I guess we were kind of trying to do that with the policy salons.

People can always take to Twitter, or the comment section on YouTube. I always get a lot of email. I always get a lot of comments on Twitter. So definitely express your questions there if you have any.

But no — I haven’t thought about creating content around that. Maybe I should.

Would you regularly rant if I had that outlet?

GROSS: Oh, look — on a topic where I have strong opinions, I’d dash off an angry voicemail.

And I guess it goes back to what you want the pod to be.

WALKER: Why do you think I should? What would be a good reason to do that?

GROSS: There’s nothing people love more than the sound of their own voice and the sound of their own name.

The Quarterly Essay, for example— 

WALKER: A great institution. 

GROSS: A great institution in Australia — has not just an essay, but also responses to the previous [quarter’s essay].

WALKER: The correspondence.

GROSS: And I think, look: ranting on Twitter is great fun, but my assumption is approximately zero people ever read any reply, any quote tweet. Either that or it’s the same 10 people reading the same tweets over and again.

And if you want to build up a sense of community and get people to engage, that’s one avenue through which they could do that.

WALKER: It’s a good idea. I should think about this some more.

GROSS: Yeah.

I guess the real question is: how much effort is it to either summarise views or edit them together?

But if people send in their own voicemails, I guess that’s at least done the audio clip for you.

And whether you put it out on the main podcast feed, or maybe even have a side feed. I guess, you always want to be incentivising your customers to come back. And if I have to sit through some science podcast to listen to the hot takes on last week’s economics podcast, that would certainly incentivise me to do so.

WALKER: Yeah, it’s a really interesting idea.

That might be my next original contribution to the field of podcasting.

GROSS: Fair enough.

All right, Joe — thank you for being the subject today.

Any final thoughts on the state of the pod before we wrap?

WALKER: No — just thanks so much to everyone for listening to the show.

It’s a privilege to be able to do this — to be able to call this my job now. And that’s of course thanks to the audience. So I’m very grateful. Thank you.

And thank you especially to you for today — for putting in the work and doing this. It’s been a fantastic conversation.

GROSS: No worries. Thanks for having me. And we look forward to next year’s content.

WALKER: Great. Done.

Thanks, Zac.

GROSS: Thanks.

WALKER: Cheers. Thank you so much.

1. My new podcast conversation, with Glyn Davis and Terry Moran. At the bottom of this email, I've included five excerpts.
2. Frontier breakthroughs in 2025, by Gavin Leech, Lauren Gilbert, and my friend Ulkar Aghayeva.
3. 'Industrial Policy: When Is Business the Government's Business?'.
4. Phoebe Arslanagic-Little on South Korea's fertility bust.
5. A podcast series on the 2005 Bali bombings, by my old high school debating coach (and Bali bombings survivor) Joe Frost.
6. 'The Best Treatment for the Most Painful Medical Condition Is Illegal', Peter Singer.
7. America's new National Security Strategy.
8. The Digitalist Papers, Volume 2.
9. 'Staring into the abyss as a core life skill', Ben Kuhn.
10. 'Pax Silica'.
11. 'The Chaos Theorem and Republican Division', Sandro Sharashenidze.
12. Gavin Leech's stock-take on AI progress in 2025.
13. 'Endometriosis is an incredibly interesting disease'.
14. 'Recent discoveries on the acquisition of the highest levels of human performance', via Tyler Cowen.
15. Patrick Collison and Tyler Cowen's call for an aesthetic for the 21st century.

Thanks, and best wishes for the year ahead,‌
‌‌
‌‌
Joe

Five excerpts from my podcast with Glyn Davis & Terry Moran

1. Have prime ministers been getting more powerful?

JOSEPH WALKER: Have prime ministers been getting more powerful in Australia?

GLYN DAVIS: There's a very interesting Canadian study by Professor [Peter] Aucoin, 30 years old now, but it basically says the core executive — the centre of government — reconfigures around each prime minister.

That the prime minister is such an important part of the system that the system actually adjusts around them. So some prime ministers are more dominant than others; some are more interventionist than others. But in a sense, their preferred style comes to dominate the process.

That's a really interesting observation. It tells you that the core institutions are relatively malleable; that is, they can change quite quickly in response to personalities. But it also probably tells you that you can't leave a lasting mark — that you can change the dynamics while you're the prime minister, but when you go, the system will reconfigure around the next person.

So some prime ministers are more powerful than others. I can't see a trend.

2. The reality of collective decision making

JOSEPH WALKER: Say I'm a minister who wants to come fully informed to Cabinet meetings and contribute to the collective debate, even on a line portfolio that doesn't directly impinge on my own — and I know not every minister is like this, and not every minister has time to read every Cabinet submission, but hypothetically I'm a minister who does. On average, how many hours would I spend reading Cabinet submissions? (And assume I don't read the attachments.)

TERRY MORAN: Oh, well, paper’s that thick or thicker [gestures].

GLYN DAVIS: So once you get disciplined about doing it, you know how to do it and you know what you're looking for. In a sense, you're reading the material in the early pages of the submission.

WALKER: The executive summary.

DAVIS: To see if it raises concerns. There might be a point at which you say, "I'm pretty comfortable with this; it makes sense," and move on.

I still think you're up for a couple of hours of solid reading.

WALKER: And that's just picking and choosing.

DAVIS: And that's just not diving deeper than you need to. If you want to read everything, including all the attachments, you'd better put a day aside, or whatever it is.

MORAN: Glyn's right. Well-crafted Cabinet submissions at the Commonwealth level and at the state level are very brief at the beginning part, but able to cover all the relevant points. Therefore, a minister might want to go further if they had a particular interest in a particular point, or they were the Treasurer or Finance Minister and were really worried about the proposal to spend a lot of extra money; they needed to find some way to either justify or block it. And so it all depends where you're coming from.

DAVIS: The Secretary of PM&C would spend several hours every week going through Cabinet submissions, not just this week's and next week's, but pipeline things. They would have multiple meetings with those shadow teams during the week just to review where we're up to on submissions, including a significant one a couple of days out from the Cabinet papers being distributed to ministers, to finalise how we're going to brief on a submission. So for us, that would take a whole day’s of work in that.

So a minister who wants to be completely thorough is looking at a fairly similar time commitment.

MORAN: In the two Secretary roles that I had, I tried to make sure that there was at least one Deputy Secretary who was really on top of the range of policy issues of concern to the government. It was his or her job to really go through it.

And if they missed anything, they copped it. [laughs] But they tended not to, so that's just a sign that, yes, there's a sieving process.

DAVIS: When I worked in Queensland, Premier Goss would make us sit in front of him for an hour before the Cabinet meeting, and he would practise by interrogating us on the Cabinet agenda. He would always find the paragraph you hadn't read and ask you the probing question, and you just dreaded that sort of thing. [laughs] So we'd spend much of the weekend reading the Cabinet books and hope to get through this meeting on Monday morning.

We enjoyed it when he travelled. [laughs]

MORAN: Well, I worked for three premiers in Victoria and two prime ministers, and none of them did that to me.

DAVIS: [laughs] You're very fortunate.

3. How does the PM find time for deep thinking?

WALKER: Paint me a picture of what the PM's diary would look like. Are they just staggering from meeting to meeting, or what does a typical day look like in Canberra?

DAVIS: Well, it depends greatly on whether Parliament is sitting, because it's a completely different world when Parliament is sitting. So let's start there.

When Parliament is sitting, the tactics meetings will start very early.

WALKER: Like 7:00 am?

DAVIS: 7:00 am or earlier. The PM may or may not float in and out of that meeting. It's normally led by the Leader of the House rather than the PM, but nonetheless the PM's staff will be there because you're deciding tactics for the day. But you're also deciding what legislation you're bringing forward and priorities, and trying to game the way the day's likely to play out, with an eye to the media and an eye to your programme.

Meanwhile, the PM will start the day either there or in meetings with her or his own office, where they do some of that briefing we've just talked about — what's going on, what's important, what are we going to get across today. There'll be a tricky negotiation with the secretaries who manage the diary about who's going to get in and who's not and how we're going to do that. The number of people wanting to get in is always vastly over the [capacity].

...

So, you know, we're only up to 8:00 or something, and already you've got a plethora of meetings. There'll be a series of ministers hanging around outside hoping to get five minutes. There'll be the media adviser who just wants one minute to discuss an issue, and there'll be lots of those. Then there'll be formal meetings through the day — diplomats and other significant people.

If Parliament's sitting, that's when all the big delegations turn up: the business councils, the unions, the people who want attention from the government. So you've got to deal with all of those; they all sit in your diary.

Meanwhile, all the cabinet meetings still happen. Committee meetings in particular still happen, particularly if you're in the middle of a budget process. So it's not uncommon for the bells to ring in the middle of a committee meeting, and if it’s the Reps — all the members [of the House of Representatives] having to stand up and walk out of the meeting, including the Prime Minister, to go and vote on a resolution, and then come back and pick up the meeting.

MORAN: Oh, the poultry.

DAVIS: [laughs] Yes. And so everybody's watching the clock, which has the red and the green lights on it, because inside the Cabinet Room it's silent; you can't hear the bells, but you can see the lights.

...

But just to finish, that pattern of rushing into the House — and then, of course, you have to be briefed for question time. You then have to do question time if you're the prime minister, which is a very significant commitment. All the time there are people trying to get in to see you.

It's hard to convey just how demanding it is, whoever you are, if you're the prime minister — and how someone like John Howard did the job for [11.5] years without falling over is a singular achievement, I have to say. You can see the exhaustion on their faces quite quickly. It is the most demanding of roles, and not just for the prime minister, for the treasurer and lots of senior ministers as well.

Parliament House reinforces this because it's never-ending; there's no escape, in a sense. If you're the prime minister, you are the centre of attention the whole time, wherever you go. And, you know, just how do you get any off time? How do you get [inaudible]? Which is why The Lodge makes sense as a place that you can escape to behind a wall.

...

WALKER: Is there anything else interesting to say on what an average non-sitting day looks like? Or is it just kind of much the same but without—

DAVIS: Just the same without having to go into parliament, into the chamber, to vote. They're full days. But of course, prime ministers also travel a lot domestically.

So a prime minister, when parliament's not sitting, would be much more likely to schedule meetings interstate to go and do openings and do all of those things, many of which are programmed a long way out, so you're sort of committed to the programme.

It gets very difficult if something arises that changes the dynamics, which only intensifies the time pressure, because often you're under pressure to do it anyway, but you've had to divert to some other, more immediate issue. And so you're constantly trying to make up the lost time. It is demanding, exhausting, and it requires a degree of good grace from everyone involved to recognise what's being asked of an individual...

One of the reasons for some of the travel is that it just gives you thinking time. Sitting on a plane for two hours to Adelaide or Brisbane is two hours you can actually talk to people on the plane, think, work through issues. It actually matters, because otherwise there's very little reflection time.

4. What great book remains to be written on government in Australia?

WALKER: What do you think is a great book that remains to be written about either an underrated individual in the history of Australian government or just the mechanics of government?

...

DAVIS: It’s a great question. Having somebody interview a series of prime ministers after they’ve left — to do the compare and contrast: how they understood the role, what they were trying to do, how it worked.

PMs all write their autobiography — and so they should — and that’s a useful thing to read. But having a Pat Weller go in and ask, [and do] the same interviews, so that we get a sense of how the role looks when you sit in it —because it’s so fast; it happens so quickly while you’re there that you must come out of it at the other end slightly shell-shocked by all of it.

It would be great if we could arrange for someone to walk them through it while they’re still with us and while the memories are still moderately fresh. Almost a process where, six months after you finish as prime minister, you go to the National Library or somewhere and somebody interviews you at length. And there’s a tradition of being frank, and maybe you don’t release it for 20 years or whatever, so people can say what they experienced. That is what I would like to read.

5. Where does Australia's talent for bureaucracy come from?

WALKER: Australia’s “talent for bureaucracy” — where does it come from?

...

MORAN: Well, it’s not so much what has been written as what some of the old hands say about the Victorian public service. In the late nineteenth century, following the release of the Northcote–Trevelyan Report in London, the Northcote–Trevelyan Report was picked up as a basis for how you would organise the Victorian colonial service or public service. This is before Federation.

When we federated, the basis of the Federation was in Victoria, and many Victorian public servants were transferred across to the new Commonwealth public service. They took with them an understanding of the Northcote–Trevelyan principles about merit-based recruitment and advancement on merit, and so on and so forth.

So a lot of the features of the public services in Australia, but particularly the Commonwealth and Victoria, come from historical accidents over a century ago. That wasn’t towards any ill result; it was just that we were greatly influenced by what the British were doing.

DAVIS: Yeah, that clearly does matter.

MORAN: Yeah.

DAVIS: It probably helps that we don’t have an aristocracy.

MORAN: It’s a pity, actually, isn’t it? They could go in the Senate. [laughs] 

WALKER: Why does it help that we don’t have an aristocracy?

DAVIS: Because in the British civil service and the British Army you had to buy [positions].

MORAN: That was in the nineteenth century. 

DAVIS: Yes, in the nineteenth century. But we never had any of that in the same way, so we didn’t have to overturn a set of cultural traditions that were so much more embedded.

Northcote–Trevelyan basically said, “It’s time to begin change.” But the change takes a long time, and they recommend, interestingly, that we learn from the Chinese and use civil service exams.

MORAN: And merit-based recruitment and advancement.

DAVIS: Yeah.

MORAN: And that was early in its introduction into the Victorian public service and spilled over into the Commonwealth public service after Federation.

DAVIS: Yeah.

MORAN: So it’s a bit of good luck, in my view.

DAVIS: Yeah, I think that’s a fair call. We’ve been very fortunate and well served by it.

MORAN: And so when you look at the States — you are not going to like this — but I used to go around talking about New South Wales as the home of the Rum Corps, which it sort of was. [laughs] 

DAVIS: I think the New South Wales administration improved, though, over time. [laughs]

MORAN: There were some people we both know that I liked taunting with that remark. They never liked it. [laughs]

Anyway, the point is that Victoria was the state that, in the lead-up to Federation, had a chance to form a public service on the British model. And then, after Federation, it exported into the Commonwealth those people who knew that system when they were working in Victoria and were instructed in the principles of merit-based recruitment and all that sort of stuff.

DAVIS: If you were going to be a sceptic, though, you’d say the abiding Australian fault was the seniority system that we imposed. Certainly the criticism of state systems — perhaps less in Victoria, but certainly strongly in Queensland for a long time — was that it was a very seniority-based system.

WALKER: And sorry, that’s promotion based on length of time served?

DAVIS: Length of time served, as opposed to merit application.

MORAN: Well, when I first became associated with the Victorian system, there was a very strong merit system, including merit-based recruitment in the first place into the public service. And the Commonwealth used to do that.

Another bit of history is that, when Sir Robert Menzies was Prime Minister, he was despairing of the then Commonwealth public service. He was told that the only person who could fix it had to be forgiven for the things he’d done in the past that the Liberals didn’t like, and he should be brought back to Australia from Switzerland, where he was in a very comfortable appointment, to take over reform of the Australian public service. And that was Fred Wheeler.

DAVIS: Fred Wheeler, yes.

MORAN: So Fred came back and took up the position of Chairman of the Commonwealth Public Service Board and set about a whole series of merit-based enhancements of how the Commonwealth public service worked.

When Menzies was Prime Minister and dealing with the Liberal government in Victoria, the Commonwealth reforms in Canberra had gone so well that he sent somebody down to aid Lindsay Thompson, who was then the Premier, to look at why the Victorian public service was so hopeless.

Basically, the recommendations out of that led to recruitment of a new top level in the Victorian public service, including a new chair of the Public Service Board, who was Ron Cullen, you might remember. So the Commonwealth and Victorian public services advanced under the influence of the Northcote–Trevelyan Report, with its emphasis on merit both for recruitment and promotion.

It’s a fairly conventional view of what public services should do. We were lucky here, whereas the Rum Corps ruled the roost in Sydney.

WALKER: [laughs] It’s a really interesting point. I had never really realised that point about the Victorian public service playing such an important role.

Victoria, just generally — Melbourne in particular — feels like it’s had an outsized impact on Australia’s kind of Benthamite view of government, if you think about people like David Syme and Deakin. And Henry Higgins was from Melbourne, I think?

MORAN: Yeah, I think so.

Glyn Davis and Terry Moran are two of the very small number of Australians who have literally sat in the Cabinet Room, week after week, watching the machinery of government operate from the inside.

Both served as Secretary of the Department of the Prime Minister and Cabinet (PM&C) — the most senior public servant in Australia. Terry held the role from 2008 to 2011 (including during the Global Financial Crisis). Glyn held it from 2022 to 2025, resigning only a few months ago.

Both have also held equivalent roles at the state level: Glyn as Director-General of the Office of the Cabinet in Queensland (1995–96), and Terry as Secretary of the Victorian Department of Premier and Cabinet (2000–08). Before PM&C, Glyn was Vice-Chancellor of the University of Melbourne for thirteen years, and later ran the Paul Ramsay Foundation (Australia’s largest philanthropic foundation). Terry’s career spanned senior roles across the Commonwealth and Victorian public services, including as CEO of Victoria’s Office of the State Training Board, inaugural CEO of the Australian National Training Authority, and Queensland’s Director-General of Education. He later served as Chancellor of Federation University.

In this episode, we trace the routines, conventions, and systems that shape power in Canberra. Where, exactly, does a prime minister’s power come from? What separates a good Cabinet submission from a bad one? What actually happens in the Cabinet room once the doors close? How does Australia’s Westminster model differ from the UK and Canada? And why is Australia so unusually good at bureaucracy?

(Episode recorded on 8 December 2025.)

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Transcript

JOSEPH WALKER: Today it's my great honour to be chatting with Terry Moran and Glyn Davis. 

I'm not going to read out their full, impressive résumés, but most relevant to this conversation, they've both been secretaries of the Department of the Prime Minister and Cabinet, so the most senior public servant in Canberra. Terry was Secretary from 2008 to 2011, and Glyn was Secretary from 2022 to 2025. 

Today we're going to chat about how government in Australia really works. And I'm going to play the role of an overly inquisitive, borderline annoying intern [visiting DPMC], and ask a bunch of naïve questions. 

So welcome, Terry, and welcome, Glyn.

GLYN DAVIS: Thank you.

TERRY MORAN: Thank you.

WALKER: So, after my last episode with Hugh White, I had this feeling that it was sort of table stakes for political leaders and public intellectuals alike to understand the causes of the First and Second World War. 

Having spent a week preparing to talk with you about how the government really works, I have a similar kind of sense; I feel like for people who want to contribute to the national conversation, it's sort of table stakes to understand how government in Australia works. 

And the interesting thing is that neither the prime minister nor the Cabinet are mentioned in the [Australian] Constitution or in legislation. Their functions are defined and shaped by conventions. And reading the details about those functions and how Cabinet works, how government works, was quite interesting. Some of the details are quite strange. So I want to get into all of that with you two today. 

But the first question is, what is the biggest thing that well-informed Australians, people like the members of my audience, get wrong or don't understand about how the federal government works at a day-to-day level?

DAVIS: Joe, thanks for that. The impossible question, of course. I'm going to actually throw it back to you.

You did a really interesting piece of work late last year, early into this year, around the quality of services in Australia and around the quality of Australian governance. That showed, perhaps to the surprise and even embarrassment of many Australians, that we turn out to be quite good at this; that by international standards governments are efficient, effective, non-corrupt — all the things that you would hope in a democracy but aren't always true — and that the quality of the services as delivered is high. 

Which is not to say they're infallible and certainly not to say they couldn't be improved or that there aren't problems, but it is to say: in comparison, we do this really well.

Which takes you back to that interesting question about why. What is it about the combination of institutions and practices and cultures that have got us to this place? Australians have a “talent for bureaucracy”. That makes us cringe. How little we like that. But there is something in it. We are good at this, we do it well, and it shows up in the quality of our services. 

I think if you put that as a proposition to many Australians, they would be bemused, if not outraged.

MORAN: I agree with that. 

But I think it's also the case that there's a bit of a deficit in the general understanding of government and how it works. And particularly still, to my surprise, there's not much understanding of what the Commonwealth does versus what the states do.

And therefore, that undermines accountability for things that could work better, like hospitals, for example.

DAVIS: And on the federal divide, I remember talking to the local manager of a Services New South Wales office, and I asked him, "So what's the single most common inquiry in this office?" And he said it’s: “How do I put in for a Medicare refund?"

And he said, "Well, that's a Commonwealth matter, but I just happen to have a drawer here full of forms [laughs] and I'll just hand one over every time it comes up." Which is a nice piece of cooperation, I thought.

MORAN: Well, when Dr “Nugget” Coombs led the Royal Commission into Australian Government Administration, established by the Whitlam government, he came back with a conclusion that there was a need for the Commonwealth Government and the States to work much more closely in delivering services at the local level. And the States were probably up for it, but the Commonwealth never was.

And so it didn't happen. And that, to me, is one of the opportunities lost, because that would have made a quite significant contribution to improving the quality of what the government does in Australia. [Sirens sounding]

DAVIS: Sounds like they're coming to get us, Terry. [laughs]

MORAN: [laughs] Oh no, they've gone away now.

WALKER: [laughs] It's interesting on Nugget Coombs. In 1988, when we had the bicentenary celebrations, the person who won Australian of the Century was Nugget Coombs. I think that says something about the kind of talent for bureaucracy.

It wasn't an entrepreneur or a scientist; it was Nugget Coombs. 

DAVIS: With very good reason, a remarkable Australian.

MORAN: Who did some terrific things.

WALKER: I have some questions about the role of the Prime Minister, and then what you might call the core executive. As I said, until about a week ago, I kind of thought I vaguely understood how government in Australia works. I quickly realised that I didn't.

One of the things I did was read some Cabinet diaries, just to try and build a visceral sense for the tenor of what happens in Cabinet. The two that were most interesting were Neal Blewett's A Cabinet Diary and then Gareth Evans' (Inside the Hawke-Keating Government: A Cabinet Diary). And Pat Weller, who was Glyn's thesis supervisor, said that Neal Blewett's diary, which focuses on the first term of the Keating government, can be read as a "constant search for the site of real power within government".

It's so interesting that even a figure like Blewett — this is a guy who was a Rhodes Scholar, a professor before going into parliament; he was Health Minister for seven years in the Hawke government and held a couple of other portfolios in the Keating government — even Blewett could never quite pinpoint the location of power in Canberra.

Maybe it's worth just reading out this quote, because I think it's so revealing. So this is from Blewett's Cabinet Diary on 6th August 1992. He goes into the PM's office to try and settle some issues. Quoting Blewett: 

“Gathered in the PM's office were Willis and Dawkins, the PM and an array of key personal and public service officials...Many of these people have more influence than us ministers. ...My whole experience of ERC—” That’s the Expenditure Review Committee. “—confirms my belief that the closer one gets to what one thinks is power the more it seems to recede. I have always assumed the critical committee of government is the ERC; now it is obvious that members of the ERC, apart from the Treasurer and the Finance minister, are second-class citizens. None of these second-class participants knows the full extent of the outlays and revenue side, nor do they participate in all the numerous side deals made in the margins of the Committee…”

So, that's a long preface to the following question: Where is the locus of power in the Australian government today? In other words, if you could draw me a diagram, who or where is the core executive?

MORAN: Well, if I were doing it, I'd draw a big circular spot on the table, and I'd put a lot of little circles in the midst, all of which were important activities that had to find a relationship to all the others. But none of it was in the control of one person.

So the Expenditure Review Committee, policy committees of Cabinet on various things, and people who deal with foreign policy and defence — all of these things go to the heart of what the national government is on about, plus more.

To an extent, one of the things that's commendable about the Australian system of government is the people who have positions within that bigger circle talk to each other quite a lot. And occasionally they talk to the states as well.

DAVIS: So interestingly, he's describing the Hawke government. He's describing Old Parliament House, because that's where that meeting would have happened, because 1988 is the year they moved up the hill, as it were.

Which you can walk through it now; you can go to Bob Hawke's office. It's been left set up exactly as it was on the night they all left and moved up the hill, so you can walk through the office that he's describing. And the first thing that will strike you is how small it is. All those people are in it; it's a very crowded space.

Which is true of that whole building: there were 2,000 people working in a building that wasn't meant for anything like that number. And he's rightly describing the fluidity of who comes in and out of the rooms.

I agree with Terry: there isn't an inner circle that controls everything, because everything is too fluid and too expansive for one group of people. It depends on the issue; it depends on the focus of interest. If, for the Prime Minister, it's a really important topic, yes, they'll buy in. That's a small percentage of everything that's going on in government.

A lot of things will be settled by ministers getting together in one or another of the ministerial suites. It'll be settled by a minister saying to a secretary, "Go and sort this out. I don't know what the answer is, but I want it to go away. Fix it." There isn't a single locus of power. Obviously, the Prime Minister is a key player, as is the Treasurer, but not on every issue. They haven't got time to focus on every issue.

So what you're seeing is just a constant reordering of the agenda, a constant flow in and out of people and suggestions and ideas, controlled through a set of routines expressed through the Cabinet Handbook and through the ERC rules, and what are called the BPORs, the Budget [Process] Operating Rules, and other processes. But those routines are to try and get a bit of a handle on so much that's going on and put them through recognisable channels so there's legitimacy to the decisions that are made.

Because two ministers talking by themselves in a room can decide something. It's still got to go through some sort of process so that it's recognised, recorded and acted on. And that's why these routines are very important, and these routines, in a sense, run everybody, including the Prime Minister, who is at the centre of them, but nonetheless not so much in control that they can just rely on a decision by her or him.

MORAN: And ministers can't spend money just because they'd like to spend money. They have to have it approved through either consideration of an issue by the Treasurer or the Finance Minister, or more commonly considered by the Expenditure Review Committee.

Similarly, many things can't go far unless somewhere in the bureaucracy somebody has given some thought to, "Well, how would we do this and would it work?" And if they do that and then usually feed it into the Prime Minister's Department, if the answer is, "This will be a disaster," that stops it.

WALKER: Right.

DAVIS: And there's the famous apocryphal piece of advice: "If you are going to do this damn silly thing, Minister, don't do it in this damn silly way." [laughs]

MORAN: [laughs] Yes.

WALKER: [laughs] So we might come back to some of—

MORAN: Oh, by the way, going back to Nugget Coombs, Nugget Coombs was brilliant at charming ministers all the way up to the Prime Minister. I worked for the Whitlam government when Nugget was doing stuff there, and he had quite an impact on Gough and the senior ministers.

So Jim McClelland listened to what Nugget was trying to say, and occasionally there are senior public servants who have experience that are like that.

WALKER: I remember reading in this Pat Weller book [Cabinet Government in Australia, 1901-2006] about how, I think, Roland Wilson used to come into cabinet meetings and give ministers his opinion on economic issues, and that they really took his opinion seriously.

DAVIS: Every now and again, you get an individual so respected and powerful in their own right that they can't be ignored. The case I most cherish is from Victoria, not the Commonwealth.

After the First World War — the fire that lit the fuse and all of that that caused the war — after Sir John Monash came home, he was put in charge of building the electricity network that still serves Victoria. He did a stunning job of basically building electricity infrastructure in a state that didn't have any, or not enough.

There was a time, which is recorded by Sir Robert Menzies when he was a state politician before he went federal, where the Cabinet met to discuss the SEC's next budget proposal and rejected it because they just didn't have that sort of money. The next week, when they met, a sort of embarrassed attendant came in while they were mid-meeting to say, "Premier, Sir John Monash is waiting outside to see the Cabinet," not that he'd been invited or anything.

They didn't know what to do, so they asked him in. They all stood up, because that's what you did when Sir John Monash came into the room. He went to the front end of the table, sat down, and said, "Gentlemen, I understand that last week you rejected my proposal for further funding for the SEC. That's obviously because you didn't understand it. I'm now going to take you through it." [laughs]

WALKER: Wow.

DAVIS: He took them through it, and at the end he said, "I take it we are all agreed," and got up and walked out. Now, there are not many people who could pull that off but it’s spectacular.

MORAN: In the Cain years, the John Cain administration, ministers would have to go and try and see individual departmental heads about issues that they wanted to fix. Normally it should have been the other way around — that the ministers would have called in senior public servants.

But what the Cain government inherited from the previous Liberal government was a significant level of respect for the most senior public servants, which went to the point of senior public servants feeling that if they had an important issue, they should be the ones who called on a minister — sorry, the minister should call on them rather than the other way around. But that's all gone now, too.

DAVIS: [laughs] Distant but fond memory.

WALKER: Have prime ministers been getting more powerful in Australia?

DAVIS: There's a very interesting Canadian study by Professor [Peter] Aucoin, 30 years old now, but it basically says the core executive — the centre of government — reconfigures around each prime minister.

That the prime minister is such an important part of the system that the system actually adjusts around them. So some prime ministers are more dominant than others; some are more interventionist than others. But in a sense, their preferred style comes to dominate the process.

That's a really interesting observation. It tells you that the core institutions are relatively malleable; that is, they can change quite quickly in response to personalities. But it also probably tells you that you can't leave a lasting mark — that you can change the dynamics while you're the prime minister, but when you go, the system will reconfigure around the next person.

So some prime ministers are more powerful than others. I can't see a trend.

MORAN: Yes. If a prime minister doesn't worry about consulting with his or her ministers and goes freelancing, they're going to face a bit of a rebellion from amongst the ministers that could end up being a little bit tricky for the prime minister.

And so, most prime ministers expect that if there's an important issue, they'll hear about it from the minister concerned and they shouldn't be facing any surprises at any point. Usually ministers understand that, but there are occasions when they don't or don't want to understand it.

DAVIS: And we have seen some prime ministers come to grief.

MORAN: Yes, yes. In fairly recent times.

DAVIS: That's right. So that's a constraint on the power. As you say, it's not in the Constitution. You're not elected to prime minister; you're elected by your party and not by the people. So you're only there as long as the party is willing to tolerate you, whoever the party is at the time.

And as we've seen, prime ministers who fail to carry their ministry or just don't look like they're coping with the job get rolled.

MORAN: So the very strength of the Australian system is in the collegiality of decisions at the top being made on important issues, so that the prime minister, the treasurer, perhaps the attorney-general and other ministers are all involved, both for technical reasons and for political reasons.

And by and large, our system continues to work really well on that front.

DAVIS: You see prime ministers [being] very careful about how they get on with their ministers and not wishing ever to humiliate them. A lot of care goes into this.

WALKER: This seems to be an interesting thing that distinguishes Australia. You often hear claims that cabinet government is dead in Canada and the United Kingdom, and it's been replaced by a prime ministerial government, or at least by a core executive that's not the full cabinet. Whereas in Australia, that doesn't seem to have happened to the same extent. 

Maybe that's because political leaders in Canada and the UK are elected by a broader group than just the parliamentary party, whereas by contrast, Australian prime ministers are more vulnerable to their colleagues. Does that seem to be the reason we haven't gone down the Canada and United Kingdom route?

MORAN: I think it's part of it, but the other reason is that our system seems to work okay from everybody's point of view.

DAVIS: Yes, and I'm wondering whether the UK would still think they have prime ministerial government after the sequence that took out all of those Conservative leaders in a row so quickly. That's a bit of a reminder that the prime minister is not as powerful as the party that chooses them.

And for a government in power, you can't go through that process of consulting widely — the population and the members of your party — because you've got to make a decision quickly.

MORAN: And in Australia at the federal level, prime ministers looking to make a significant decision have to be wary of different views coming from different factions amongst the ministers, both supportive and otherwise. A sensible prime minister, therefore, has got to find a way to settle everybody down and bring them on side.

WALKER: So, true or false: Anthony Albanese is more powerful within Australia than Donald Trump is within the US?

MORAN: Well, he can't send off the bombers with nuclear weapons and destroy a country.

WALKER: [laughs] But just domestically.

DAVIS: He can't unilaterally impose tariffs. He can't arrest his people and have them sent offshore. He probably doesn't authorise the blowing up of so-called drug boats. I don't think it's a reasonable comparison.

I think the Australian prime minister is much more enmeshed in the parliamentary and executive system than a US president, who is, after all, elected to be a sort of elected king in a way that our prime minister is not.

MORAN: An important part of how the Prime Minister operates is in the central agencies — not just the Department of the Prime Minister and Cabinet, but also Treasury and Finance. No matter how good the political advisers are, they'll never be as much on top of the detail that those departments have got to handle for big decisions.

And therefore, they and the Prime Minister have no choice but to listen to what the official advice would be.

DAVIS: So often you get an interesting dance, in a sense. A prime minister or a treasurer or a senior minister might have a view about what they want to do, but they then have to turn to the bureaucracy and say, "There's a global pandemic on. We need to find financial support for people who can't work. How do we do this?" Then you rely on Treasury and/or PM&C and all sorts of people to put together the proposal.

So you know roughly where you want to go, but if you said to a minister, "Go and design me the technical specifications for JobKeeper," it would be pointless. They don't have the expertise or the skill.

So it is a partnership, because you could imagine a department coming back and saying, "We can't make that work. There's just no way that works." 

Now, you might then get an interesting situation where the government said, "Well, you've just got to make it work," and then you get disasters — and those are not unknown.

But in general, what you're seeing — "partnership" is the wrong word — it's not ever in doubt who's in charge: it's the ministers, it's the government. But it is the idea that ministers, particularly for complex technical questions, need expert advice, and they look to the public service to get that.

That's, in a sense, when we talk about stewardship in the public service, we are in part talking about the public service maintaining the expertise to be able to respond to unpredictable circumstances. Sometimes you have expertise in the public sector that you're not calling on all that often. That's not really the point; the point is you need it there.

WALKER: Last week, in preparation for our chat, I read through the 15th Edition of the Cabinet Handbook.

DAVIS: Oh, you're a brave man. [laughs]

WALKER: For people as tragically nerdy as me, I recommend it. You can get it on the Department of the Prime Minister and Cabinet website. It's only about 50 pages long. I think the new edition's due out soon.

DAVIS: It is. We're all excited.

WALKER: [laughs] Reading the Cabinet Handbook, the impression I got about the institutional source of the PM's power is that it largely seems to flow from the PM's ability to set the agenda for cabinet. Because obviously, if matters can't be put on the agenda, then they usually can't be decided upon — important matters at least.

And perhaps secondarily, the PM's power seems to flow from their ability to determine the existence, membership and terms of reference of cabinet committees. Am I understanding that correctly?

MORAN: Yes, but there are other elements in it as well. The PM has got to have a sense of where the whole show is supposed to be going, and also have a sense of what people out in the community will make of whatever is proposed to be done.

Part of the prime minister's strength — and premiers' too — is usually access to good quality attitudes research on where the community is at. That's for a long, long time been very important in the Victorian government, for example. That gives the head of government, the prime minister or the premier, a bit of an advantage in dealing with his colleagues.

But it also shows that the prime minister has got to make sure that if something's to be done, it's not going to be something which blows up in the public's collective mind.

DAVIS: I think you're entirely right to say, though, that control of the agenda is a really important power. It's not the only consideration, as Terry rightly points out, but it allows you to sequence when things are going to come to Cabinet. It also allows you to defer things that you really don't want to have discussed for a while—or forever. And as Harold Wilson said, "A decision deferred is a decision made." And so it does give you authority. 

The committees are important as well because they report back, but the most important of those committees — the Expenditure Review Committee — although in some cases the PM is technically the chair, in practice the Treasurer is the driving force in that committee and will decide the agenda.

The other thing to say about an ERC is that because it's doing the budget process, we're talking about hundreds and hundreds of agenda items. This is not a small committee.

Whereas a cabinet meeting might have 10 or fewer matters, and they're all important and they're all mature — that is, they've done the work and what's coming up is the end of a long process, rather than just something that's been dreamt up the week before.

In that sense, they're more routine because… the recommendations are normally accepted, because they've all been tested and workshopped and co-ordinated — not always, but that's the normal pattern.

Whereas committee work is often about, earlier in the stage, trying to think through the problem and test the options before you go to Cabinet, because most committees can't make binding decisions.

There's some exceptions — the National Security Committee is an exception — but in most places, the committee work is more about trying to get on top of the issue. Cabinet is about making the legitimate, defining, authoritative decision.

WALKER: So when the PM wakes up in the morning, there's a multiplicity of different types of information that he or she could read. There are overnight intelligence updates from the Office of National Intelligence, media summaries, draft cabinet submissions, forward schedules for travel, etcetera etcetera.

If you were PM, what would be the first thing that you would read on a typical morning?

DAVIS: [laughs] That's an impossible question.

WALKER: [laughs]

DAVIS: As you say, there's a huge amount of material, but the moment you get to work, there's also a queue of people outside your office wanting to get in and talk to you. You're much more likely to spend time in meetings being briefed than you are being able to read this material in the sort of detail that it warrants.

But you rely on your staff to read it and to highlight things that you need to know about, so you get summaries of summaries of summaries coming through.

MORAN: And you'd particularly want to know, before you walked out the front door of the Lodge, whether there are any really big issues breaking in the media that morning. Because you probably won't be able to get into Parliament House or anywhere else without being confronted by journalists asking questions about that matter, whatever it might be.

So it's not all about the policy papers; it's also about the public presentation of them and what the public thinks.

DAVIS: Absolutely.

MORAN: One case in point from my time at the state level and at the federal level — I worked for two state governments as well as the Commonwealth more than once — [is that] the Commonwealth is short of quality attitudes research in a way that is not a problem in the states.

In Victoria, when Jeff Kennett was Premier, by agreement he set up a system of regularly testing community attitudes to the services delivered by the state government. That meant that he had a sense of what was going wrong, he had a sense of what the opportunities for new things were, and subsequent ministers stuck with it meticulously.

It really had a big impact on the quality of decision-making within government.

DAVIS: Less so at the Commonwealth level, as you rightly say; it's not as much part of the machinery, although—

MORAN: At the state level in Victoria, both sides of politics agreed that it would be a good thing to have market research done on the delivery of government services.

WALKER: And just very briefly, paint me a picture of what the PM's diary would look like. Are they just staggering from meeting to meeting, or what does a typical day look like in Canberra?

DAVIS: Well, it depends greatly on whether Parliament is sitting, because it's a completely different world when Parliament is sitting. So let's start there.

When Parliament is sitting, the tactics meetings will start very early.

WALKER: Like 7:00 am?

DAVIS: 7:00 am or earlier. The PM may or may not float in and out of that meeting. It's normally led by the Leader of the House rather than the PM, but nonetheless the PM's staff will be there because you're deciding tactics for the day. But you're also deciding what legislation you're bringing forward and priorities, and trying to game the way the day's likely to play out, with an eye to the media and an eye to your programme.

Meanwhile, the PM will start the day either there or in meetings with her or his own office, where they do some of that briefing we've just talked about — what's going on, what's important, what are we going to get across today. There'll be a tricky negotiation with the secretaries who manage the diary about who's going to get in and who's not and how we're going to do that. The number of people wanting to get in is always vastly over the [capacity].

WALKER: Can the PM see their own diary? I mean, I assume they're not using Google Calendar or something. Does Parliament have its own software?

DAVIS: The PM can see it, yes, and will have on their table a little plastic folder with the printout in it. But it’ll move.

WALKER: Can they check it on their phone?

DAVIS: Yes, absolutely.

WALKER: Is it proprietary software or something?

DAVIS: No, I don't think so. Actually, it's a good question to which I don't have the answer, but I doubt it's proprietary. I suspect it's the same system the rest of government uses, which is the same systems the rest of the world uses.

WALKER: Things like Microsoft or Google.

DAVIS: [Nods] But don't hold me to that. I actually don't know on the Prime Minister's office side, because I worked in the public service, not there.

WALKER: But sorry, keep going.

DAVIS: So, you know, we're only up to 8:00 or something, and already you've got a plethora of meetings. There'll be a series of ministers hanging around outside hoping to get five minutes. There'll be the media adviser who just wants one minute to discuss an issue, and there'll be lots of those. Then there'll be formal meetings through the day — diplomats and other significant people.

If Parliament's sitting, that's when all the big delegations turn up: the business councils, the unions, the people who want attention from the government. So you've got to deal with all of those; they all sit in your diary.

Meanwhile, all the cabinet meetings still happen. Committee meetings in particular still happen, particularly if you're in the middle of a budget process. So it's not uncommon for the bells to ring in the middle of a committee meeting, and if it’s the Reps — all the members [of the House of Representatives] having to stand up and walk out of the meeting, including the Prime Minister, to go and vote on a resolution, and then come back and pick up the meeting.

MORAN: Oh, the poultry.

DAVIS: [laughs] Yes. And so everybody's watching the clock, which has the red and the green lights on it, because inside the Cabinet Room it's silent; you can't hear the bells, but you can see the lights.

MORAN: So here lies one of the differences between the American system and the Australian system.

In the Australian system, when the ministers are in Canberra, as they often are, they're all clustered in Parliament House. And the public servants they deal with are near at hand and readily accessible. So there's a constant flow of information into the centre of government located in Parliament House, in a way that isn't achieved in the American system.

DAVIS: That's true. Although there's a fascinating difference between State and Commonwealth here, as you know from Victoria and also from Queensland. Although when Parliament sits, that's where everybody is, but for most of the time Parliament is not sitting, ministers work in their departments, premiers included.

So they're much more often sitting with their public servants. They spend much more time with their public servants than they do in Canberra. It's easy to go to a meeting and hear directly from people you need to hear from. Whereas in Canberra, if you're a public servant, you have to go up to Capital Hill in order to have your meeting. There's a lot of sitting around in corridors waiting to get in. It's not the intimate relationship you get at state level; that's quite a different dynamic in Canberra.

But just to finish, that pattern of rushing into the House — and then, of course, you have to be briefed for question time. You then have to do question time if you're the prime minister, which is a very significant commitment. All the time there are people trying to get in to see you.

It's hard to convey just how demanding it is, whoever you are, if you're the prime minister — and how someone like John Howard did the job for [11.5] years without falling over is a singular achievement, I have to say. You can see the exhaustion on their faces quite quickly. It is the most demanding of roles, and not just for the prime minister, for the treasurer and lots of senior ministers as well.

Parliament House reinforces this because it's never-ending; there's no escape, in a sense. If you're the prime minister, you are the centre of attention the whole time, wherever you go. And, you know, just how do you get any off time? How do you get [inaudible]? Which is why The Lodge makes sense as a place that you can escape to behind a wall.

MORAN: And there are some differences between, say, Victoria and the Commonwealth in Canberra. In Victoria, years ago, when the colonial administration was being set up before the Commonwealth was formed, it was influenced by the Northcote–Trevelyan Report and the expectations that it created for politicians of a competent public service.

In Victoria, from time to time, people would question whether the public servants are any good, and that would be an opening for the advisers to jump in and join the dots if it wasn't immediately apparent what should be done.

We now see debates about the ability of the public service to properly serve government. Some of those positions, which are critical, are well placed, in part because these days Commonwealth and state bureaucracies are over-influenced by the enthusiasm of microeconomists and macroeconomists who, in their enthusiasm, can bedazzle heads of government, whether it's at the state or Commonwealth level.

So there's a bit of a problem in our system, which is that we've allowed it to be too weighted in favour of economic enthusiasms, without putting beside that a really good understanding of what's going on in the community and how they feel about hospitals and schools and migration and all that sort of stuff. And unless premiers try and take account of that, they get into trouble.

WALKER: Is there anything else interesting to say on what an average non-sitting day looks like? Or is it just kind of much the same but without—

DAVIS: Just the same without having to go into Parliament, into the chamber, to vote. They're full days. But of course, prime ministers also travel a lot domestically.

So a prime minister, when Parliament's not sitting, would be much more likely to schedule meetings interstate to go and do openings and do all of those things, many of which are programmed a long way out, so you're sort of committed to the programme.

It gets very difficult if something arises that changes the dynamics, which only intensifies the time pressure, because often you're under pressure to do it anyway, but you've had to divert to some other, more immediate issue. And so you're constantly trying to make up the lost time. It is demanding, exhausting, and it requires a degree of good grace from everyone involved to recognise what's being asked of an individual.

WALKER: Physical energy levels are not evenly distributed, and it makes sense that PMs tend to be individuals of unusual energy, because it does seem like such a wildly demanding role.

DAVIS: They also get good at working out what they can delegate and what they can't — what really matters and what doesn't. And they learn how to. 

One of the reasons for some of the travel is that it just gives you thinking time. Sitting on a plane for two hours to Adelaide or Brisbane is two hours you can actually talk to people on the plane, think, work through issues. It actually matters, because otherwise there's very little reflection time.

WALKER: All right. I've got about four or five pages of questions about Cabinet, which I'm going to rapid fire at you. Some are more trivial than others, but I want to be like a fly on the wall in the Cabinet Room and also kind of understand the routines.

So just to begin with, to back up a little bit, could you give a three or four sentence summary of what the Department of the Prime Minister and Cabinet does, just for anyone lacking that context?

DAVIS: The Department of the Prime Minister and Cabinet is the central agency so it runs the cabinet process — physically runs it. It organises the agendas, makes sure there's tea and coffee, records the decisions, transmits them to agencies.

But more than that, it provides advice to the Prime Minister on every matter before Cabinet, and detailed expert advice, which means it needs to have what's called shadow functions which look at every part of government and are able to provide independent advice on those.

So a minister going into a cabinet meeting with a submission knows that there's been close conversation between their department and PM&C, but also knows the Prime Minister will have in front of her or him a briefing from the department that's meant to be as thorough and, if needed, as critical as possible. It's without-fear-or-favour advice, and that's what PM&C does.

It also runs a whole suite of ancillary functions — the international protocol, visits. It provides support for Kirribilli House and the Lodge and so on. But its principal function is this core policy function: both understanding policy, helping set up collaborative policymaking across the whole of government, and then providing advice to the Prime Minister as that process — often a committee process, often lots of interdepartmental committees coming together — eventually has to be distilled, through the Cabinet Handbook, into a submission which is strictly ordered because it has to cover a whole set of fields, and by the time it gets to Cabinet, government should be confident that every piece of information they need to make a decision has been thoroughly tested and is before them, and that everything they're being told is accurate.

WALKER: Mm. The facts are not being contested at that point.

DAVIS: Exactly. It's a judgment question for Cabinet, not a facts question.

WALKER: As Secretary of PM&C, did either of you ever actually sit in on meetings of the full Cabinet?

MORAN: Yeah, every week.

DAVIS: Yeah, in Canberra every week.

WALKER: In the full cabinet meeting?

DAVIS: Yes.

WALKER: Ah, see, this is so interesting. 

DAVIS: Committee meetings, including National Security and ERC.

MORAN: Yes, and the same at the state level.

WALKER: Okay. Because of course you were Secretaries of the Department of the Premier and Cabinet.

DAVIS: Not in Queensland, curiously. In Queensland there was a separate Cabinet Secretary. It was a full-time role. 

MORAN: There was a separate Cabinet Secretary in Victoria. But nonetheless, the Secretary of the Premier's Department sat in the Cabinet Room.

WALKER: So you guys saw everything in the cabinet process?

DAVIS: Certainly in the Commonwealth, yes.

WALKER: Okay, fantastic. Well, this is good because now I can ask all of my questions.

Okay, so I'm just going to rapid fire these at you. Firstly, when the doors close, how many non-cabinet ministers are present and who are they? So I think at the federal level, which is mainly what I'm interested in, you've got the three note-takers, you've got some Cabinet Room attendants who are passing things back and forth from staffers to ministers, and then you as the Secretary of PM&C. Anyone else?

DAVIS: No. And no assistant ministers. You would get called in if you were part of a submission, for your submission.

MORAN: That's it. And then you go.

DAVIS: When the door closes, it's the Cabinet and only the Cabinet. And the officials are silent. You're not to say a thing; you're never called into the debate.

WALKER: From reading the Cabinet Handbook, the figure who emerges as the most mysterious and potentially very powerful is the Cabinet Secretary. [laughs] They're kind of like the PM's consigliere. At the moment it's a minister, Andrew Charlton. In the past I think it's sometimes been a political staffer.

DAVIS: Yes, I think the practice has changed quite a lot, depending on the government in power and even the prime minister in power.

MORAN: In Victoria, unless it's changed, it was always a parliamentarian.

WALKER: So at the moment at the federal level it's a parliamentarian.

DAVIS: Yes.

WALKER: How powerful is that person as Cabinet Secretary?

DAVIS: Well, they don't decide the agenda, and in that sense they're not powerful.

The Prime Minister is the chair of the Cabinet committee, and therefore the Prime Minister settles the agenda. But the Cabinet Secretary — who was previously Mark Dreyfus, as the Attorney-General — I mean, it is a very significant role.

You do play a key role in advising the PM about what is urgent and what is not, what can wait and what needs to be settled now. You also write down the decisions of the Cabinet. 

WALKER: So those decisions are technically known as the minutes, which is a little bit confusing. But in this context, “Cabinet minutes” refers to the outcomes of the Cabinet meeting, the decisions taken.

One of the interesting things I learned just while reading about how Cabinet works, reading some of Pat Weller's work, is that sometimes there need to be decisions about what the decisions were. It's not always obvious what Cabinet agreed, and so there might be discussions after Cabinet about what are the actual minutes.

Obviously the people in the first instance responsible for recording those decisions are the note-takers, and so you've got three note-takers in the room. I don't know if you have this information at hand — but what tends to be the professional background of those note-takers?

Because I imagine they can't just be scribes, because there's a level of interpretation that needs to happen, they need some policy context. So who do those individuals typically tend to be?

DAVIS: So we talked about the shadow functions inside PM&C that are expert groups around each area. Whoever leads that particular shadow function comes into the Cabinet Room as the note-taker for the item. They know the policy as well as anyone in the room. 

And you mentioned disagreements about what was decided. They are, in my experience, incredibly rare. Because the recommendations have been worked through, people know exactly what's on the table. Sometimes, if there are amendments on the fly — and that happens — you might get ambiguity.

It's normally sorted out by the Cabinet Secretary with the PM. It doesn't go back to Cabinet unless it's a substantial issue. But I can remember at best not even a handful of times when that [happened].

It is a little more common with ERC only because of the sheer volume of what's coming through. But even then, it's a rarity. It's a very structured process.

MORAN: And the note-takers have got an important role to play in making sure that individual departments understand what the final result as a Cabinet decision on a particular matter was.

WALKER: So, random logistical question. Cabinet meets most weeks of the year, right? But Parliament, at least for the House of Reps, only sits about 20 weeks a year.

Does that mean, for the weeks in which Parliament isn't sitting, Cabinet ministers all have to fly back to Canberra for the Cabinet meeting?

DAVIS: Yep. Because there's no video attendance. You are in the room or you're not there.

WALKER: Has to be a physical meeting.

DAVIS: Yes.

WALKER: That’s tough for any ministers from WA. [laughs]

DAVIS: Absolutely. And in airports all around the country on a Sunday night, you can see Cabinet ministers waiting for their plane.

WALKER: Oh, interesting. Okay.

I'm interested in what doesn't make it to Cabinet. That's too broad a question, but I'm going to narrow it down. What's an example of a borderline issue where you'd need to have a conversation about whether or not that's an item that should make it to the Cabinet table?

MORAN: Well, you might have an issue that's immensely sensitive politically, perhaps in the national security space. And normally that wouldn't go through unless there was some reason the Prime Minister wanted his colleagues to know about it.

DAVIS: Yes, and the way [it works] — and it varies from government to government — but in recent years, the Cabinet will meet and, at the start of its meeting, it'll just be Cabinet ministers. All officials will leave the room, and they will discuss anything political — or frankly, who knows what they discuss.

But they'll have the conversation, so if there's a sensitive matter they want to raise, it'll be raised. There are no note-takers. There are no decisions recorded. It's not a decision session. It's a Prime Minister briefing the Cabinet on the issues of the day, and then the officials get called in, and they turn to the agenda and work their way through the agenda.

That provides a chance to do short briefs on current issues, and sometimes signal that, “We'll be coming back to this in a more structured way as a Cabinet.”

WALKER: I see.

MORAN: And in the case of the Victorian system, when I was there — it might have changed, I don't know — at the very beginning of the Cabinet meeting only ministers would be in the room, and they could raise anything of political concern about a submission that they wished.

Then that wouldn't necessarily be placed before the Secretary of the Premier's Department when he came in to sit in on the meeting. So there's an opportunity for a political discourse, which is really valuable for everybody concerned.

WALKER: I'll come back to that, because that's one of the things that surprised me about how Cabinet works: the kind of political strategising is mixed in with the actual executive decision-making.

And I think it was for the federal Cabinet that that practice of starting the meeting with the political stuff started under Howard, I think.

MORAN: And that was the practice in Victoria under Bracks and Brumby.

WALKER: Okay. Interesting.

DAVIS: It's not uncommon, but there are variations on where in the meeting and all that stuff.

WALKER: And even in the Keating government, they still had those conversations, but it just wasn't routinely at the start necessarily.

DAVIS: The logic of Cabinet ministers wanting to have a political discussion with no one else in the room makes perfect sense, and that's a standard feature of all governments.

WALKER: I've got some questions about submissions. Again, I'll just sort of rapid fire these at you.

My interest here is just that if there's a template that's good enough for the Federal Government, that's kind of evolved over the decades, it's served Australia through wars and all sorts of crises, maybe there's some lessons we could learn from that.

But the first question is: either in terms of pages or words, what's the maximum length of a Cabinet policy submission?

DAVIS: So it's done in terms of pages, but there’s multiple parts to a submission.

You have a two-page summary at the front end that goes through all of the core things and lists the recommendations. You'll then have an explication area that runs through some of them.

You'll then have a second section that goes through what are called coordination comments, where each agency provides its view. And that's important, because if you're a minister, you can read not just what the proposal says but what the rest of government thinks of it.

The intention there is, again, frank and fearless advice. If you think it's a dumb idea, you say it's a dumb idea. You say it nicely, but you say, “This would not be a wise use of public resources,” or whatever it is you want to say.

And then there are attachments at the back where you need to lay out, particularly, implementation plans and evaluation strategies. 

So they're thick documents, but in a sense, once you get used to reading them, it's easy to go to the level of detail that you want to get into as a minister.

MORAN: And with so many different sections, those papers can't be written with a love of exhaustive detail.

Because if you do that, they don't get read and you have mistakes made.

When I went to be Chancellor of [Federation University], I was a bit surprised at the quality of the papers coming forward to the university council for decision. And I said, “Well, look, in government this just wouldn't be acceptable.”

So I persuaded a very good person out of the state government to come and do a template and some instructions as to how to use it.

Transformed everything overnight.

DAVIS: [laughs] Because it does provide discipline.

That's why I talk about it as a routine. It means, for example, you can't put in a submission until you've answered all the questions in the Cabinet Handbook. That's really important.

You can't rush something in and try and—

MORAN: Sneak through the cost without the comment— [laughs]

DAVIS: For example, because there's a section that, if it's not filled in, the Cabinet Secretariat will not let it go onto the Cabinet papers, because it's an incomplete paper.

It is a significant discipline on…

WALKER: Did you, in your time, notice any commonalities in the poorly drafted Cabinet submissions? Or is the template in CabNet so rigid that it doesn't really permit or allow much margin for error?

(CabNet is the government's software that facilitates the kind of end-to-end Cabinet process; that's where Cabinet submissions are lodged and tracked.)

DAVIS: Well there is a coordination process that PM&C is central to.

When a draft is put forward, there's then a consultation between PM&C and the agency. And if it's a poorly drafted policy, part of PM&C's responsibility is to say, “This isn't up to standards,” and work through what that means.

Now, there can be a bit of tension coming out of that, to put it mildly. Nobody likes being told that their submission is not of the standard that it should be. But PM&C will be blamed if a submission does come forward [that isn’t up to standard].

MORAN: And in the case of the Victorian government, when I was Secretary of the Premier's Department, if such a submission came forward and it was seriously deficient, I'd just simply say, “Go away and try again.”

Because I knew that it'd blow up in the Cabinet Room.

Sometimes I wouldn't have minded too much if the particular secretary were going to cop it because of that, but that's not really being fair to your colleagues. [laughs]

WALKER: [laughs] Yeah. So, okay. So by the time it gets to the Cabinet Room, there are rarely, if ever, any deficiencies in the submissions?

DAVIS: Well, we have to be a bit careful, though. I mean, yes, there are possibly mistakes.

Not everything is well written. Not everyone releases their inner Hemingway when they get to write the submission. I wouldn't want to get carried away. They're not perfect gems of documents.

They're still human. They still have errors, and they still sometimes elide key points that need to be made. And sometimes there are people who try to push things through that they know they're going to struggle with, so they frame it in as positive a way as they can.

So, no, it has all the foibles of anything that people are involved in. But the system is designed to minimise those, standardise the process, and provide the same scrutiny on every submission.

And that's the key discipline in my view. It's what happens before it gets into the Cabinet Room that decides the quality.

WALKER: So as Secretary, when you're rejecting submissions —exposure drafts coming from the departments — can you generalise what are the common shortcomings in the ones where you say, “No, that's not good enough. Try again”? Is it a lack of detail or…

MORAN: Seldom a lack of detail.

It's a lack of suitable analysis of the problem.

DAVIS: A tendency to jump straight to the preferred solution and not argue why, and not argue the alternatives. And/or a failure to say, "If we did this, these are the implementation challenges we face." And part of every submission, as you know from the Handbook, is you've actually got to say, "If this is adopted, here is how we are going to go about implementing it.” and “Here's the evaluation strategy: whether we'll know if it worked or not.” 

That's actually a tough discipline because you're being asked to set out what the thresholds are for this thing actually to be considered a success.

WALKER: Say I'm a minister who wants to come fully informed to Cabinet meetings and contribute to the collective debate, even on a line portfolio that doesn't directly impinge on my own — and I know not every minister is like this, and not every minister has time to read every Cabinet submission, but hypothetically I'm a minister who does. On average, how many hours would I spend reading Cabinet submissions? (And assume I don't read the attachments.)

MORAN: Oh, well, paper’s that thick or thicker [gestures].

DAVIS: So once you get disciplined about doing it, you know how to do it and you know what you're looking for. In a sense, you're reading the material in the early pages of the submission.

WALKER: The executive summary.

DAVIS: To see if it raises concerns. There might be a point at which you say, "I'm pretty comfortable with this; it makes sense," and move on. I still think you're up for a couple of hours of solid reading.

WALKER: And that's just picking and choosing.

DAVIS: And that's just not diving deeper than you need to. If you want to read everything, including all the attachments, you'd better put a day aside, or whatever it is.

MORAN: Glyn's right. Well-crafted Cabinet submissions at the Commonwealth level and at the state level are very brief at the beginning part, but able to cover all the relevant points. Therefore, a minister might want to go further if they had a particular interest in a particular point, or they were the Treasurer or Finance Minister and were really worried about the proposal to spend a lot of extra money; they needed to find some way to either justify or block it. And so it all depends where you're coming from.

DAVIS: The Secretary of PM&C would spend several hours every week going through Cabinet submissions, not just this week's and next week's, but pipeline things. They would have multiple meetings with those shadow teams during the week just to review where we're up to on submissions, including a significant one a couple of days out from the Cabinet papers being distributed to ministers, to finalise how we're going to brief on a submission. So for us, that would take a whole day’s of work in that.

So a minister who wants to be completely thorough is looking at a fairly similar time commitment.

MORAN: In the two Secretary roles that I had, I tried to make sure that there was at least one Deputy Secretary who was really on top of the range of policy issues of concern to the government. It was his or her job to really go through it.

And if they missed anything, they copped it. [laughs] But they tended not to, so that's just a sign that, yes, there's a sieving process.

DAVIS: When I worked in Queensland, Premier Goss would make us sit in front of him for an hour before the Cabinet meeting, and he would practise by interrogating us on the Cabinet agenda. He would always find the paragraph you hadn't read and ask you the probing question, and you just dreaded that sort of thing. [laughs] So we'd spend much of the weekend reading the Cabinet books and hope to get through this meeting on Monday morning.

We enjoyed it when he travelled. [laughs]

MORAN: Well, I worked for three premiers in Victoria and two prime ministers, and none of them did that to me.

DAVIS: [laughs] You're very fortunate.

WALKER: So what's the median length of time for drafting a Cabinet submission for the Department of Defence? Because I've heard some can be worked on for years before they reach Cabinet, but I assume those are outliers. Roughly, what do you think the median might be?

DAVIS: Very hard to say, and for this reason. A lot of the Defence submissions are around acquisitions. They're around defence procurement, and they are often hundreds of millions, if not billions of dollars. And yes, they take a long time because the scale of the decision is so big and the thoroughness required, so extreme.

They're also the largest submissions you're ever going to see, because you're trying to work out how you would acquire a frigate or aircraft or whatever it is you're buying for the next 20 years. And so the level of detail is extraordinary, and years seems to be an exaggeration, but those are the ones that take enormous time, and they get workshopped through a whole set of committees long before they get to the National Security Committee.

But many Defence ones won't be much different in calibre from those from other agencies. You're dealing with a problem, you're trying to outline how you're going to manage it, what your response is. From the time you decide there's going to need to be a Cabinet discussion of this matter through to it actually getting in front of Cabinet is typically a number of months, and there are processes long before Cabinet buys in. So if you're a minister, you see things at the end of the chain, not along the way.

WALKER: Just quickly, you've mentioned the kind of standard template. It's the executive summary, the recommendations, the analysis; it might have some attachments including the coordination comments from different departments.

I assume the actual template in CabNet is more granular than that in terms of the rubrics or the sections, and it would vary depending on the type of submission?

DAVIS: You mean the presentation the minister would make, or you mean the nature of the submission itself?

WALKER: The nature of the submission itself.

DAVIS: Well, I would have thought closer to standard than not.

WALKER: Oh, really? So it's not incredibly prescriptive in terms of subsections and whatnot?

DAVIS: No, it is. That's what I mean. It is quite prescriptive. I wouldn't say incredibly, but it's a set of headings, and you have to answer each of the headings. And the headings are designed to make you outline each relevant consideration for making a decision.

They're the policy cycle explained. What's the problem? What are the alternative approaches we've considered? Why have we chosen this particular instrument? Who have we consulted? What was the advice back from the coordination comments? And then, why these recommendations? I mean, that's basically it. And then you start again.

WALKER: So I want to talk about the kind of vibe or tenor of Cabinet meetings now. Can you paint me a picture of what the discussion in the Cabinet Room is like? How informal can Cabinet meetings be? How heated do they get? How structured is the debate? If we're a fly on the wall, what would we witness?

MORAN: In my experience, they weren't heated. Ministers who had read the submissions and had something to say would invariably be heard, and that might provoke a bit of a conversation around the table.

But by and large, I think the ministers were depending upon submissions and attachments being comprehensive and capable of supporting whatever the decision was that needed to be taken. You'd sometimes find that a minister with a particular interest, perhaps the Attorney-General or perhaps a minister who was chairing the Cabinet committee that dealt with social policy issues, would come in and have something additional to say.

But by and large, the ministers bringing forward submissions proceeded on the basis that they and their department had got everything on paper that needed to be there, and therefore there could be a reasonable discussion about the merits or otherwise before a decision was taken, and it seems to work.

DAVIS: I agree with all of that. Collegial, focused on the submissions. If there were factional or other tensions, they didn't surface in the Cabinet Room; it would be inappropriate for that.

MORAN: The point we didn't make at the very beginning is that Cabinet is the forum for the government sinking or swimming on a variety of issues. So the ministers know that any Cabinet submission can have some deficiencies, and it's best if they're found and sorted out.

But also, the Cabinet submissions are really dealing with sensitive issues that everybody in the government has to get right.

DAVIS: Exactly so.

So they're collegial. They can be funny at times, and people need sort of light relief.

I remember a Cabinet meeting in which one of the Cabinet members had just turned 50. It was his 50th birthday, and Cabinet sang him happy birthday. Then someone said at the end, "It's a bit rough to have to spend your 50th birthday in Cabinet." And he said, "It could be worse. It could be shadow cabinet." [laughs]

WALKER: When I was reading cabinet diaries, the Blewett and Evans ones, three things stood out to me in my naivety. Let me summarise what they were, and you can react to them or not. 

The first one was, as we mentioned earlier, the political strategising mixed in with the executive decision-making. In Neal Blewett's diary, he talks about the kind of “general waffles” that they had, with Keating giving a broad, sweeping state-of-the-nation-type address to the Cabinet.

The second was…and maybe this was not so much a feature of your experiences in the Rudd, Gillard and then Albanese Cabinets, but it's funny to contrast the formality of British Cabinets, which you get in accounts like Richard Crossman's account of the Harold Wilson government, with the occasional informality of Australian Cabinets [laughs]. There are so many anecdotes. A couple of days ago in a bookshop, I just happened to pick up the new Troy Bramston biography of Gough Whitlam and just turned to the page where he's describing the Whitlam Cabinet, and there's Whitlam swearing at his ministers and throwing his papers across the Cabinet Room and all sorts of things like this. [laughs] 

MORAN: Sounds right. [laughs]

WALKER: It was obviously an infamously rowdy Cabinet, maybe an outlier. But even in — was it in Gareth or Blewett's Cabinet diary? — that there's a story of Keating opening Cabinet by saying not to listen to the ABC in the morning because you can't have “fuckers filling your mind up with shit at 8:00 am.” [laughs] So it's funny how the Australian style is a little bit different.

And then the third thing, which I think we should talk about, is how much latitude the PM has to chair the meeting well or poorly — and the PM's skill as a chairperson seems to be unusually important to the quality of the decision-making. Which is interesting because it's not something most people might think about when you think about what skills are needed to be a good PM: the ability to chair a meeting well. 

We've had PMs with different styles of chairing over the years. I think Menzies was famously very good at synthesising the debate and summarising it as an outcome which was pleasing to everyone, even people who probably didn't agree with the outcome. Whitlam's Cabinet was very rowdy, as we've said. Fraser was very domineering but he pushed people because he wanted to test ideas. Hawke was the kind of relaxed consensus-builder, he didn’t state his views too early but — and this is a quote from Gareth Evans' diary — he could let debates turn into “Esalen sessions” which dragged on too long and sucked up ministers' time. Howard was very punctual and businesslike. There are varying accounts of the Rudd Cabinet, but pretty negative ones in Paul Kelly's book Triumph and Demise. Chris Barrett, who was Wayne Swan's Chief of Staff, talks about the meetings being run inefficiently, and sometimes Rudd would use them as personal briefing sessions. Terry, I'm not sure if that checks out with your experience. 

But the general point is that there's this range of different styles which seem to matter to the outcomes and to just how well the government runs. I mean, the pace of decision-making could sort of grind to a snail's pace, or it could be too fast, depending on how the PM chairs the Cabinet. 

So could you step me through some of the, I guess, on the one hand, hallmarks of a good chair, and then, on the other, are there any habits of chairing a Cabinet that reliably produce worse outcomes for government?

DAVIS: [laughs] I think you touched on a number of the hallmarks of really good chairing. The ability to let people speak and not dominate by saying what you want out of this discussion early on, as a chair, is crucial. If you start the meeting by saying, "I'm looking for us to do this and this," you've killed the debate before it has started and people will resent you for it.

If they have a chance to speak and to hear the same evidence that you're hearing, and then you can sum it up well and provide a pathway that most people in the room can nod and say, "That makes sense," that's an excellent outcome. 

And the chairing matters for the reason we discussed before. A PM who's seen not to be able to manage Cabinet would quickly lose the confidence of the senior ministry, and then the broader backbench. It's such a core skill to the job. If you couldn't do it at least passably well, then it really matters. 

The timeliness thing matters. You mentioned John Howard and timeliness; it is hugely important. There's always such a backlog of things waiting to get to Cabinet. There's so much material running around that if you can't efficiently move it through, then the whole of government becomes...

Toward the end of the Hawke years, there's a famous case about a mining lease that the government just couldn't make a decision on, and they kept coming back and back. Gareth Evans' diaries talk about that as a sort of signal to the Cabinet that the Prime Minister was, in their view, losing the grip on the role, and it was important in their thinking about, "It's time for change."

So the ability to keep government moving, to be responsive to your colleagues but to give clear direction at the end, [matters]. You want, for better or worse: "We've dealt with this matter. It's finished. It's over. It's a clear and unambiguous decision. Now we get on with it and we move on." Those are the skills you look for in a great Cabinet chair. Styles matter because people are different, and there are times when you do expect people to sit back and you just need a bit of venting and you let people do that.

But overall, you need things to keep moving. Above all, you need them to keep moving. You've only got two hours max to get through 10 of the most significant policy items in front of the nation every week. And if you can't do that efficiently, then sooner or later people are going to get very angry that their issues are not getting dealt with.

MORAN: I've worked for two prime ministers and two premiers. One prime minister got into a spot of bother, but I don't think it was driven entirely by the Cabinet process. Although the anxieties of some Cabinet members were apparent at Cabinet meetings, their anxieties were dependent upon a whole lot of things outside the Cabinet Room itself.

And so, one could have a very interesting discussion about what can bring down a prime minister or a premier, but there'll be such a variety of possibilities that it won't take you very far.

WALKER: Alright, so I’ve got some general questions about Cabinet and then how—

DAVIS: You've done an extraordinary amount of work for this discussion. Well done.

WALKER: [laughs] Thanks. Well, we'll see what you think of these next ones. Obviously, one thing I learned is that big decisions don't always happen in the full Cabinet. They can be stitched up in the PMO, in ERC or some other committee, or in the corridor of Parliament House. From your vantage point, what fraction of important decisions are genuinely forged in Cabinet, and what fraction are settled elsewhere and then merely endorsed by Cabinet, roughly speaking?

MORAN: Well, I'd say most decisions are worked out before the meeting and go through.

DAVIS: Yes, but it would be a mistake to think of that as Cabinet not working, because what happens is there are negotiations, discussions—

MORAN: There's a process.

DAVIS: There's a process that gets you there. By the time it gets to Cabinet, you are broadly looking at an agreed set of recommendations.

Not that everyone in the room will necessarily agree, but you're not dealing with a...

WALKER: It's a feature, not a bug.

DAVIS: Yes, and so those sorts of more tense, emotional and angry discussions are not going to happen in the Cabinet Room. They're going to happen a long way back. They're not going to happen in public. They're probably not going to happen with public servants in the room. Or they're going to happen in committee meetings.

I have seen committee meetings get pretty heated, at state and Commonwealth level, and that’s because people have genuinely different, strikingly different views about what's the right thing to do. It's the right process, because you then have the argument and you can move to a decision.

MORAN: There are committees that can be a bit difficult: those in social policy, those dealing with expenditure of government funds — the Expenditure Review Committee, for example — and conceivably those considering complex legislative suggestions.

DAVIS: Agree with all that.

MORAN: But the third thing is less likely than the first two.

DAVIS: Agree. Sometimes you get an iconic development proposal in which people have a view for or against a development, and there's no way to resolve it except to have the arguments and then it's a majority vote. They can be, in my experience, the most emotional, because it's how you feel about native forests or ocean pollution or whatever the issue happens to be.

You've got people who've got strikingly different views, but they also represent constituencies that have strikingly different views, and there is no easy resolution of that. And so you do need a process that forces you to step through it and then make a binding call.

MORAN: And the good thing about the Australian system, at the state level and at the Commonwealth level, when compared with other similar democracies, particularly in America but also to an extent in Westminster, is that the whole process is genuinely well understood by most of the politicians on both sides of politics in Australia.

If they don't know something, they know it's quite easy to get most solutions or most answers that you might need from the Cabinet handbooks. And so there's no excuse for them saying, "Oh, I've been surprised by this. I didn't realise that this might happen," because that's just a lack of application by the minister in question — which happens. 

But the colleagues don't necessarily look upon that fondly.

WALKER: Right. So when the Cabinet debate isn't going the PM's way, what are some tricks you've seen prime ministers use to get their way in Cabinet? [laughs]

MORAN: Bad language. [laughs]

Well, I'm not serious about that, because if it's not going the Prime Minister's way, it might be set aside for a further discussion outside the Cabinet involving selected ministers.

WALKER: Right. So they'll defer it. They'll say, "We need more information," or something.

MORAN: Yeah, something like that. It doesn't happen often, because people know once you get to the Cabinet table, you have to make the decisions one way or the other.

And the only person that can deflect that would be the Prime Minister or the Premier, who's not happy with where their colleagues have got to and doesn't want the decision to be taken. So you send it out for a bit more work.

WALKER: When big mistakes are made by a government, so things that prime ministers and ministers come to regret, what's typically the root cause of those mistakes? Is it junior public servants not having thought through the unintended consequences of their advice? Is it the Cabinet making decision-processes that don't facilitate the right outcome? Have you noticed any patterns? When mistakes are made, what's the root cause?

MORAN: In a few cases, the cause of the reaction was a feeling that the matter X, whatever it was, had not been subject to sufficient political scrutiny so that the government could proceed without danger.

DAVIS: Yeah, I think that's really common, because often policy choices and political choices don't match up. And so a Cabinet might, in good faith, make a policy choice without having thought enough about the politics, or the other way around.

Particularly if they rush a decision in response to some public crisis or moment, you can often see bad choices made. What happens is governments then, at the next election, just quietly drop whatever it was that they recognise didn't quite work as they expected, and they move on. They don't ever say, "We made a mistake." They move on.

But it's a lack of prep[aration]. It's rushing into choice. It's not having considered carefully enough the consequent electoral and other consequences. 

There's another factor, and that's the temporal one. What makes sense at one time turns out not to make sense over the long run.

The case that a lot of people are talking about at the moment is the raising of tobacco taxes to discourage smoking. That was a widely accepted public health initiative that worked well, and we saw Australia's use of tobacco decline very steadily over a long period.

What I think few people anticipated is that we might hit a point where the incentives to—

MORAN: ... to bring in tobacco illegally— 

DAVIS: Yeah, a black market and the development of a... Now, that wasn't an intended consequence, and I don't think it was a discussed consequence, because I think the assumption was that the use of tobacco would just trail off until there would be no point in a black market. That's not been the case.

So there you get a case of what made sense for a long time — and not just briefly, a long time — making less sense. But most people would say, "Okay, so what do we do now?" And that's what's not obvious.

You don't want to give in to a black market. On the other hand, prohibition has not got a long record of success in most areas. So what are you going to do? And now you have to have a new and quite awkward policy discussion, because your policy instruments, which worked really well for a long time, suddenly no longer work.

WALKER: Can you think of any examples of physical exhaustion impairing the judgment of prime ministers or ministers and degrading outcomes?

MORAN: Not really.

DAVIS: Not examples. We've all seen exhausted people, and so it's more likely to result in bad behaviour and snaps and unpleasant workplace moments. Less likely — again, because we're discussing routines for decision-making that have channels and processes and timelines, it doesn't play in as a factor.

You could imagine an exhausted Cabinet eventually agreeing to something because they were just so tired and sick of it and they just wanted it to go away, but I think the process mitigates against that. The decision-makers at any one time might be exhausted, but all of those people who were working on the process on the way through are not in the same place, and they're likely to give the same advice.

WALKER: Terry, what about Kevin Rudd deciding to shelve the CPRS in the Strategic Priorities and Budget Committee? I think he'd just come off a kind of two-day mammoth set of meetings with the state premiers about... This was when he was trying to do his health reform. And then he made the decision immediately after that in a meeting of the SPBC. How much do you think his personal physical exhaustion played a role in that decision, which I think he said he now regrets?

MORAN: Well, it's hard to know, because he had a great deal of stamina on almost any occasion which was not necessarily beguiling, but it was real. And so I don't think the stamina issue was the point there.

He was a politician with very good judgment on both good days and bad days.

WALKER: So it's interesting that your tenures as Secretaries at the federal level overlapped with our two biggest national crises of this century. Terry, you were obviously Secretary during the global financial crisis. Glyn, you caught the tail end of the pandemic.

If we take the Strategic Priorities and Budget Committee and also the National Cabinet as inspiration — I don't want to talk about those two examples in particular; I more want to reflect on the general principle, but just using those as a kind of primer — how different is the optimal decision-making format in times of crisis to the optimal decision-making format in normal times, if you think about Cabinet and the machinery of government?

MORAN: Well, take the one that you mentioned, which was the global financial crisis.

Kevin [Rudd] said, "I want to have a meeting every day with you and people from PM&C and Treasury, and there is to be a briefing that goes to what's happened overseas in the night before as part of all of that, plus any actions that might be needed."

And Ken Henry was fabulous in doing all of that. He really got Treasury wound up to deliver. The relevant Deputy Secretary in PM&C who handled it was ex-Treasury and a respected economist. So all I had to do was orchestrate the meetings and the contributions, because the most capable people you could have advising the Prime Minister were at the table.

DAVIS: And I should say, in fairness, I came in right at the end of the COVID crisis. The heavy lifting was done by Phil Gaetjens, who was my predecessor, and by Prime Minister Morrison.

By the time I came to PM&C, the architecture that had been developed through COVID was firmly in place and well developed, and the National Cabinet had become the core institution for making national decisions. It continues, though not with the urgency it did through the COVID years.

It was quite a significant shift from the former Council of Australian Governments, the COAG process that both Terry and I knew and loved — [laughs] as state officials.

WALKER: Speaking ironically, of course. [laughs]

DAVIS: Yes. As state officials, and then something very strange about ending up on the other side of the table in PM&C.

What it did was show that national institutions can change. None of them appear in the Constitution, of course. They are all informal in that sense, and they're custom and practice, and they're now well established. But it was a remarkable shift, and it happened in a relatively short space of time.

And it was actually encouraging that a democracy in a crisis—

WALKER: Can be nimble.

DAVIS: Can be so nimble.

WALKER: Yeah. I have a question about National Cabinet, but we'll come back to that towards the end. Speaking at a very high level, it seems like more centralisation in a time of crisis is appropriate?

DAVIS: Not surprisingly.

WALKER: Yeah. Yep.

MORAN: Well, selective centralisation. So you don't have everybody in the room. You just have people who are capable and have something substantial to contribute.

When that comes down to economic issues, you don't actually tend to want to have the Reserve Bank in the room, but you do want to have the Treasury and some people out of finance and the economists out of PM&C. And that's what Kevin was making use of.

WALKER: Yeah. So if you could change one thing about the machinery at the centre as it exists today — so one rule, one committee, one role, one bit of digital infrastructure, whatever — to improve the quality of federal decision-making, what would you each choose?

DAVIS: [laughs]

MORAN: Give me the options again.

WALKER: Surely some things have bugged you when you were working there. It could be anything, for example a rule, a committee, a sub-committee, some digital infrastructure, a role that doesn’t exist that should or that does exist that shouldn’t. Etcetera.

DAVIS: The key thing you'd want is more time for almost all of these processes, but particularly for Cabinet and committee meetings, because everything always feels like you're running out of time, you're running short of time.

There's no way to arrange the rest of life. [laughs]

WALKER: How do you create time?

DAVIS: Well, you don’t. If you're a parliamentarian, if you're a minister, if you're a Prime Minister, the work you do in policy, the work you do in the Cabinet, is one small part of a much bigger portfolio of things you are constantly doing. And you're trying to fit this in amongst everything else you're doing as well. The exhaustion factor is non-trivial, because it really is extraordinarily demanding. 

As officials, we would like more time with our principals to work through the Cabinet decision, to have a better sense of their preferences, and often that is actually a challenge. You go in to brief on an issue that they haven't had to deal with before, they haven't had time to think through what they think, and you're trying to get a sense of, "What would be useful for you in helping to make this decision?" Again, it's just down to time. You get your scheduled time to talk with them, which is really important, but it isn't ever enough for anybody.

Everybody's got the same poverty of time, and if there are life hacks to do with that, that would be great to know about, but I...

WALKER: "The poverty of time" — that could be a good title for a memoir of a former Secretary of PM&C. [laughs]

DAVIS: [laughs] Yeah.

MORAN: Well, by the time a Cabinet paper goes forward to Cabinet, all relevant people within government will have been consulted, and that will have influenced the nature of the decision that is available to be taken.

Mainly, in my experience, the papers that have been done on that basis go through bang — it’s not a problem. And the issue that becomes a problem is where there's a troubling political overlay that has to be considered. But that doesn't necessarily torpedo proposals being brought forward; it just causes a testing of those proposals with regard to the anxieties that a minister or whoever might have. Would you agree with that?

DAVIS: I agree with that entirely. Most things go through Cabinet quickly and efficiently because they have been so thoroughly road-tested that they're not contentious.

So they invest their time on the handful where it's really difficult to know what the right call is. And they're often recurring issues, issues that can't be resolved simply. They’re environmental controversies, they’re complex decisions about energy transmission. They're the things that actually need multiple goes to get through.

We've just seen the environmental protection and conservation legislation go through, and the number of iterations of that over a couple of years was extraordinary because it's such a complicated piece of machinery. You don't make a decision. There are elements that need to be worked through systematically, and you can't make some decisions until you've made decisions on the earlier ones. So you get multiple passes at it.

That's necessary; you couldn't easily avoid that. They are just time-consuming. And you are trying to balance interests: you're trying to balance political against policy outcomes, you're trying to balance development against environment. These are fundamental choices, they're not simple, and you can't do them in one hit. And so a lot of Cabinet time is taken up often with those sorts of very specific, very technical issues.

MORAN: In my experience of Cabinet consideration of issues, there weren't many that had to be delayed for further consideration, largely because if they had to be deferred, there was some deficiency in the scoping of the policy challenge ahead, and/or the political challenge ahead.

So, by and large, again, you wouldn't expect a significant issue to lay on the table with the Cabinet for six months. It's not the way it works.

DAVIS: Once it's ready to go to Cabinet, they just want it done and fixed.

MORAN: And they, one way or another, quickly make a decision.

WALKER: So by the end of your time this year, there was nothing that really bugged you — a process or system, that you thought, "I needed to fix that, but I haven't had a chance to fix it"?

DAVIS: There are a thousand things you'd like to do differently. That's not the point. It's not your system to play with; you are part of the system.

Yes, you get a very influential voice from PM&C, but you don't get to control everything. On the contrary, the system works best at a public service level when there's good collaboration across the core central agencies.

When Treasury, Finance, Attorney-General's and PM&C work well together around issues, and that goes to how the Secretaries Board runs, it goes to how a lot of the inter-departmental committees run. It's the key role of the deputies, as Terry mentioned. They are really important.

You look for deputies who can take control of a policy issue and manage the work across government around that issue. That's part of their role; it's why they're there. You try to choose well so that you get skilful people. I think Terry and I would both say we had the chance to work with some fabulous people who showed that over and over again.

A lot of the tricky issues have to be resolved internally at the bureaucratic level before they get to Cabinet. I can think of some very specific examples where there were just months of work, often with the state government involved or a major corporation or a sector, before you wanted to get anywhere near Cabinet.

Because you didn't want to put in front of Cabinet something that hadn't been worked through. Even if you didn't know the answer, you needed Cabinet to have the chance — which you would often do in committee — to say, "There are three choices here and at this point what we need is an indication from you about which way we should develop."

So, in asking you to make a final decision, we just need to know: is the inclination to go one of different ways? That's the sort of routine work that's going on behind the scenes long before it actually gets into a Cabinet recommendation.

But Cabinet recommendations are recommendations. You don't put up options; you put up the recommendation. And you don't get to that easily on really major issues.

WALKER: Imagine I become PM and I decide to make solving the housing crisis my top national priority. I say, "This is what I want my economic legacy to be. I want to be known as the guy who solved the housing crisis, and I'm going to try and do it in three political terms."

Concretely, how is that new top priority reflected in the machinery of government, the org structure of PM&C, Cabinet committees, etc? Do I, as PM, set up a Cabinet committee for housing policy? Is a housing group added to PM&C? What happens exactly?

MORAN: Well, you've got to find a good source of advice on how you could solve the problem. Setting up a bureaucratic arrangement won't solve it.

You've got to have a strategy for doing it. And, so far, the Commonwealth has struggled with getting a strategy. Even when Glyn was there, they were struggling to get a strategy because everybody was thinking in terms of putting it out with the private sector to build things. But that doesn't necessarily get you what you want.

DAVIS: Terry's right about a sequence. Until you know what you want to do, there's no point setting up machinery.

WALKER: But say I've decided that. Take that as given.

DAVIS: You're right about sequence. We've seen recently something that pretty much follows what you've just said. The government, having decided on its priority, assigns a minister, creates a new division — in this case, within Treasury — brings new skills into it, puts it on the National Cabinet agenda, and gives it enormous impetus in terms of funding. Because the ambition to do 1.2 million new homes is an extraordinarily ambitious agenda and requires, therefore, a real allocation of resources.

I guess the thing about government is you can't just do one thing. You never have that luxury. Yes, you give it enormous advantage, you really get on with it and try to set up the structures that will allow you to do it, but what you're trying to do is set up the structures so that that will continue while you turn your mind to the hundred other things that are going to need your attention.

So, yes, you have major priorities, but you cannot just have only priorities. We've seen lots of governments around the world that have announced they've got five key priorities and that's what they're going to focus on, and it lasts just a bit longer than the press release.

In the end, the reality of government is you think about the multiplicity of services you're providing, the groups you're supporting, the programs that you need to continue or to focus on. It does not allow for extreme focus. Even at state level, that's very hard to do.

Governments always have signature programs, but they can't just have those.

MORAN: So I would go to the department and say, "Could you dig out the old papers on what Sir Robert Menzies did, and also find out how he decided to handle the states and what they would do?"

Because Menzies faced this problem after the Second World War, and he actually got it all done. He got all these houses done, this land developed, all that sort of stuff. It wasn't done just by trying to get a few companies interested in developing land or building apartment blocks.

It was done by going back to what we were talking about before. In Victoria's case, to get through the state government, to get various things built, and all the engineering stuff that needed to be done was done through government arrangements. And it worked.

Now, we've embarked upon an approach where we are largely reliant on what the private sector can do, and it doesn't seem to be solving the problem. Now, you won't agree with me entirely, but that's okay.

DAVIS: No no. And, as a sidebar, what's interesting is that under artificial intelligence we now have access to all those briefs back to the Menzies period. We can interrogate them instantly. We can actually look at consolidated policy advice over decades, and we can try and have a more informed discussion about what has worked in the past and what might work in the future.

MORAN: Well, to comment on that, going back many, many years, what the Liberal government in Victoria did was set up arrangements to do a lot of the work that, under the current arrangements, is left to the private sector.

And so there was an entity that had the job of taking land and developing it for houses and other things. And there were a number of different agencies that got houses built on that land and other land. So it all worked very quickly in a way that is avoiding us at the moment.

DAVIS: Yes, but it's also a reminder, isn't it, that a housing question crosses a whole lot of government. It's got to do with skilled labour, it's got to do with financing, it's got to do with taxation policy. Housing isn't [just] housing; it's actually something much larger.

The fascinating question is how, at a government level, you coordinate all of those policy inputs to try and get to an outcome.

MORAN: When Menzies approached Victoria, he managed to get a cooperative government on both sides of politics, over a period of time, to do the job. And I think, likewise, in New South Wales.

DAVIS: Yeah. Well, I'm not suggesting despair, but I'm just saying it's a nice example of complexity and having to manage complexity.

MORAN: So I'll finish up by saying that we assume the private sector can do almost anything, do it well, do it quickly, and do it at no great cost. But that's not true. Many of the things that need to be done, they can't do well.

Robodebt, employment services — disasters when they were contracted out to the private sector. But Canberra, under the influence of Treasury, still believes that if you want something done, do a contract with some firm and get them to do it for you. They might, but they'll make a great profit out of it as well.

I think we're being a bit naïve about who can do what with speed in an emergency. And housing is an emergency at the moment.

DAVIS: So you promised to be controversial, and here we are. [laughs]

MORAN: Oh, well, I can go a bit further if you like. [laughs]

WALKER: Please. [laughs]

Would it be fair to say that unless I established a committee or sub-committee of Cabinet for housing, I'm not truly serious about solving it? Or is it difficult to answer because it depends on what my policy is, and that might affect whether I need a committee or sub-committee?

DAVIS: Well, committees are there for a purpose. If you know the variables you need, you can just directly talk to the relevant ministers. You talk to the Immigration Minister about workforce needs, and you talk to your Education Minister about training, and so on.

Committees are most valuable when you actually don't know what you need, and you broadly need to bring a group of people together to work your way through, to be clear about what it is that is going to be in play. So the committee might come a little earlier in the process and then—

WALKER: Maybe we do an ad hoc committee or something.

DAVIS: Yeah, and that's not uncommon.

MORAN: Could I go one step further to test your patience on this issue?

WALKER: Yes, please.

MORAN: Arguably, what's gone wrong with the public service here and in Canberra is the effect over many years of Treasury zealots migrating from the Treasury Department or the Finance Department in Canberra into departments, to have a strong hold over how policy is developed.

What's been neglected is preparing public servants in various jurisdictions, including here, who have the ability to actually make things happen — like housing or land development. That's what we used to do when Sir Robert Menzies was around, when he found a reasonable basis of dealing first with John Cain Senior's government and then the subsequent Liberal governments in Victoria. By the time all of that was done, there had been a huge amount of land development for housing, and there'd been a great number of social housing units built all over the place.

It's Treasury which says the only way to get anything done is to contract it out. That's not true. Treasury — and its ideology — is standing in the way of getting some important things done in Australia.

DAVIS: So I'm just reflecting, with a little bit of irony here, how hard it is now to hire economists into the public service.

MORAN: Good. [laughs]

DAVIS: I don't think it is good. We've gone from a period where people wrote books complaining that economists were running the entire APS to now it actually being—

WALKER: What was one of those books?

DAVIS: The managerialism argument. Various people wrote [on it]. 

WALKER: So you think it's the opposite now?

DAVIS: Well, the argument was Terry's argument—

WALKER: Because Terry clearly hates economists.

MORAN: No, no, no. [laughs] 

DAVIS: Some of his best friends.

MORAN: Some of my best friends are macroeconomists. 

It's the microeconomists that I don't like. [laughs]

DAVIS: [laughs] It's not the economists, it's the economic thinking, and in particular the principal–agent thinking that said contracting out was a viable way of managing conflicting interests.

MORAN: I didn't know you liked economists so much. [laughs]

DAVIS: No, well, I was just ruefully noting that the Commonwealth has gone from people saying, “We’ve got a surfeit of economists,” to economists actually being quite hard to recruit and hire, and that’s just because there are so many other career options and choices for economists. 

But I’m also seeing, in my time in Canberra, quite a significant pushback against the earlier attraction of contracting, and a realisation — and there are enough studies around it — that contracting hasn’t always achieved…

MORAN: We’re on the same page there.

DAVIS: On this, well, we might be at a degree of difference here. 

It raises a problem, though, because if you decide to bring back into government large sections — which is what’s happened over the last three years — you immediately cop the criticism that you’re growing the APS, there are too many public servants, and so on.

Even the conversion of labour-hire employees into APS employees, which I strongly supported and think is the right thing, now attracts regular complaints that the public service is out of control and growing in great numbers, even though the costs are actually no different.

So we’re going to have that argument again about what is the appropriate scale of public service. Part of our challenge here is that governments are ambitious — they have things they want to do. Citizens are ambitious for the services they want to access. They don’t want to pay the taxes for them — nobody does — but also: how do we do this?

In the past, we’ve tried to do it with a degree of contracting. We’re now at a point where that’s much less acceptable and we’re having to find alternatives. There is a really interesting debate going on about what that might look like, and you and I have discussed it out of session — about relational contracting and the way that changes the dynamics of how contracting can work.

But we are going to have to have this discussion. You can’t be against contracting if you’re also going to be against having more public servants, if you aren’t willing to live with a reduction in what the public service can do. That’s a difficult task.

It’s interesting that the scale of the public service, at least at Commonwealth level, has broadly stayed static against population. That is, it’s grown roughly with the population, even though you can read lots of rhetoric around out-of-control numbers. It’s not the case. But you’re always having to defend absolute numbers as opposed to relative numbers, and relative numbers haven’t shifted — absolute numbers have.

WALKER: I’ll come back to the public service. I’ve got one more Cabinet question.

So, in my last conversation with Hugh White, Hugh mentioned that if, hypothetically, China attacks Taiwan and America decides to defend, the Australian decision to support America won’t be made by the full Cabinet, according to Hugh. But it wasn’t clear to me whether a decision like that would be made by the National Security Committee or in an even smaller group within the National Security Committee... 

So I guess the question here is: how are decisions about going to war made?

DAVIS: I’m fortunate to have never been around Cabinet when that decision’s made, but it has been at various times. It’s not a decision I imagine anyone would make lightly.

The National Security Committee is likely to discuss such a matter, but I think it unlikely that it wouldn’t then be referred to the Cabinet. NSC after all is a committee of Cabinet, and I would expect it to be referred to the Cabinet. But let’s hope we never find out. Terry?

MORAN: Yeah, I agree. Hugh is a deep skeptic about America these days, and that probably feeds into his view as to how you’d handle the situation you described.

But I’m a bit of a skeptic about America as well in those circumstances, and I can’t see that, in the face of all of that, our prime minister could avoid going to Cabinet on the issue of whether we go there in support of America or not.

WALKER: So you think it would need to get endorsed by the full Cabinet?

MORAN: Well, it’s potentially so controversial because of the way in which America is positioning itself, and the way in which China is positioning itself too.

WALKER: Yeah. I’m curious how this happens logistically. Say you’re the prime minister: you get a call at 3:00 a.m. and Australia needs to make a decision within three or four hours about whether to support America in defending Taiwan.

Assume Parliament’s not sitting and your Cabinet are all in different cities. How is that conversation actually coordinated? Is there some kind of secure videoconferencing platform the government would use? Does everyone have to immediately jump on a flight back to Canberra? Because there’s a real time constraint here. How does that happen?

DAVIS: Yeah, this is one where I’m gonna drop out, because—

WALKER: Too sensitive?

DAVIS: It goes into administrative and security arrangements I don’t think we should be discussing.

WALKER: Yeah.

MORAN: Yeah, fair enough, and I’m reluctant as well. But the IT links around Australia, for the use of ministers in circumstances like this, aren’t too bad. So I don’t think that getting people together — which would take time — is an obstacle to people sitting around and making a decision.

WALKER: Mm. And if you think we need an endorsement from the full Cabinet, does that mean that in three or four hours we have to try to coordinate the full Cabinet to make a decision about supporting America?

MORAN: Well, ideally you’d hope that that was the way it was handled, but there may not be time for that to be the case.

WALKER: In which case it might just be the NSC.

MORAN: Yeah.

WALKER: Because the NSC can make decisions that don’t need to be endorsed by Cabinet, right? There are two committees that can: the Parliamentary Business Committee and the NSC. So the NSC could make that decision without the endorsement of the full Cabinet.

MORAN: Well, the prime minister would have to decide on that. And if the decision were going to be held through the NSC, there’d then have to be a follow-on so that all of the Cabinet was informed as to what was happening, which is not hard to do.

WALKER: Okay, to finish on a somewhat lighter note, I’ve got an assortment of questions more or less loosely relating to state capacity. 

So, if we laid off the bottom 10% of performers across the APS tomorrow, what would happen in the medium term? Put aside the question of short-term disruption. On a continuum from “the sky falls in” to “nothing happens” to “actually the APS becomes quite a bit more productive,” what happens?

DAVIS: Well, think for a minute about where the workforce is because 10% across the board means 10% fewer people running the NDIS, 10% fewer people in the defence forces. Where are the big workforces? They’re either in service delivery or they’re in defence.

We can talk about what defence cuts might look like, but what it would mean for the big service-delivery agencies — for Services Australia, for NDIS, for the health system — would, in my expectation, be directly felt by the public very quickly.

MORAN: Different parts of that system you can’t tamper with. You can’t not use the health system as we know it to do that side of the problems.

But in respect of things like some of the social-welfare-type programs — like employment services, as was mentioned, and others — you could actually seek to set up a collaborative arrangement with the states and the local-government entities, to be service-delivery agents funded by the Commonwealth.

And the benefit of that is that they’re much closer to the communities affected than would be the companies that might do that work. The way in which companies have done the employment-services work has been remorselessly criticised over the years, but they still get the contracts because the Commonwealth doesn’t want to change it.

DAVIS: Doesn’t want to employ the people that would be necessary to deliver it.

MORAN: Ah, well, no — if you decide to do an arrangement with the local government, as I suggested, all you’ve got to do is give them the money and the guidelines as to what they’ve got to do. 

DAVIS: Yes.

MORAN: And I’ve been talking to the local government recently on this very point, suggesting that they should give it some thought.

DAVIS: [laughs] Indeed. But I guess what you’re saying is: if you’re going to do this damn stupid thing, don’t do it in this damn silly way.

If you’re going to knock off 10% of the workforce, do the prep work in advance and think about the different delivery system, rather than imagining you could make the system more efficient just by firing.

MORAN: Yeah. But no rational government would do it if, correctly, the public service advised them on the consequences at the local level of doing just that.

DAVIS: Yeah.

WALKER: Is there actually a mechanism that exists — say you wanted to lay off the bottom 10% of performers — is there actually a mechanism that exists to do that? Are there grounds to do that?

MORAN: Well, how would you define low performers? 

WALKER: Get managers to give you a score or something.

DAVIS: You don’t do an ordinal ranking.

MORAN: You’d have a revolution.

DAVIS: Yeah. Very few companies would do that, if you think about other players outside of government, unless you had a very reliable system for knowing who your performers were and being able to rank them from one to a hundred, basically. It’s crying out for things going wrong as an approach.

MORAN: Right-wing savants have these dreams, but they don’t work them out in practice.

WALKER: But you’re not calling Joe that, of course.

MORAN: [laughs] No, he’s not a right-wing savant.

WALKER: This is Socratic questioning. I don’t necessarily agree with the questions I’m putting. [laughs]

Okay, next random state-capacity question.

In a congressional system like in the US, obviously the president has greater scope to pick experts from across society to join his or her Cabinet, whereas obviously in our parliamentary system Cabinet’s formed from the parliamentarians. So it’s interesting how many different fields a single minister can potentially be responsible for across the course of his or her career.

Just for illustration, here’s the range of portfolios held by Kim Beazley during the 13 years of the Hawke–Keating Government: 

• Minister for Aviation; 
• Special Minister of State; 
• Minister Assisting the Minister for Defence; 
• Minister for Defence — which is obviously the role he was best known for; 
• Minister for Transport and Communications; 
• Minister for Finance; and 
• Minister for Employment, Education and Training.

So that’s interesting in and of itself. 

Separately, you also have the problem that, as we’ve discussed with respect to ministerial workloads, you’re not just being a minister, you’re also accountable to Parliament. There’s a whole lot of parliamentary business that detracts from your time, at least when Parliament’s sitting or primarily when Parliament’s sitting.

So, just as a thought exercise, holding everything else constant: if we could somehow switch Australia to a congressional model — so our ministers are picked by, I guess in this case, the president, and they’re not members of Parliament — would that be a net negative or a net positive for Australian state capacity?

MORAN: Net negative, in my view.

WALKER: Why is that?

MORAN: Well, because if you look at the American system, you’d say, “Shit, do we want that?” [laughs]

WALKER: Mm. But we hold everything else we love and cherish about Australia constant, and we just change that somehow.

DAVIS: You’re right to point to the trend. In my time as a Vice-Chancellor, I worked with 11 different higher-education ministers, who lasted on average 18 months or thereabouts — maybe two years.

That high turnover, in one sense, it’s why you need a good bureaucracy. If you’re going to turn the ministers over that quickly, that’s where the continuity comes.

But you can’t hold everything else constant and change something as fundamental as the role of ministers. Ministers are drawn from Parliament, accountable to it. It’s Parliament that approves the legislation; it’s Parliament that approves the budget they operate in.

We’ve talked about Cabinet government and executive government, as we should, but it sits in a wider context of a representative democracy. I don’t think you could fundamentally change that in our system. Others have tried.

The Canadians, for example, have a system where you can sort of be parachuted into the Parliament in order to be a minister. Other countries have similar things. 

You could make it work in our system, potentially, but you’d actually be changing more than you think. You’d be changing the legitimacy of a minister to make decisions.

But also, Parliament is a pretty good training ground for the skills you need to be a minister — a pretty good way of sorting out who’s got the capacity. You mentioned Kim Beazley’s many portfolios. I think you could argue that he became a very effective minister over time precisely because he saw so much of government and understood how it worked.

By the time he hit the Defence ministry later in his career, he was a formidable Defence Minister because he brought a decade’s worth of ministerial experience. He knew how the Cabinet worked, he knew how to get decisions made.

You don’t start there — you’ve got to learn. I can remember, again, discussions with premiers about saying, “We could have fewer ministers,” and the premier saying, “Yes, we could. But to be good, you have to first be bad — or at least you have to be inexperienced. And to do that, you need some more junior portfolios people can learn in, so that they acquire over time the skill and the attributes.” You wouldn’t lightly give that up.

MORAN: In the Australian context, ministers are there to provide political leadership, political evaluation of what might be done in a portfolio, and to be answerable to colleagues — i.e. the Cabinet — who are all more or less of the same composition in terms of their experiences.

And my judgment is that it works well. Occasionally, you get people in the private sector saying, “Well, you know, we should just have a few business people in there to really make things fly.” But the truth is, when business people are put onto the boards, or even to be CEOs of government enterprises, it doesn’t necessarily make a huge, great, big difference.

DAVIS: Max Weber talked about politics as a vocation. And like other vocations, it had to be learnt. It needed time. It needed dedicated opportunities, and you need people who are committed to learning those skills.

They are very different skills from being a senior official or being a great business leader. They’re quite a distinctive set of skills, and they have to do with being able to communicate to the public and being able to sense the public mood and bring that into your political decisions. None of that is intuitive. It all has to be learned.

It takes time.

WALKER: And there’s no course, there’s no induction.

DAVIS: Well, there are plenty that claim, but no. It’s the sort of 10,000-hours argument.

That’s why, when we’ve had experiments parachuting people into politics, it’s generally not gone as well as people thought.

MORAN: Yeah, yeah. And so many of the people who did go into politics and ended up as ministers — Kim Beazley being one of them, Gareth Evans being another — they were exceptional performers. And there are others in the same category on both sides of politics.

And so I spend my time talking to lots of senior people in the private sector. I wouldn’t want any of them running a government department. [laughs] Because they’re not attuned to the community’s feeling about things, and the community’s expectations of what a given department might do.

DAVIS: Yeah. I’m less persuaded by that around agency leadership than around political leadership. 

MORAN: Oh, sorry, I meant to be talking about political leadership, as ministers supported by public employees.

DAVIS: Absolutely. Yeah. I’ve seen plenty of very skilled people come in laterally into leadership roles in the public sector and do very well. It can be done, but it’s because running organisations has more in common.

MORAN: And I’ve recruited a few of them, but the good ones are fairly rare. [laughs]

DAVIS: Yeah.

WALKER: So let me ask you a kind of narrower version of the question.

Assume that we don’t change the parliamentary system — but somehow you could guarantee that each minister has relevant expertise in their portfolio. Would that actually be better or worse than the current system of ministers being, I guess, informed amateurs? Because maybe there are virtues to being an informed amateur. Maybe you don’t need expertise; you can bring that in… 

MORAN: I’d put it slightly differently.

I would say that ministers, wherever they come from, should be open to advice from the senior public servants they deal with as to the policies and so forth which should be pursued. And, that being the case, ministers have to be given time to become aware of the nuances they will face looking after a department or agency or whatever.

To an extent, many of them now do have an opportunity to get those skills. And it’s working better here, frankly, than it does in Britain or the United States.

DAVIS: “Amateurs” is a patronising word, and it’s why I’d be cautious about it. 

WALKER: Renaissance people. [laughs]

DAVIS: Being a minister is a profession in itself. And [for] the good ones, it’s not about the content; it’s about judgment, and political understanding, and skills, and the ability to persuade. It’s a set of skills. Yes, content is great, but it’s not the be-all and end-all.

In a sense, part of judgment is being able to look at the advice you’ve been given by your agencies and say, “I’m comfortable with this,” or, “I’m not comfortable with this for these reasons.” And, to go back to Cabinet processes, part of having to write a Cabinet submission like that is you’re telling the minister long before it gets to Cabinet, “This is our understanding of the problem. This is how we’ve proposed to address it.”

And the minister might say, “I don’t share your confidence that you’ve understood the problem.” That’s not uncommon. Ministers send back draft submissions and say, “You’re going to have to show me that this is as you’ve understood it.”

In a sense, they’re exercising judgment. They don’t have the content, but if they’re not persuaded, they’ll say, “No…”

MORAN: Colleagues won’t buy it.

DAVIS: Colleagues won’t buy it, and no citizen will buy it. “That’s not a plausible logic that you’re giving me here — go back and do some more work.”

MORAN: And that’s actually a strength of the system. Not an occasion to amalgamate two different types of work: what a minister’s likely to do as a politician, and what a minister might do running a department or an agency. If you tried to put those two together in the one person, probably neither imperative would fare well.

DAVIS: Yeah. There is the old rhetoric around public servants being experts who are “on tap, but not on top”. In a sense, the profession that the ministers are in is to make those calls.

WALKER: Yeah. It’s interesting that the one exception to this general rule of ministers as informed amateurs is attorneys-general. They’re generally former lawyers. Maybe that’s just because parliamentarians disproportionately are lawyers and so you’ve got—

MORAN: Plenty to choose from. [laughs]

WALKER: Plenty to choose from, or I don’t know — maybe there’s another reason for that tradition.

DAVIS: Well, also, if you’re going to be choosing judges, you want to have at least some expertise.

MORAN: And if you’re a minister who might be dragged before a court at some stage, you’d really like to think that the Attorney-General was competent to give you some advice on what to do.

DAVIS: Because the Attorney-General is considering legal advice and having to make calls on it. In that sense, I think it’s perfectly sensible.

There are ministers who draw on their own professional backgrounds... But it’s a surprisingly young profession, and so people haven’t necessarily got deep professional careers, or other careers, before they come into politics, in a way that was less true in earlier generations.

I mean, we now have a Prime Minister who’s older than the Cabinet — the average of the Cabinet — by a significant margin. That’s probably often true; Howard and others. But if you take the average age of ministers, it’s 40s and 50s, not 60s.

I’m not saying it’s a bad thing. On the contrary, you want diversity and you want span. But to get to be a minister in a government, you’ve usually had to spend a decade in Parliament, or close to it, before you get into the ministry. Which, you start to work back: how long does that give you to develop a deep professional expertise?

So we really are choosing people, we hope, on judgment rather than on content.

MORAN: Yeah

WALKER: Earlier in the year, I had a live conversation with the economists Steven Hamilton and Richard Holden, talking about the handling of the pandemic as a case study in Australia’s state capacity.

DAVIS: I listened to it. It was fabulous.

WALKER: Oh, great. And I don’t know if you can speak to this, or if you even know — maybe this is more a question for you, Glyn. But did you ever get any insight into why the federal government went all in on the AstraZeneca vaccine?

DAVIS: No, I didn’t. And it was a decision made under an earlier government, and I wasn’t in any way involved. So no, I actually have no idea.

WALKER: Yeah. That one still baffles me because even ex ante it was sort of an obvious mistake to put all your eggs in one basket like that.

DAVIS: No, but none of us can see the advice they had before them, and you’re in a global competition for vaccines. And it may have been a pragmatic judgment about what’s possible.

MORAN: Yeah, from what I heard at the time, I think that was probably the reason why they went that way — because they knew they could lock in a supply of very many doses of the vaccine that they might not be able to achieve by going to a number of different suppliers.

DAVIS: So, sorry, we can’t solve the mystery for you.

WALKER: No, no. My search continues. [laughs] My search for answers. But that makes sense. I’ve also heard maybe they were trying to kill two birds with one stone and do some industry policy as well.

MORAN: Oh, that did arise. Yeah.

WALKER: If you could boil it down, what are the specific differences that have meant the National Cabinet has turned out to be so much more effective than COAG?

DAVIS: Well, it had a crisis, and nothing concentrates the mind like a crisis to actually force you to work together.

The test will be — and it’s too early — but the test will be: before and after COVID, the National Cabinet during COVID, and the National Cabinet when COVID was over, and whether life doesn’t return to a more familiar pattern over time, where National Cabinet becomes less effective.

And look, it makes perfect sense. A global crisis that transcends ideology and party affiliation and has to be addressed is a great reason to collaborate and cooperate really effectively. It’s harder to do that when it’s business as usual.

MORAN: I just didn’t see much in it. It was just two different ways of naming something.

DAVIS: The frequency of meetings, I think, was really important. And so they got used to working together in a way that under COAG.

MORAN: But it was still the same people who would have sat around the table for a COAG decision. That’s all I’m saying.

DAVIS: That’s true. I guess there’s something about proximity, about having to spend time together over lots of issues and develop a working comradeship. So it might not have survived even the change of premiers over time.

WALKER: Yeah. I wonder if it’s sort of like that iterated-games thing. It forces you to be more co-operative or something. [laughs]

DAVIS: That’s right. It’s not a prisoner's dilemma, because you’re doing it multiple times.

WALKER: [laughs] Exactly.

DAVIS: That’s right, yeah.

WALKER: Okay, two final questions. Australia’s “talent for bureaucracy” — where does it come from?

DAVIS: Hancock had a couple of explanations when he coined the phrase—

WALKER: Sorry I think it was Alan Davies who coined the phrase in Australian Democracy. 

DAVIS: In Australian Democracy.

WALKER: But you’re right that it draws on themes in Hancock.

DAVIS: Because Hancock has a long description around—

WALKER: Hancock’s famous passage is about Australians viewing the state as a “vast public utility”.

DAVIS: Yes. I do apologise, you’re entirely right. Hancock, though, laments that it’s a very rule-bound public service at the time and has a seniority system. He talks about how, if you want to head the post office, you have to join as a clerk and work your way up over a lifetime.

WALKER: And this is before the days when it’s as meritocratic as it is now.

DAVIS: Yeah. He’s having a dig.

It’s not necessarily all true, because even in the time he’s writing in the 1930s there were some remarkable public service leaders. And then we saw that — and we’ve talked about Coombs — going into the war and seeing Australia through post-war reconstruction. I mean, this is a remarkable group of people.

We’ve always had a large state because of the nature of how we were set up by the British. That really mattered. We have actually been a democracy longer than most countries, so we’ve had longer to develop our system. I know that sounds strange, but it’s actually not. You can run a credible argument that New Zealand is the oldest continuing democracy on the planet, and we’re not far behind. That’s because we had universal suffrage, if that’s the mark of a democracy. 

WALKER: From the sort of 1850s-ish?

DAVIS: Well, we didn’t…

WALKER: Universal male suffrage.

DAVIS: Male suffrage. But we had universal suffrage from the early 1900s, and New Zealand was a decade ahead of us on that.

And so you’ve had to have governments that work with the entire population for 125 years. Even the United States didn't get full female suffrage until the 1920s, and then it takes the laws of the 1960s to make sure that voting rights are available more widely. Whereas we’ve had a genuine democratic system for a very long time. I think that’s a part of it. 

We’ve had an activist state; that’s a part of it. 

We’re isolated, so we’ve had to fall back on our own circumstances; that’s part of it. 

But I’ll have to go back and look at Davies to see if he offers an explanation of why.

WALKER: He doesn’t really. You’d probably find it more in Hancock than Davies.

MORAN: Well, it’s not so much what has been written as what some of the old hands say about the Victorian public service. In the late nineteenth century, following the release of the Northcote–Trevelyan Report in London, the Northcote–Trevelyan Report was picked up as a basis for how you would organise the Victorian colonial service or public service. This is before Federation.

When we federated, the basis of the Federation was in Victoria, and many Victorian public servants were transferred across to the new Commonwealth public service. They took with them an understanding of the Northcote–Trevelyan principles about merit-based recruitment and advancement on merit, and so on and so forth.

So a lot of the features of the public services in Australia, but particularly the Commonwealth and Victoria, come from historical accidents over a century ago. That wasn’t towards any ill result; it was just that we were greatly influenced by what the British were doing.

DAVIS: Yeah, that clearly does matter.

MORAN: Yeah.

DAVIS: It probably helps that we don’t have an aristocracy.

MORAN: It’s a pity, actually, isn’t it? They could go in the Senate. [laughs] 

WALKER: Why does it help that we don’t have an aristocracy?

DAVIS: Because in the British civil service and the British Army you had to buy [positions].

MORAN: That was in the nineteenth century. 

DAVIS: Yes, in the nineteenth century. But we never had any of that in the same way, so we didn’t have to overturn a set of cultural traditions that were so much more embedded.

Northcote–Trevelyan basically said, “It’s time to begin change.” But the change takes a long time, and they recommend, interestingly, that we learn from the Chinese and use civil service exams.

MORAN: And merit-based recruitment and advancement.

DAVIS: Yeah.

MORAN: And that was early in its introduction into the Victorian public service and spilled over into the Commonwealth public service after Federation.

DAVIS: Yeah.

MORAN: So it’s a bit of good luck, in my view.

DAVIS: Yeah, I think that’s a fair call. We’ve been very fortunate and well served by it.

MORAN: And so when you look at the States — you are not going to like this — but I used to go around talking about New South Wales as the home of the Rum Corps, which it sort of was. [laughs] 

DAVIS: I think the New South Wales administration improved, though, over time. [laughs]

MORAN: There were some people we both know that I liked taunting with that remark. They never liked it. [laughs]

Anyway, the point is that Victoria was the state that, in the lead-up to Federation, had a chance to form a public service on the British model. And then, after Federation, it exported into the Commonwealth those people who knew that system when they were working in Victoria and were instructed in the principles of merit-based recruitment and all that sort of stuff.

DAVIS: If you were going to be a sceptic, though, you’d say the abiding Australian fault was the seniority system that we imposed. Certainly the criticism of state systems — perhaps less in Victoria, but certainly strongly in Queensland for a long time — was that it was a very seniority-based system.

WALKER: And sorry, that’s promotion based on length of time served?

DAVIS: Length of time served, as opposed to merit application.

MORAN: Well, when I first became associated with the Victorian system, there was a very strong merit system, including merit-based recruitment in the first place into the public service. And the Commonwealth used to do that.

Another bit of history is that, when Sir Robert Menzies was Prime Minister, he was despairing of the then Commonwealth public service. He was told that the only person who could fix it had to be forgiven for the things he’d done in the past that the Liberals didn’t like, and he should be brought back to Australia from Switzerland, where he was in a very comfortable appointment, to take over reform of the Australian public service. And that was Fred Wheeler.

DAVIS: Fred Wheeler, yes.

MORAN: So Fred came back and took up the position of Chairman of the Commonwealth Public Service Board and set about a whole series of merit-based enhancements of how the Commonwealth public service worked.

When Menzies was Prime Minister and dealing with the Liberal government in Victoria, the Commonwealth reforms in Canberra had gone so well that he sent somebody down to aid Lindsay Thompson, who was then the Premier, to look at why the Victorian public service was so hopeless.

Basically, the recommendations out of that led to recruitment of a new top level in the Victorian public service, including a new chair of the Public Service Board, who was Ron Cullen, you might remember. So the Commonwealth and Victorian public services advanced under the influence of the Northcote–Trevelyan Report, with its emphasis on merit both for recruitment and promotion.

It’s a fairly conventional view of what public services should do. We were lucky here, whereas the Rum Corps ruled the roost in Sydney.

WALKER: [laughs] It’s a really interesting point. I had never really realised that point about the Victorian public service playing such an important role.

Victoria, just generally — Melbourne in particular — feels like it’s had an outsized impact on Australia’s kind of Benthamite view of government, if you think about people like David Syme and Deakin. And Henry Higgins was from Melbourne, I think?

MORAN: Yeah, I think so.

DAVIS: So David Kemp, though, would argue in his history of liberalism that Victoria was the tariff, closed-economy state, and New South Wales was the one that was much more committed to liberal trading rules. Victoria was slow to catch up.

He would, as others have done, argue that the depression here of the 1890s was largely self-inflicted on Victoria because it failed to follow open-economy-type arrangements, as opposed to New South Wales. And that’s when Sydney overtook Melbourne as the largest city in the country.

MORAN: And the public service that Victoria had then was still not too sympathetic to the sort of economic policies that prevailed in New South Wales, largely because it would have had the effect of basically reducing the influence of the public service.

This is one final point. I came in and out of the Victorian public service going back a fair way, and I was told at one stage — it was Ron Cullen who told me this — “Look, the biggest problem the Treasury has got is that they don’t employ economists.” [laughs]

Which is a fair comment, actually. And so the whole top end of the Victorian Treasury was changed to bring in a lot of economists, and things improved.

DAVIS: Your friends.

MORAN: Oh, that’s cruel. [laughs]

WALKER: [laughs] One other thing that’s just occurred to me, semi-related to what we’ve been talking about, is that Australia has maintained a distinctively Cabinet form of government, unlike the other Westminster systems like the UK and Canada. I wonder to what extent that’s connected to our egalitarianism, the equality of manners; we don’t like leaders with too much auctoritas, or the appearance of too much auctoritas, at least.

DAVIS: I’m wondering, though, whether we’re not overstating the changes in the UK, given the earlier conversation about the fact that governments reform around the personality of the prime minister to a certain extent.

Whether the UK has probably got a wider range of experience than that might suggest. Again, people have been talking about prime ministerial government for a very long time — decades and decades — but it’s actually harder to see a trend that says this is definitively happening. You can see highlights and then times when it’s [less so].

I keep coming back to the idea that any system where the prime minister can be assassinated by their colleagues is one with a self-limiting control over prime ministerial power. [laughs] 

WALKER: Good point.

What do you think is a great book that remains to be written about either an underrated individual in the history of Australian government or just the mechanics of government? I’ll give you an example of a book I’d love to see written. I’d love a historian to gather up all of the red and blue books of the losing side and write a counterfactual history of Australia, speculating on what might have happened if the other party had won government. But what do you think is a great book that remains to be written?

MORAN: Glyn’s analysis of public policy in Australia over the last century. [laughs]

DAVIS: [laughs] It’s a great question. I’d like to read that book. 

And people don’t know about blue and red books. 

WALKER: Do you want to just give them a second explanation? Because people listening might not know.

DAVIS: So each time there’s an election, PM&C (and it happens at the state level as well) forms up two teams: a blue team and a red team. Not individuals who share that political view, but as a professional task.

WALKER: Red for Labor, blue for the Coalition.

DAVIS: That’s right.

MORAN: I think I started that pattern when I was there. 

DAVIS: Possibly.

MORAN: Because all they ever did was the red book, and I said—

DAVIS: Really?

MORAN: Yeah, for whoever happened to be government. Whereas what you needed was for both sides to have their policies analysed in terms of what needed to be done.

WALKER: Wait, so do you think you might have started that in Australia or just in Victoria?

MORAN: Oh no, yeah. I’d done it in Victoria.

WALKER: And then everyone copied it?

MORAN: No, I just did it when I was in PM&C.

DAVIS: I just took it for granted. Maybe it’s a more recent tradition than [I realised]; I took it for granted that it was long-standing.

So, coming into the election, these two teams track every announcement by both sides. Then they try to provide policy briefs for an incoming prime minister — whoever is elected — that say, “This is what you’ve committed to. Here’s the program you’ve said you’ll implement. Here’s our analysis of timelines and costs.” It’s a really thorough piece of work. And then, as you say, after every election, one of them gets — well, you keep a copy.

But symbolically you’re throwing it aside because it didn’t matter. But they all exist, and they’re really, really detailed.

The head of PM&C usually meets with the leader of the Opposition in the course of an election to discuss the book.

MORAN: It was fun meeting with Tony Abbott.

DAVIS: Okay, well, I met with Peter Dutton and we had a very respectful discussion about, if he were successful, here’s what we’re ready to do. Here are the arrangements for election day and the day after.

WALKER: Oh wait, so you actually talk to the leader of the Opposition? 

MORAN: Oh yeah. It’s part of the process. 

DAVIS: Yes.

WALKER: I thought that conversation would only happen if they won government. You’d say, “Here’s the book.” But you show them the book?

DAVIS: No, you don’t show them the book. You just let them know what work is happening.

MORAN: And what they can receive should they be elected to be the first minister.

DAVIS: It goes down to particular examples like, “This is when we would meet on the day after, and this is what we would bring.” So you’re briefing them on what the process is going to be on election day and afterwards, but what you’re telling them is, “We’ll be bringing you this — basically your manifesto.”

It’s as thorough as we can make it, but the reason we want to give it to you as early as possible is that you — or your team — need to go through it and make sure we’ve accurately captured what you [want]. 

There’s always a problem because individual candidates announce things, so what is definitively [the program is not always clear], and that’s why you go through it with them.

It’s a very important process. And it means the bureaucracy is attuned to what the alternative government would want to do and has already begun thinking about how to go about doing it. I think it’s a really important tradition.

MORAN: So what I’d done down here — and I did it in PM&C as well — on top of all of that, was get the first minister’s department to prepare an analysis of current policy issues of importance, which may require some action and how you might take that action.

Invariably those papers — which weren’t just geared to things a particular party had promised — they were just the department’s view of what was really pressing at the moment and what was potentially a bit dangerous. And they were always well received.

DAVIS: Yeah. It’s an understood process, and so both sides have an investment in it. It’s really important. It’s good.

MORAN: And it’s a way of demonstrating that the first minister’s department is on the ball.

DAVIS: Yeah, that’s true as well. And the Treasury does the same; it’s not just PM&C. 

WALKER: All the departments, right?

DAVIS: They all do it for their portfolios, but Treasury and PM&C tend to do broader because—

MORAN: They’ve got a better, broad view of things than those two departments.

DAVIS: So an incoming government would expect to get detailed advice on day one about their program. And they’d be right to expect it — and they get it.

MORAN: And what I did down here before going to Canberra was not only prepare that, but then get a professional editor to come in and turn it into plain English. [laughs] And then get a professional designer to come in and turn it into a publication in a magazine style. And when I did that for Julia [Gillard], she really liked it.

DAVIS: Well, I can tell that tradition continues, because that’s how it was done.

MORAN: Oh, that’s good. You mean I had an impact? That hasn’t gone away! [laughs]

Or you had the same ideas—that’s probably the story.

DAVIS: No, no. The tradition is that it has to be accessible. It has to be written for people who haven’t been in government recently, so you don’t put it in a standardised government format, you put it in…

MORAN: That’s right. And what I did down here — and I think I did it in Canberra as well — was say to the people doing it, “We’ve got to put in some nice photographs, some nice graphs on some of the issues.”

WALKER: It’s quite nice, quite flattering.

MORAN: Well, no. The model is a magazine that you would like to read.

WALKER: [laughs] Yeah, that’s clever. But what’s a great book you think remains to be written about how the government works? So, Terry, you’d like to see Glyn’s—

MORAN: Yeah, no, I’m all for Glyn writing it. [laughs]

WALKER: [laughs] Glyn, what’s your answer?

DAVIS: It’s a great question. Having somebody interview a series of prime ministers after they’ve left — to do the compare and contrast: how they understood the role, what they were trying to do, how it worked.

PMs all write their autobiography — and so they should — and that’s a useful thing to read. But having a Pat Weller go in and ask, [and do] the same interviews, so that we get a sense of how the role looks when you sit in it —because it’s so fast; it happens so quickly while you’re there that you must come out of it at the other end slightly shell-shocked by all of it.

It would be great if we could arrange for someone to walk them through it while they’re still with us and while the memories are still moderately fresh. Almost a process where, six months after you finish as prime minister, you go to the National Library or somewhere and somebody interviews you at length. And there’s a tradition of being frank, and maybe you don’t release it for 20 years or whatever, so people can say what they experienced. That is what I would like to read.

But the book I would really like to read about Australia is actually none of those. You can’t do it — there’s no way to do it — but wouldn’t it be fascinating to hear how the first Australians landed in this country, and how they dispersed, and what they discovered, and how it looked to the first human eyes to see this continent? Wouldn’t that be the most fascinating thing?

MORAN: Yeah it would be.Well, it’s been fun.

WALKER: Thank you both. Really enjoyed it.

DAVIS: Absolute pleasure.

1. My new podcast conversation, with Hugh White. There are too many good excerpts to highlight them all. At the bottom of this email, I've included just five. I recommend the whole thing.
2. Apply to interview me for my end-of-year retrospective episode.
3. I'm late to the party in sharing/praising it, but the Grattan density report is excellent.
4. Chad Jones on AI and economic growth.
5. 'End of The Line: how Saudi Arabia’s Neom dream unravelled', from the FT.
6. 'Inside Cursor', by Brie Wolfson.
7. Gavin Leech looks at the current state of Chinese LLMs.
8. Robin Hanson and Joe Henrich chat about cultural evolution.
9. Samuel Hughes on the Great Downzoning in the West.
10. 'Some people can't see mental images: the consequences are profound', New Yorker article by Larissa MacFarquhar.
11. Matt Clifford speech on UK growth.
12. John Collison on Irish abundance.
13. Rare interview of Watson and Crick together.

Thanks, and have a great weekend,‌
‌‌
‌‌
Joe

Five excerpts from my podcast with Hugh White

1. The first time Hugh participated in a conversation about going to war

JOSEPH WALKER: Any anecdotes about your time, your five years as Hawke’s international relations advisor, or before that, working for Kim Beazley when he was Defence Minister? Any anecdotes you haven’t shared publicly that you can share with me today?

HUGH WHITE: Well, I think one moment… And, you know, most days in the office when you’re working for a minister are much like every other day. 

But sometimes something happens.

One of the most interesting moments was in May of 1987, when the first Fijian coup occurred. A Labour government, as it happened the Fiji Labour Party, had been elected a week or two before, and the Fiji military pushed it out and tried to take its place.

I was working for Kim at the time, and Kim and Hawke and Gareth Evans, who was acting foreign minister — Bill Hayden was the substantive foreign minister, but he was overseas — were gathered in Hawke’s office and started talking about how to respond.

I insinuated myself into the conversation after they’d been at it for a while, and I was surprised to discover they were seriously considering a military intervention. This was the first time in my professional experience — and I’d only been in the business for seven years at that stage — that I’d been, so to speak, witness to, participant in, a conversation about, in very broad terms, ([and at an] almost trivial scale) going to war, using the armed forces in that kind of way.

These were three very sophisticated people. What I’m about to say is not in any way a criticism of them. I know them all well and admire them all immensely. But the idea that we might send the ADF to overturn this coup and restore the Bavadra government was very seriously uppermost in their minds.

I was fascinated by how quickly even these very sophisticated people, who were all absolutely of the generation who’d learnt the lesson of Vietnam and all through the 1980s were extremely allergic to the idea of using armed force precisely because Vietnam had been such a traumatic experience, it was an idea that came to them very naturally. I never forgot from that how...

Now, in the end, of course, they decided not to. Or rather, they kind of decided not to. We did deploy the ADF, but not to overturn the coup. Just to make sure that if any Australians got into trouble, we could rescue them. But that in itself was a halfway acknowledgement of the fact that they wanted to do more.

They quickly reached a very sober and conscious and correct decision that an intervention would be a mistake, that it wouldn’t work.

But the fact that they initially thought this was something they really wanted to seriously consider taught me a lesson about the way governments and people react in such situations.

Now, to compare that to the British Cabinet on 2 August 1914, weighing whether to go to war with Germany, is trivial at one level. But for me it just illustrated that these decisions are made by very few people, often on very short timeframes.

We touched before on the idea of whether Australia would decide to go to war, support the United States in a war with China over Taiwan. If the Chinese do attack Taiwan, the decision confronting Australia will need to be made within hours, and it won’t be made by the full Cabinet. It’ll be made by three or four people in the Prime Minister’s office.

The question is, are they prepared to make that decision? Have they thought about it? Do they think they’ll have long to think about it when the time comes? So that experience, trivial in itself, of watching ministers confront that choice of peace or war for the first time — and it was not the last time, because I was involved in other decisions about conflicts later on, bigger conflicts — but there’s always something about your first time.

WALKER: Was there anything in particular that surprised you about it, watching them wrestle with that decision?

WHITE: Just that the idea of going to war seemed appealing.

WALKER: Right. It was a decision that they could make.

WHITE: It was a decision they could take.

It was a decision they quite wanted to take — and decided against it. And decided against it for the right reasons. I don’t think their approach or their processes were inappropriate or illegitimate, and I think their decision was the right one.

But it was striking to me... And these were very sober people. These were not silly people.

2. Hugh's brand of realism (more Carr than Morgenthau)

WALKER: So can you tell me your understanding of Carr's realism?

WHITE: Right at the heart of Carr's argument is the idea that you have to be — not surprising for someone who’s writing about those decades — you have to be extremely conscious of the costs of what you're trying to achieve. You don't want to abandon hopes for a more orderly and disciplined international system, a more peaceful international system, but you have to be extremely conscious of the real costs of doing that, including the risk of war. One of the points he makes is that people in the post-First World War era underestimated the significance of armed force. 

In particular, as you contemplate the management of change in the international system, you have to put a very strong priority — not an overwhelming priority, but a very strong priority — on the imperative to manage that change peacefully.

What for me is one of two really key passages in the book ... is the one in which he critiques the idea that everybody really wants peace. Of course at one level, he’s right: everyone wants peace.

But in the words of Jackie Fisher, the British admiral who built the Royal Navy before the First World War, who thought about this stuff, Jackie Fisher said something like, “Oh yes, peace. Hmm. Everybody wants peace. But they want the peace that suits them.”

WALKER: Exactly.

WHITE: Carr has a line in which he says something like, “The universal declaration everyone makes that they want peace conceals the fact that some people want peace in order to preserve the international system, and others want to change it peacefully.” In other words, they want to improve their position without having to fight for it.

He's stressing that the idea that it's going to be easy for us all to agree on an international order which we're all going to be happy with is just not realistic. That's the first point about realism.

The second is that when confronted with a force, a country, that wants to change the international order, there's a kind of presumption — and for someone writing just before 1939 this is a very big thing to be saying — that somebody who wants to change the international order must by definition be in the wrong, and that it's always right to fight to preserve the international order and always wrong to fight to change it. But actually change is natural, and in some circumstances it might be as wrong or wronger to fight to preserve an old order than it is to produce a new one.

It's probably obvious why I think that's an important set of judgments, because that's where we are right now. As we ask ourselves, should we go to war with China over Taiwan — not a hypothetical question — clearly we're facing a China that wants to change the international order. The question is: are we so sure that the international order that we like, that we're used to, that we support, which tellingly we call the "rules-based order"...

The image of the rules-based order that we have, that we say — I think, ahistorically — emerged after 1945, is really a very Wilsonian image: the image of a world basically run by American ideas. Not that I've got anything against American ideas; I'd love it if this world worked. I just don't think it's realistic. 

But the idea that we live in a rules-based order and that China is challenging the rules-based order, and therefore we're justified in doing whatever it takes, including, if necessary, going to war with China in order to preserve it, which is the orthodox view of the mainstream of American foreign policy (though not the Trump administration...), is also the essential underpinning of Australia's position on these issues, certainly the underpinning implied by AUKUS, for example.

We've got to ask ourselves: is that right? Are we so justified in thinking that preserving the existing international order is so important that it's worth going to war to preserve it?

And of course that judgement has got to be heavily based on a judgement about what kind of war we're talking about. Well, in this case, we're talking about a nuclear war, almost certainly. So I would say — and I think Carr would have said too if he was alive and with us today — that we're much better off (going back to Taylor) trying to find a way to adjust the international system to accommodate China's power, rather than putting ourselves in a position where we find ourselves with no option but to fight to contain it.

Now, the point about that second sense in which that's realistic — my sense of realism — is that that doesn't deny the attractiveness of preserving the features of the current international order that we like. But it weighs against them the costs of doing so, the real costs of doing so. And if the real costs of doing so are fighting a nuclear war, then that cost is too high.

You've got to make a choice. It's a difficult choice. It's a choice between an order which in some ways is going to be less congenial to us, just as poor old Sir Edward Grey and his colleagues faced a choice between a Europe in which Germany's strength and power would be disagreeable, on the one hand, or the costs and risks of a war that would make the First World War look like a picnic.

Because I do think there's absolutely no reason to expect a US–China war over Taiwan not to become a nuclear war. Unless America starts the war and then surrenders quickly. Which is not the worst of all possible worlds. Nuclear war is the worst outcome. But whatever happens, you end up with a war that looks a bit like the First World War. That is, countries go into it hoping to preserve their position as great powers and then end up destroying it.

3. Appeasement done properly

WHITE: The evidence is reasonably clear: Hitler did not expect the British to go to war over Poland. Because although Chamberlain had stood up in the House of Commons and said that Poland was given a security undertaking, they didn't do anything to implement it. And they were right: actually the British did nothing to defend Poland.

So you could argue — I would argue — that the mistake they made in the lead-up to the Second World War, viewing it more narrowly, not in the very broad way that Taylor views it, wasn't that they didn't go to war over Czechoslovakia. It's that they didn't absolutely, unambiguously draw the line over Poland, given that Poland was where they decided to stop appeasing. There's a message for us in that.

We keep on saying, “You must not do this.” You know, “You must not invade Ukraine.” Then we don't effectively resist the invasion. That's a big mistake. I'm a big believer in appeasement — that is, I’m a big believer in making concessions to avoid war. But to avoid war through making concessions, you have to make it absolutely crystal clear where the concessions stop.

The idea that you can never appease, because whenever you give something the other guy always asks for more, that's only true if you fail very satisfactorily, very compellingly, to draw the line and say, “This is where we stop appeasing.”

Now, the Cold War is the absolute object lesson in this. What happened in the Cold War — you might say at Yalta — the Russians were appeased, essentially by FDR with poor old Churchill tagging along behind saying, “Yes, you can do what you like in Poland,” and, of course, they can have their half of Germany. But then they drew a line down the middle of Europe and said, “We will go to war over this.”

It was effective deterrence based on effective appeasement. If the Allies at Yalta in 1945 had tried to deny Russia the hegemony it sought over Poland and the rest of Eastern Europe (but Poland's the one that everyone focuses on), then they would have faced a war with the Red Army in Europe in 1945. And the Red Army was very, very good and very, very big. That would have been an unimaginable disaster. Tough to say to a Polish audience — and I've done it — but it was the right decision to make.

But then they drew a line down the middle of Europe and said, "No further," and made that line absolutely compelling. How? By sending hundreds of thousands of American troops to garrison it and by backing them up with an unimaginable nuclear arsenal. Now that's deterrence.

4. Which one of the 11 books would Hugh impress on Australian statesmen and women?

WALKER: If you could force every Australian statesman and stateswoman to read only one or two of these eleven books that we’ve discussed, which would you pick?

WHITE: Oh, that’s a good one.

The Origins of the Second World War.

WALKER: Huh.

WHITE: It’s the hardest. It’s the starkest. It’s the one that most challenges you.

WALKER: If you could somehow guarantee that every member of the CCP’s Politburo read a Mandarin translation of one of these books, would it also be Origins of the Second World War?

WHITE: They’ve read them all.

That’s the point. They understand this much better than we do. I wouldn’t say the Politburo, but the Standing Committee. That’s the point. They’ve thought about this a lot.

Our problem is not that they don’t understand what they’re doing. In some ways, our problem is that they do understand what they’re doing and we don’t.

5. If we take WWI and WWII together, what is the grand parsimonious explanation unifying those two events?

WALKER: If we take World War I and II together, what is Hugh White’s grand, parsimonious explanation of those two events?

WHITE: It’s the collapse of the very stable and successful European order of the 19th century, caused by a fundamental shift in the distribution of wealth and power, both within Europe, with the rise of Germany; with the rise of Russia/the Soviet Union coming out of nowhere; the collapse of the Ottoman Empire, which fundamentally destabilised relations particularly between Russia and Austria, which was a big part of what happened in 1914; and with the rise of Japan, and the relative decline of Britain, and of course the rise of America. 

So you’d had this very stable international order all through the 19th century, which didn’t mean they didn’t have wars. They did have wars. But the wars didn’t become systemic. The Germans fought the Austrians, or the Germans fought the French, or the British and the French fought the Russians, but they were contained and they didn’t lead to fundamental change.

Whereas once you get to 1914, the whole thing comes apart at the seams. It came apart at the seams in 1914. They failed to put it back together in 1918. The same problem — with Hitler added as an additional appalling catastrophe — but it was the same fundamental problem in 1939. And having destroyed Germany, or at least having destroyed that German challenge, because of the way Western Europe evolved after 1945, Russia of course takes its place.

So the whole unfolding of the 20th century, through indeed to the end [of the Cold War] — because I’d include the Cold War — is the unpacking of the consequences for the European order of those fundamental shifts in the distribution of wealth and power which really occurred in the 19th century. They continued in the 20th century, but a lot of what happened in that continuation was driven by the wars themselves. Russia emerged as the strongest power in Europe because it was the one that survived the Second World War best.

Hugh White is Australia's foremost defence and strategic analyst. He has served as senior adviser to Defence Minister Kim Beazley and Prime Minister Bob Hawke (1985–91), Deputy Secretary for Strategy and Intelligence in the Department of Defence (1995–2000), and founding Director of the Australian Strategic Policy Institute (2001–04). As Deputy Secretary, he was the principal author of Australia's 2000 Defence White Paper. He is now Emeritus Professor of Strategic Studies at the Australian National University, where he has taught since 2005. His books and essays include The China Choice, How to Defend Australia and, most recently, Hard New World: Our Post-American Future.

Months before we sat down to record, I asked Hugh for the books that had most shaped his thinking on strategy, international relations and defence policy. He sent me a list of eleven. In this episode we work through them one by one, book-club-style — what each book argues, what it gets right and wrong, how it influenced Hugh's worldview, and what it says about the big questions: Why do great powers start wars that ultimately destroy their status? What really drives the collapse of international orders? Can change be managed peacefully? And how should Australia and America respond to the rise of China?

I really enjoyed preparing for this episode. I’m embarrassed to say I didn’t have a better-than-average understanding of the causes of WWI or WWII beforehand. If you’d asked me to explain 1914, I might have given some vague answer about the assassination of Franz Ferdinand, half-remembered from high school history class. For 1939, I probably would have said ‘Hitler’. This episode has convinced me that a decent understanding of the causes of the world wars should be table stakes for public intellectuals and political leaders alike. (And to be clear, I still don’t feel like I understand them as much as I’d like!)

As for Hugh, Hugh is a mensch. I’d long been aware of him and had read some of his essays over the years. It wasn’t until last year — preparing to interview Richard Butler — that I read parts of Hugh’s 2019 book How to Defend Australia. That experience elevated him to a special group of intellectuals in my mind: truly independent thinkers. He wrote a chapter about the circumstances in which Australia would be justified in considering exiting the NPT and acquiring nuclear weapons. It’s written with an appropriate mood of gravity and sombreness, and it showed intellectual bravery — that he’s willing to follow the argument where it leads and to leave no stone unturned when it comes to keeping the torch of liberty aflame in the South Pacific. My respect for him was much deepened after that.

I hope you enjoy our conversation!

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Transcript

JOSEPH WALKER: It's my great honour to be here with Hugh White. Hugh is maybe Australia's most prominent strategic thinker. He has been thinking about Australian strategic and defence policy for decades. He's held positions at the pinnacles of multiple different domains — in government, the public service, journalism, academia, think tanks.

He was an advisor for Kim Beazley when Kim was Defence Minister, for Bob Hawke when Hawke was Prime Minister. He is currently an emeritus professor at the Australian National University. And he's the author of multiple books and Quarterly Essays.

We're doing something a bit different today.

Hugh, I'd actually been wanting to do an interview with you for years. But you've done your fair share of media and I wasn't sure how much I could add to that body of work.

And so I asked our mutual friend, Sam Roggeveen, you know, “Is there a great interview kind of locked up inside Hugh?” And Sam said that, at least to his knowledge, no one had gone into your philosophical and historical underpinnings.

That gave me the idea, why don't we sit down and talk about the books that have most influenced you, most shaped your worldview, because I think it'll be increasingly the case over the next few decades that people will look at you as a very prescient prognosticator.

HUGH WHITE: I hope not [laughs].

WALKER: [laughs] Well, exactly. That's right. I guess there's a distinction between what you think might happen and what you want to happen.

WHITE: Exactly.

WALKER: Which maybe sometimes people forget.

WHITE: Yes.

WALKER: But I think it will be really interesting just to look at the sort of intellectual bedrock underneath your views.

Just for people who aren't familiar, maybe the thing that you've been most clearly and consistently describing in the Australian discourse over the last few decades has been the rise of China, how China is going to become the dominant power in East Asia and the Western Pacific, and how Australia needs to adjust accordingly.

So I asked you whether you could put together a short list of the books that have most influenced you. 

For people [not] watching the video, Hugh and I can't quite see each other right now because there's a stack of books between us on the desk [laughs]. So, this is the “short list”.

WHITE: [laughs]

WALKER: So, we have 11 books and we're going to go through and discuss each of them. I've endeavored to read at least parts of all of these books, if not the whole thing. And I guess we’re going to compare notes and then we'll discuss some specific questions about each book. And then at the end, I've got some general questions. 

So, are you ready?

WHITE: I'm ready to go. Thanks very much. Really appreciate the opportunity. It's been a very interesting exercise for me to revisit these books and think about how one's ideas have developed.

Donald Kagan: The Outbreak of the Peloponnesian War [03:44]

WALKER: The first book is The Outbreak of the Peloponnesian War by Donald Kagan.

So, for each book, I'll give a brief background of the author, a blurb for the book, just so our audience has context, and then we can start talking about it.

First published in 1969, the author is Donald Kagan. He was an American historian and classicist at Yale specializing in ancient Greece. And he taught a very popular course at Yale for decades called The Origins of War (I think one of the most popular courses at the university, period).

He wrote four volumes on the Peloponnesian War, and this was probably his best-known scholarly work. And this is Book One of those four volumes.

If I condense the thesis down into a sentence or two, for me, the question he's trying to answer is, at what point did war between the Athenian Empire and the Peloponnesian League become inevitable? So, what was the threshold?

And he concludes, in contrast with Thucydides, that the war was not inevitable. It was avoidable, possibly right up to the last minute, potentially even after the Megarian Decree, when the second Spartan embassy requested that the Athenians rescind that.

We can explain what all that means. But my first question is, do you buy Kagan's basic account of the causes of the war?

WHITE: Yes, I do. I mean, what he's trying to do in the book, and the reason why he wrote a whole book on the outbreak, as you say, as the first volume of his multi-volume analysis of the whole thing, is to interrogate this line in Thucydides, very famous line in Thucydides — who, of course, was the Greek general who himself was involved in the war and wrote, in some ways, the first real history of anything and a wonderful book in itself. (It’s sort of perverse of me in some ways to have suggested Kagan rather than Thucydides as the book that has most shaped my thinking about these things.)

But what Kagan set out to do in the book was to interrogate the proposition that is in Thucydides. Thucydides said the rising power of Athens and the fear that caused in Sparta made war inevitable. At least, that's the way his Greek is usually translated into.

WALKER: And then there's obviously a debate around whether he meant inevitable literally or just as something like “very likely”.

WHITE: Exactly, exactly.

And so the whole book really is an interrogation of that question. And in the process, what he does is to give a very detailed — I mean, considering we're talking about the fifth century BC, astonishingly detailed — account of what steps actually led to the war.

And as you say, he comes down very strongly on the idea that it wasn't inevitable, that there are all sorts of points at which the war could have been avoided.

It's a terrifically interesting analysis from my point of view, because it has throughout history, since then, always been seen as such a sort of quintessential example of strategic analysis. I mean, Thucydides' book is such a quintessential, sort of primary example of strategic analysis. But also because it does seem to resonate so directly with the choices that we face today. People addressing the US-China rivalry have spoken very explicitly about Thucydides' Trap.

And not just the scholars. Xi Jinping on a visit to the United States a few years ago, in a speech in Seattle, specifically spoke about Thucydides' Trap. Is war between a rising power and an established power — a rising power like China and established power like the United States — inevitable?

And another US scholar, Graham Allison of Harvard, wrote a book which has become very famous in which he does specifically analyse that question.

So, to go back to the original, to see Kagan's painstaking analysis of what was going on in fifth century Athens, what drove the slide to war, and which was, indeed, a catastrophic war for both sides in the end. The way in which he unpacks Thucydides' initial distinction between ultimate causes and proximate causes... the big movements in history in the background, and then the little things that happen day by day.

I found it when I first read it — which was sometime in the '90s, when I was starting to think about the implications for Australia of the rise of China, and what that meant for America's role in Asia and so on — a very compelling model for how you think about these questions.

And indeed, his answer is extraordinarily complex as you just sketched. There are very big questions about the way in which Athens' position in Greece after the Persian Wars, after the victory over Persia, evolved: the creation of Athens, the Athenian-led alliance, which was really an Athenian empire; the challenge that posed to the traditional Spartan position in the Peloponnese; the fact that there were different kinds of power… Sparta is quintessentially a land power. It's got a great army. Athens is quintessentially a naval power, a maritime power, which itself is very, very resonant.

And the way in which he describes those background forces and then all sorts of stuff happening. And what's fascinating about the outbreak of the Peloponnesian War is it starts with an internal dispute in a two-bit little town that nobody had heard of called Epidamnus, which is on the coast of what's now Albania.

And it drags in other countries — cities. It drags in Corcyra, what's now Corfu. Drags in Corinth.

By dragging those two in, the Athenians are dragged in. It's a fascinating account as to why that little dispute drags these other powers in. 

And then that starts to worry Sparta, and then the Athenians do some stupid things, as Kagan argues. The Corinthians do stupid things. The Corcyraeans do stupid things. The Athenians do stupid things.

Oddly enough, it's the Spartans who come out kind of as not exactly the heroes, but they do fewer stupid things than anybody else.

And that combination of grand shifts in the distribution of wealth and power on the one hand, and events, and people's response to them — failures of imagination, as Kagan says actually in his ultimate chapter: people didn't understand, didn't see clearly, didn't have the imagination to see the likely consequences of the steps they took — produced a war which they didn't have to fight.

One of the really important conclusions Kagan reaches is that Athens really wasn't threatening Sparta's position — that Pericles, the great leader of Athens at the time, did accept the basic deal which had been done between Athens and Sparta at the end of an earlier confrontation, what's called the First Peloponnesian War. And so Athens wasn't really threatening Sparta at all, and the Spartans probably kind of understood this, but somehow things got out of hand.

And of course, when you tell the story like that, it feels very familiar. And feels very frightening. Because it does seem to offer, from 2,500 years ago in an unimaginably different social and political and geographic and military and technological setting, a set of propositions which are scarily resonant to our present predicament.

WALKER: Right.

WHITE: If you study the plays, the great plays, or you study the great philosophers, the dialogues of Plato, the Socratic works and so on. You can't help but not just be familiar with it, but in a way to love it.

And so the sense of fifth century Athens, this was one of the most amazing moments in history.

And yet they couldn't avoid these screw-ups. The same community that could produce Sophocles and Euripides and Socrates and Plato could produce these mistakes.

That's a warning.

WALKER: [laughs] So many analogies to be drawn. I mean, obviously you can think of Epidamnus as like Taiwan, but...

WHITE: Yes.

WALKER: ... plenty of analogies to World War I as well.

WHITE: Absolutely. I mean, Epidamnus is Taiwan or it's Serbia. Or it's the assassination of the Archduke.

And the analogy there is in many ways quite precise. And this is the point about the Thucydidean distinction between ultimate and proximate causes.

If we look at the origins of the First World War — I guess we'll come to that — all sorts of stuff was happening, centuries long, decades long, fundamental transformations in the nature of the international order or at least the underpinning distribution of wealth and power.

But then a whole lot of little things happened, and in some ways the analogy with the assassination of the Archduke in 1914 is not so much with Epidamnus because that happened a few years before. That's more like the Moroccan crisis, for example.

Or the Balkan crises of 1909 and 1911. All sorts of bad things happened in which bad choices were made and then finally one happens which sets the whole thing off. That might be the Megarian decree.

WALKER: Exactly.

WHITE: That's the last thing [where] you say, "Why did they do that?"

WALKER: So there's this city in the middle of Attica, Megara. I think it's still an occupied city.

WHITE: Oh yes.

WALKER: And Pericles issued a decree. I think the pretext was that the Megarians had violated some sacred land and killed the Athenian diplomat who went in the aftermath of that, and also given safe haven to some Athenian slaves, who fled Athens. But probably the real reason was to punish them for their involvement in the Epidamnian affair.

WHITE: Yes.

WALKER: And it was essentially one of the first instances of economic warfare, right?

WHITE: What they did was slap trade sanctions on them. Sound familiar?

WALKER: Exactly. And this was obviously an ally of the Spartans.

WHITE: Yes.

WALKER: Thucydides de-emphasises the role of that event in his account, but Kagan kind of elevates it again.

WHITE: Re-elevates it.

WALKER: Let me tell you what I didn't like about this book. And then I want your feedback. So Kagan disagrees, obviously, with Thucydides that war was inevitable, however we want to interpret that word.

WHITE: Yes. And whether Thucydides really thought that.

WALKER: Exactly. Kagan seems to just take the literal interpretation of inevitable.

WHITE: I think for the purposes of the exercise, he takes that as his starting point.

WALKER: Sure.

WHITE: I think a classicist of Kagan's sophistication would probably understand— and just to be clear, I'm no scholar of ancient Greek, but I understand that the word which is usually translated as inevitable means something more like "very bloody likely".

And that's different. Inevitable is a very strong word to use.

WALKER: That's a strong word.

WHITE: And people use it all the time. And so I think, in a sense, he's taking that traditional translation of Thucydides as a way of setting up the argument, because, of course, Kagan, in a sense, is no more interested in what happened in fifth century Attic Greece than we are. He's writing this at the height of the Cold War.

And he's very engaged… Hee becomes an active participant in contemporary debates. He became a leading Neocon after the end of the Cold War. His sons, one of them in particular, Bobby Kagan, to whom this book is dedicated, became one of the principal advocates of the Iraq invasion, for example. And there's a very poignant passage in the book early on when he discusses the Athenian attack on Egypt, which is one of the contributing… a completely unnecessary stupid attack on Egypt, which has some resonances with the American invasion of Iraq.

But Kagan was deeply interested in contemporary strategic affairs. And in the end, I think he's choosing to take Thucydides' proposition about inevitability as a starting point for a conversation about how wars happen.

And so I think if you actually quizzed him as a linguist of ancient Greek, he'd acknowledge that “inevitable” is not the best translation of that formulation.

But it's a good way— it's a great way — of setting up the argument.

WALKER: Yeah. And Thucydides probably was being hyperbolic, if he was using it in the literal sense.

WHITE: Well, put it this way, I've always thought he was far too good a historian and far too good a strategist to make the mistake of imagining that anything in human affairs is inevitable.

There are always choices.

And in a sense, the great drama of this whole subject — and it's worth making the point, I guess — the subject is how do countries find themselves going to war? Particularly, how do they find themselves going to war in really big wars against really formidable opponents? Deciding to go to war against weak countries is easy — not very nice, but it's easy. Deciding to go to war against a major adversary is a very big step indeed. And so the question is, how do countries reach this kind of decision? And I think Kagan is setting out to really interrogate that question. And it’s a very important question.

WALKER: Let me tell you, though, what I didn't like about it. So, let's take inevitable as just meaning very bloody likely. Kagan says that there were pre-existing conditions that made the war possible or narrowed the choices of statesmen, but it was this sort of concatenation of mistakes and errors of judgment by statesmen, on all sides, who lacked imagination, that caused the war to start — that provided the spark.

And we've already touched on some of them, but just to list some of those mistakes: I think he places the most blame at the feet of the Corinthians for getting involved in the Epidamnian affair. And their miscalculation was not thinking that the Athenians would get involved.

And essentially, they wanted to mete out revenge on the Corcyrians.

WHITE: Corcyrians, that's right.

WALKER: So Corinth was the mother colony of Corcyria. Corcyria was the mother colony of Epidamnus. An incredibly incestuous kind of quarrel. [laughs]

WHITE: [laughs] And you've got to remember, all of this is happening with a total population of a few hundred thousand. I mean, everybody knows everybody. 

WALKER: It’s a small world.

WHITE: It's like Canberra. [laughs]

WALKER: [laughs] And no less bloody, in the end.

WHITE: [laughs] No less bloody.

WALKER: So the Corinthians miscalculate. The Athenians get involved. Then the Athenians really make two mistakes. One is the Potidaean Affair.

So this is now in, I guess, Macedonia.

WHITE: Yes. It's up the top right-hand corner, so to speak, of Greece.

WALKER: Another Corinthian colony.

WHITE: That's right.

WALKER: Athens issues an ultimatum to them. 

And then there's the Megarian Decree.

So those are two errors of judgment on the part of Pericles that antagonise the Spartans.

You also have mistakes on the Spartan side. There's a hawkish party in Sparta who's agitating for war. And the Spartans, right up until the last moment, they don't have to tip this thing over into war.

WHITE: And although — and Kagan describes this very well — people's image of Sparta is that they're all sort of crazy militarists, in fact it was a much more sophisticated, complex, weird society than that.

And there was certainly a hawkish faction. But there were also very significant elements of the Spartan polity that thought that getting on with Athens was going to be just fine. And that's one of the reasons why it took a while for the war to break out, and it took all these incidents. The whole stuff with the Corinthians and the Corcyraeans and Epidamnians, as you said. But also the Potidaean crisis and the Megarian crisis.

It took all of that adding up to finally reach the point where the Spartans said, "Bloody hell, all right. Off we go."

And of course once the war begins, then of course the whole dynamic changes and the prosecution of the war itself becomes an end in itself. And then people get killed.

WALKER: And you start to hate each other.

WHITE: And you end up with the dreadful sunk costs fallacy, so eloquently expressed by Lincoln at Gettysburg, that these honored dead shall not have died in vain.

But the fact is they were already dead.

I think what I like about Kagan is I think he does do justice to the complexity of the process. People often, looking back, think wars break out for simple reasons.

Whereas there are a lot of different strands, even leaving aside the ultimate causes, if you just look at the proximate causes, a lot of different strands are coming together to produce a situation where political leaders, national leaders, end up deciding that going to war is a better idea than not going to war.

Which in the end is what it always ends up being: that choice. Is it better or worse? Are the costs and risks of war better than the costs and risks of avoiding war?

WALKER: Okay, but now we've set up Kagan's view, here's what I didn't like about it. And apologies if this is being unfair to Kagan, but this is how I read him.

The problem I have with arguments of the form, “the war wasn't inevitable because we can imagine a counterfactual where these precipitating events didn't happen…” So he goes through those mistakes and says, “you know, it could have gone either way, other choices were available,” and then comes to the conclusion that war wasn't inevitable.

The problem I have with arguments of that form is that, in those universes where those mistakes weren't made, other mistakes can be made later. So really it shows that war wasn't inevitable in 431 BC, but it doesn't show that war wasn't inevitable at some point in the second half of the fifth century BC.

WHITE: Yes. That's a fair observation, but the fact is that at every point leaders, people, have choices. And at every point it's open to people to make a choice between peace and war.

And I think it is true that at every point it's not inevitable, it's not true that the only choice people have is to go to war.

People often say in connection, for example, with the non-hypothetical question as to whether Australia would support the United States and go to war against China if China attacks Taiwan… People in this town [Canberra] often say, “We would have no choice.”

That is wrong. We would have a choice. Now there would be costs for the choice  not to go to war in support of the United States. But we could choose to accept those costs rather than choose to accept the costs of war.

And being very self-conscious, very reflective, very analytical, very cautious and prudent about how you weigh the costs of one side against the costs of the other. Making yourself very aware of those choices that you're making, seems to me to be a terribly important piece of policy.

So I would defend Kagan's interpretation, because even if a different set of circumstances had arisen; even if the Corinthians hadn't misjudged Athens' support for Corcyra; even if Pericles hadn't gone in so hard against the poor old Potidaeans and not torn their wall down and one thing or another; even if he hadn't got vindictive towards the Megarians; or even if the, so to speak, peace faction in Sparta had been more powerful and the hawkish faction had been weaker; and so even if war had not broken out when it did, then the next time a similar set of circumstances arose, and they almost certainly would have, then the Athenians, the Spartans, everybody else involved still would have had choices, and they still could have chosen not to.

And I think to ever surrender to the thought that under whatever circumstances, war is inevitable, is to let ourselves off the hook, to relieve ourselves of the responsibility for the choices we make, and putting our choices back into the middle. Our choices, our leaders' choices, but in the end, our society's choices — putting our choices back into the middle of the mix. Asking ourselves, “Do we really want to choose this?” Do we really think that going to war with Athens is a better idea than making some compromises, accepting what's gone on, accepting that they've screwed over the Megarians in a vindictive and, frankly, unjustified — from the benefit of a lot of hindsight, what Athens did towards Potidaea and what they did to the Megarians looks unjustified. But the Spartans could have chosen to say, “Okay, you know…”

Now of course, when we view that at this point in history, in hindsight, looking back at what happened in 1938 and 1939, we think that answer is easy. We think that we have no choice. The Munich metaphor — we'll probably come back to that.

I think it's very important to preserve our consciousness of the fact that we do have choices to make, and I think that's what Kagan — because he does it so exhaustively and unpacks all of those choices at such length — does it very compellingly.

And I've always, when I find myself thinking about the choices that I think Australia and America and other countries face as they confront the rising power of China and the fear that causes, then I find myself often going back to Kagan as the kind of way into the great Thucydidean debate.

WALKER: Next book?

WHITE: Next book.

Garrett Mattingly: The Defeat of the Spanish Armada [29:03]

WALKER: Alright.

So, the next book is The Defeat of the Spanish Armada by Garrett Mattingly. This was first published in 1959. Mattingly was an American historian, professor of European history at Columbia, and he specialised in modern diplomatic history.

This is a narrative history. You might describe it as purple prose, but it's incredibly enjoyable.

WHITE: Oh, yes.

WALKER: Won a Pulitzer, I think.

WHITE: Yes, I think it did.

WALKER: And it, of course, describes the defeat of the Spanish Armada by the English in 1588, and the backdrop to that event.

So, why this book? Why is this on the list?

WHITE: Well, partly, in a sense, sentimentally. I read it as quite a young man — probably I was still at school — because my father recommended it to me. And my father was in the trade. He was a defence official. And my own interest in this whole business does owe something to the fact that I sort of grew up with it a bit. And it was a very uncharacteristic book for my father to recommend because, as you say, its prose at points is quite purple. It's a very colourful narrative.

And [my father] was an engineer with, if I can put it this way, an engineer's soul. He used to say the best way to improve a piece of writing is to cross out all the adjectives. Which is sort of what he did.

Whereas Mattingly sticks plenty of adjectives in.

WALKER: And adverbs. [laughs]

WHITE: Yeah, and a lot of adverbs.

But it really made a big impression on me, partly because of the way in which it illustrates how many different strands there are that feed into this.

Unlike Kagan, it's not about the… Well, it is, of course, about the individual decisions people take. But one of the things it's about is how many different players are involved. And it's also — and this is a recurring theme, we touched on in Kagan, about Kagan's point about failure of imagination — the mistakes that people made. In this case, particularly the mistake that Philip II, the King of Spain, made in launching the Armada to start with. 

But one of the things that's fascinating about it, it starts with the execution of Mary, Queen of Scots at Fotheringay. Which, until I read it, I had never recognized that that was, in terms of proximate causes — there was the grand sort of growth of Spanish power and the way in which Spain… And of course a whole religious dynamic, the Reformation versus the Counter-Reformation — there were very big forces at work there. But the execution of Mary, Queen of Scots was the beginning of the proximate causes.

WALKER: And she was, of course, Catholic.

WHITE: And she was Catholic.

WALKER: And he wanted her on the throne.

WHITE: That's exactly right.

The thought that she might, if Elizabeth died — Elizabeth I, Queen of England — if she had died, Mary would have taken the throne, England would have returned to its Catholicism, and Spain would have gained an adherent and been spared a country that was becoming a more formidable adversary.

So, there was both religion and real power politics involved, and one of the things that makes the whole era fascinating is the interconnection between them.

But then, there's this whole business of what's happening in France, where there's this very bitter civil war between, broadly speaking, Catholics and Protestants. But also, between supporters of Spain on the one hand, and a whole range of others on the other.

And one of the things that's fascinating about the book is the way in which Mattingly interweaves the struggle in France, which turns out to be vital; Elizabeth's own thinking in England, because she's very, very reluctant to make an enemy of Spain, but in the end, not that reluctant (her decision-making, the description of her decision-making about the execution of Mary, Queen of Scots itself is worth the price of the book); and the way in which decisions are made in Rome, by the Pope; by Philip II, immured in his weird, isolated castle fortress monastery, the Escorial in the hills outside Madrid...

WALKER: It’s this sort of nerve centre of the [empire]. And he's just there, sort of, sending out letters across the empire.

The Spanish Empire, it's the first empire on which the sun doesn't set.

WHITE: The first global empire. That's exactly right.

WALKER: And he's sort of from this nerve centre, just sending letters and correspondences out. Calling the shots.

And he seems very isolated.

WHITE: Oh, he is. That's right. He's an extraordinary bureaucrat in a way, Philip II, a fascinating character. He was a workaholic, and he wrote everything down.

I think Mattingly mentions it in that book. If not, it's in another book by a bloke called Geoffrey Parker, called, I think, [The Grand Strategy of Philip II]. At any rate, he wrote all this stuff in the margins.

At one point, he writes in connection with this, “I don't understand what this person means. This is very confusing. What am I meant to think about this?”

WALKER: And one of his generals or admirals is saying that it's going to be easy to defeat the English fleet in the channel.

WHITE: Yes.

WALKER: And he writes, “Nonsense,” or something.

WHITE: Exactly.

And so, you get this wonderfully vivid sense of this person across the centuries. And in some ways, Philip II, heir to the unimaginable Habsburg Empire, son of Charles, probably the greatest hegemon Europe has ever seen, at least before Napoleon (but Charles’ hegemony was more lasting). An extraordinarily remote character, but it feels very vivid, this man, this individual, making these decisions — and in the end, although he was a very prudent person, getting it wrong.

And Mattingly describes how he, pushed by events, pushed by the Pope, pushed by his own diplomatic representatives in France who saw the Armada as a way of prosecuting Spain's agenda in France as well — and in the Low Countries, because the Spanish response to the rebellion of the Protestants in the Low Countries, what's now Holland and Belgium, was central to all of this — he comes up with this harebrained scheme.

Militarily, this is a harebrained scheme. It requires one fleet to sail from Spain up the Channel. And then somehow, his commander in the Low Countries, to ship a huge army across the English Channel. This is heavy stuff. [laughs]

And one of the reasons why it's so enthralling is that the book is a very good example of the way in which all of the stuff we've been talking about so far — grand changes in the distribution of power, the way in which statesmen respond to individual events, all of this sort of stuff — that's all one thing. On the other hand, it's the sheer military reality of this stuff.

There are two bits of it that come across here. The first is how hard it is to move soldiers across water. The fact that England is an island makes all the difference. And Philip has this very strong army in the Low Countries, in the Netherlands essentially, which he hopes to ship across the English Channel. And the Armada is really there to win control of the channel, to give that army a chance to get across into England. But it just turns out to be really hard — assembling enough boats turns out to be really hard.

And the other thing is that, as it happens, when technology comes into play, the English guns were just much better than the Spanish. And so, it's a purely technological thing. The English had smaller ships, but better guns. And they could stand off and inflict real damage on the Spanish ships without getting close enough to grapple.

Whereas the Spanish style of naval warfare was to get so close that you actually grapple onto the ships and the soldiers who are on your ships jumped onto the other guy's ships. Well, if the other guy's guns were better at longer range, you couldn't make that work.

Now, a lot of other things were involved in the outcome of the Armada, including the weather, which always counts for something, particularly in the age of sail. But when you look at Philip's decision, sitting alone there in the middle of the night in the Escorial, a big factor… And of course, they knew that: they'd been fighting the English; they knew what they were up against.

It's hard now... And Mattingly makes the point really, or at least the point comes through from his wonderful, colourful description of what was going on: “Why did Philip do this? This was a dumb decision.”

And, well, the study of dumb decisions is pretty much the study of how wars happen.

WALKER: [laughs] Was the religious motivation, restoring the status of Catholics in England, just a pretext?

WHITE: I don't think it's just a pretext. I mean, it's very hard for someone in our secular age, and certainly someone of my totally secular disposition, to think my way into the state of mind of a devout Catholic in the middle of the 16th century, with this extraordinary challenge from the Reformation. And the way in which people's view of human life was built around their sense of religion, the place of Catholicism in Europe's sense of itself, and the idea that this would be violated by the Reformation, I think it's very hard for us to recreate what that meant. 

So I don't think it was just a pretext. I think it was for real and to a certain extent you can see that from what individuals did, not just Philip himself, but the martyrs going to the stake.

I studied for a while at Oxford, and just outside my college, there was a cross in the road, in the street, where the Oxford martyrs had been burnt at the stake, just before this, when Queen Mary, before Elizabeth, was [queen]. And just walking past it, as I did every day, it just gives you a sense: it really meant something to people.

So I don't think it was just a pretext. On the other hand, it didn't run counter to Spain's strategic interests and to the Habsburg's strategic interest. It directly reinforced it. Bringing England back to the Catholic faith brought England on Spain's side against its various adversaries, including, of course, against France.

Now, where France was going was itself a huge issue, and in a sense, the whole Spanish Armada story — and this is one of the points that Mattingly makes — was a kind of subset of a big story about the contest between Spain and France. Which is hard for us to get our head around now because we're used to Spain being, at best, a second-order power but, of course, in the 16th century, it was absolutely a first-order power.

WALKER: Next book?

WHITE: Next book.

WALKER: Okay.

WHITE: But also, I mean, the thing about Mattingly: as a story, I just find it riveting. I go back and re-read it every few years just for the pleasure of it.

WALKER: The chapters are pretty short, and some of them are just gorgeous.

WHITE: Oh, yes.

WALKER: They're like paintings or scenes.

WHITE: Oh, that's exactly right. And moving too.

There's a description which seems in some ways to be obiter dicta, but the description of a battle between the Protestant and Catholic side in France within the French Civil War, which is one of the best descriptions of a battle I've ever read.

WALKER: Really?

WHITE: Yeah.

WALKER: Why so?

WHITE: It's just so vivid and concise.

He sets up — and I'm not really a military history buff, I should say — but he sets up the geography of the battle with the Protestants on the defensive in a fork between two rivers and the Catholic Royalists across the arc between them.

And the sense of how the Catholics, supremely confident of victory and they're fresh in the field… The Protestants have been campaigning all year; they're feeling weakened and demoralised. But in the end, they win. And how that unfolds…

WALKER: Do you remember which chapter?

WHITE: Oh, yes. I can find it for you very easily. 'The Happy Day', 136.

WALKER: Is it too long to quote?

WHITE: Yes, it's too long, I think. But…

“Across the few hundred yards of open ground, the opposing horsemen had time to eye each other. The Huguenots looked plain and battle-worn, in stained and greasy leather and dull grey steel. Their armour was only cuirass and morion, their arms mostly just broadsword and pistol. Legend was to depict Henry of Navarre as—” He was their leader. “—as wearing into this battle a long white plume and romantic trappings, but Agrippa d'Aubigné, who rode not far from Navarre's bridle-hand that day, remembered the King as dressed and armed just like the old comrades around him. Quietly, the Huguenots set their horses, each compact squadron as still and steady as a rock.” Et cetera. 

“Opposite it the line of the royalists rippled and shimmered.”

WALKER: That's so good.

WHITE: He could really write, this bloke.

WALKER: He could.

WALKER: No offense, but a little bit surprising. I mean, this guy is a historian, and he just comes out with... He's a serious scholar. And then he comes out with [this].

WHITE: Oh, he's a serious scholar. And, for example, he wrote a book called Renaissance Diplomacy, which is full of vivid little vignettes, but it's a very serious, dry, sober piece of history.

As I said, I was first introduced to Mattingly with that book by my father. And when I saw that he'd written this thing, Renaissance Diplomacy, I thought, "Oh, that'll be great."

It's actually very interesting. But it's a bit dull. [laughs]

A. J. P. Taylor: The Struggle for Mastery in Europe, 1848-1918 [47:08]

WALKER: Okay, next book, The Struggle for Mastery in Europe, 1848-1918.

WHITE: Ah, yes.

WALKER: So this was first published in 1954. The author is Alan John Perceval Taylor, A. J. P. Taylor: eminent English historian who specialised in 19th and 20th century European diplomacy.

So this book is a diplomatic history of the struggle between Europe's great powers from the democratic revolutions of 1848 to the end of the First World War. It's a river of facts, characters, events, flowing from '48 to 1918.

And an interesting fact about this book: Taylor knew German, French, and a little Italian, and obviously English, and he learned Russian in the course of writing this book, reading the diplomatic archives, because he thought it would be useful.

He started writing it in 1941, during the Second World War, interrupted it to complete The Course of German History, one of his other books, which was published in '45. And so he came back to this and finished it in 1953. So for more than a decade, he was working at this book.

WHITE: And what a decade.

WALKER: What a decade. 

It is sweeping. There were two chapters in particular that you recommended to me: Chapter 18 and Chapter 22.

So Chapter 18 is about the making of the Anglo-French entente in the early 1900s. What's significant about that for you?

WHITE: It's worth stepping back a bit. Why is the book on my list?

WALKER: Yes, okay.

WHITE: There are two reasons for that. The first is because it is a textbook as to how the European order worked in the 19th century, at least in the second half of the 19th century. And in particular how the European order adjusted to the phenomenal shifts in the distribution of wealth and power that occurred over that time.

Germany in 1848 is — I forget the number: 37? 137? — anyway, some bizarre number of different sovereignties. Germany as we know it didn't exist.

WALKER: Little states, lots of little states.

WHITE: Little states. Well, some of them—

WALKER: Prussia's big. Austria's big.

WHITE: Prussia's big. Austria's big, of course. Some of the others are reasonably large. And Prussia is kind of a great power. No, Prussia is a great power, but it's a marginal great power. And there are all these other states. So Bismarck has not begun his process of creating modern Germany.

And, of course, Russia is still completely backward. Russia is nowhere. 

The Ottoman Empire is still a fairly serious proposition and so on.

And so, the distribution of wealth and power, the underlying international structures, which created 1914 were still then a long way off. And yet the European order survived and flourished over those years from — not until 1918 [laughs] — until 1914.

So it's a textbook for how a very complex multipolar order in an extraordinarily dynamic era… I mean, we think we're living through an era of change, but you think of the changes that occurred in Europe. I mean, apart from anything else, just off the top of your head: railways appeared. I mean, boy, talk about change. Steam navigation appeared. Globalisation. Well, globalisation had begun before, but this was the full fruits of the Industrial Revolution transforming the way people lived, states worked, the whole thing.

And so it's a textbook for the way in which — as you say, an extraordinarily detailed textbook — Europe managed this process. And that seems to me to be inherently very interesting. That's the first reason.

The second reason, it's AJP Taylor. Which means it is full of the most outrageous statements. He'll generalise: you know, boom, poof. 

But always insightful. Always stimulating. I just love his prose.

WALKER: He's always taking a few potshots at people.

WHITE: Oh, he takes potshots at people, and he'll just say, “That's complete rubbish. It was this [or that] —”

And sometimes one will disagree. But most of the time, you just, so to speak, savour the texture. I mean, it's a little bit like reading Gibbon.

Perhaps I shouldn't admit this: I do sometimes in moments of stress or relaxation just pull my copy off the shelf and open it and read it at random just because I love the way the prose works. I do the same with Gibbon actually, every so often. Gibbon can be describing some completely nonsensical theological dispute in the Middle East sometime in the seventh century, but somehow the prose will just carry you along for a few pages and make the world seem a better place. And that's Taylor for me. So, that's the broad setting. 

But if we look at Chapter 18, for example, two things are happening at that moment — and this is the 1890s, roughly speaking. The first is that — and it's sort of hard to remember, but particularly under the Second Empire, under the second Napoleon, the first one's nephew — France still looked like a very threatening place to Britain. And because we know how the story ends, including, of course, France's defeat by Germany in 1871… But to the British, France still loomed very large.

So, one of the great revolutions, one of the great ways in which that order, as I mentioned before, adapted to what was going on in Europe, was the long process of rapprochement between France and Britain, which came to a head at that time. And I loved the description he gives of the way in which that happened.

But that's not the only thing he's talking about. Because he also in that chapter is talking about the way in which issues outside Europe — because this is the high point of European colonialism, and Europe is perhaps, in a sense, the strongest sense we've ever seen before or since, ruling the world... European colonialism had gone through an extraordinary explosion in precisely the period covered by the book. And so, he's describing the way in which events outside Europe, particularly in this case, in the Far East, as they called it — China — start to really hone in on what's happening within Europe.

And so, that sense, particularly for an Australian reader, in which what's happening in the Far East, particularly what's happening with China — which is always a big part of my interest in whatever's going on — is impinging back into Europe and creating the circumstances which, amongst other things, led to the Pacific War... I mean, there's a lot of water [that] goes under the bridge before that happens, but you can see the questions about Japan's place in Asia, the question about Japan's relationship with China, the question about Japan's relationships to the Europeans, and the Americans’ (we'll come back to that) relationship with China. You can see them all starting to bubble to the surface there.

The whole book in a sense can be seen — I think should be seen — as a long exposition in extraordinary detail of how we ended up in 1914 on the 4th of August.

But it's a bit more than that. It tells you a lot about how the modern world was brought into being by what happened in the latter half of the 19th century, which is a big part of the prologue to what we've lived through in the 20th century and what we're trying to deal with now.

WALKER: I think worth emphasising: it's fundamentally a diplomatic history. So, it's not a general history.

WHITE: No.

WALKER: It's sort of lacking the economic and military dimensions.

WHITE: Yeah. It's a history of diplomacy and strategy. The military is never far below the surface.

WALKER: Right. So the kind of documents he's reading are sort of memorandums of foreign offices.

WHITE: That's right, yes.

WALKER: Minutes. Correspondences between foreign ministers and their diplomats and ambassadors.

WHITE: Yes. That's that. And so, it's a classic old-style diplomatic history of the sort which is, I guess, in some ways discredited these days, I think wrongly; I think there's a great deal to be learned from that kind of thing. Because in the end, these might not be people or attitudes that are broadly representative of society. But they're the people and the attitudes that are in the room when wars are decided on. So pay attention.

WALKER: Yeah. So, Chapter 22 is on the build up and then outbreak of the First World War.

WHITE: Yeah. Brings it right down to the moment.

WALKER: Exquisite chapter.

WHITE: Yeah.

WALKER: I've got about three pages of notes on it.

WHITE: Yes [laughs].

WALKER: But I'm curious what you took from that chapter, if you can distill it.

WHITE: Look, it's a little bit hard to separate that from the whole question about what happened at the beginning, what happened from the 28th of June to the 4th of August, 1914.

But one of the things, one of the really critical questions about that moment is: how far did the various participants intend? Who intended to go to war? In particular, did Germany want to go to war? There's a strong argument, particularly in Germany itself after the Second World War, there's a strong school of thinking that the Germans really planned the war.

What on earth were the Austrians thinking? Why did they think it was so necessary to go to war with Serbia given that there was a threat that Russia would intervene and so on? And the French and the British.

What I really take from it is, first of all, because that chapter has its roots in all the previous chapters and therefore connects what happened in those weeks from the 28th of June to the 4th of August, with all that had gone before, back to 1848, I think it makes it very powerful. But he also has some really important propositions. 

He gives a very compelling argument that the Germans had — you've got to be very careful of the collective nouns here, because one of the things about what happened in those weeks is that in Germany, in Austria (Austro-Hungarian Empire), and in Russia, and to some extent in France, the decision-making was very fractured.

I mean, in the first three, in all three, you had these weird — these were modern states with modern economies, this is a world we can kind of relate to when we look at it economically — but they're still governed by these absolute monarchs.

WALKER: The Kaiser is really the commander-in-chief.

WHITE: Yeah. And he's mad as a meat axe.

The Tsar, even more than the Kaiser. I mean, the Kaiser at least has to deal with the Parliament; but in St Petersburg, the Tsar really is the boss.

But he's completely ill-equipped to perform this function. And Franz Josef in Vienna, the head of this weird polyglot empire, which hardly makes any sense at all...

And not just in Taylor; I mean, there are whole books, some very good books, written about what happened in those few weeks. But one of the things that comes clear, and Taylor touches on this, is how confused the decision-making is because the structures are so poor. 

And in some ways, the only one of those capitals in which you get a sort of a halfway sensible analysis of the choices is in London (and [inaudible] is a tale in itself).

So one of the things I really like about Taylor's account is that he does a very good and actually quite concise job of adjudicating the question as to whether the Germans wanted to go to war or just went along with going to war. And there was certainly a strand of German thinking that said, "We're going to have to fight eventually." And particularly their fear of Russia.

I think in our present understanding, we underestimate the extent to which the real rising power in 1914 was not Germany but Russia.

Russia was coming out of nowhere and industrialising really fast. And so it's traditional… It had always had a place. Well, not always. Since the days of Peter the Great at the beginning of the 17th century, Russia had been a significant player in European power politics.

But as Russia was changing, it was industrialising, it was going through its industrial revolution, two generations, behind the rest of Europe. But because of its sheer scale, that made it very impressive.

And so the combination of that, the collapse of the Ottoman Empire, and all the vulnerabilities, the obvious weakness of Austria, the Germans had reason to think it might be better, if you're going to fight, to fight now than later. But I think A. J. P. Taylor's adjudication of that question is very good.

WALKER: Yes.

WHITE: The other thing I really like about the chapter is the way in which he analyses the British decision-making.

Because there's an argument which he addresses directly, if I remember rightly, that if Britain had only said right at the beginning that it was going to fight or not going to fight—

WALKER: If it had been unequivocal.

WHITE: Unequivocal one way or the other, then it would either have deterred the Germans or deterred the French and the war wouldn't have happened.

And I think he destroys that.

WALKER: Rejects that.

WHITE: Rejects and destroys it very, very compellingly.

WALKER: Right. So he says it was essential to the Schlieffen Plan that the Germans had to violate Belgium.

WHITE: Yeah. They were going to go through Belgium whatever happened.

WALKER: They were going to go through Belgium, and they'd already factored in that if they violated Belgium's sovereignty, then the English would intervene.

WHITE: Then the British would be in.

WALKER: And they discounted Britain's involvement. They didn't think it was going to affect the outcome one way or the other.

WHITE: Which was a not unreasonable position for them to take.

WALKER: Because Britain would only submit a couple of divisions.

WHITE: Six divisions.

WALKER: Six divisions.

WHITE: Well, five initially.

WALKER: And so maybe one division is like 15 to 20,000 troops.

WHITE: That's right. And, you know, by comparison, the French and the Germans both mobilised way over 100 divisions, something like 160 divisions. 

WALKER: Over a million troops. 

WHITE: The British army weight was really negligible. In the end, actually on the day, it didn't have a negligible impact on the way the battle unfolded in August — we might come back to that. But in the sort of grand strategic weight, Britain really only counted as a maritime power. And its maritime power really only came into play if the war dragged on. And the Germans being confident that the Schlieffen Plan would work, that they'll be able to knock France out in six weeks and then turn on Russia, knock Russia out…

So the idea that Britain's commitment one way or the other would have made a big difference to German thinking, Taylor demolishes in a few sentences. And I think quite correctly. I think it's a very compelling argument. 

Of course, you can make the same point the other way. If they'd said to the French, "We're not going to fight," then the French wouldn't have fought? No. No, apart from their alliance with Russia, which was really fundamental, and particularly the attitude of Poincaré...

I think you can argue that the only one of the European leaders who, in those last days of July and first days of August, really wanted the war to happen was the French President, Poincaré.

That's not a common view, I might say, but back in 2014, like a lot of other people, I found myself reading a lot of books about what happened a hundred years before. And my conclusion was that of all of them, he was the one who was least ambivalent.

The rest of the French government wasn't. But as president — and he was very influential partly because the rest of the government was in chaos because this is what French governments in [laughs] the Second Empire were like — he was very influential.

So, I think Taylor is right on that as well.

WALKER: I want to compare a couple of my notes with you, but could you give a 30-second description of the Schlieffen Plan just for anyone lacking that context?

WHITE: Sure. So Germany's problem as it saw itself in a traditional rivalry with France, very strongly amplified, of course, by the outcome of the Franco-Prussian War in 1871 in which the Germans marched off with two key French provinces, Alsace and Lorraine.

On the one hand, France on one side, Russia on the other — this rising Russia — who had allied themselves with one another to neutralise or at least to manage Germany's rising power. So, Germany's problem in the event of a European war was that it faced the potential for war on two fronts. And in order to manage that problem, Schlieffen, who had been their overall commander in the late 19th and very early 20th century, formulated a plan in which Germany would defeat France in six weeks, and then swing all its forces against Russia. 

And the way to defeat France, given that the French had very strongly fortified the border in the middle part of the border, was to go through Belgium. A huge army swinging through Belgium and then swinging around to hook behind Paris and then drive the French forces, enfold the French forces in a giant encirclement.

And it involved the violation of Belgium. And Belgium, when it was established as an independent state in the 1830s, was neutral, and its neutrality was guaranteed by all of the key European powers including Germany. And this therefore involved the violation of what was seen as a really fundamental principle of European order.

So the German war plan, if they were going to go to war with Russia, they had to go to war with France, and if they were going to go to war with France, they had to invade Belgium.

WALKER: Because of the entente between…

WHITE: Well, the problem was they couldn't go to war with Russia without assuming that France would go to war with them because they knew that that's what France's commitment to Russia entailed.

WALKER: Yes.

WHITE: And this was not a wishy-washy alliance. It had a lot of substance to it.

It wasn't as substantial as NATO, where NATO kind of distorts our view of the way alliances work. But the French had, for example, poured, in contemporary terms, billions of dollars into helping the Russians build the railways that would ship Russian troops to the front against Germany. So, this was not just a piece of paper. This was very practical, strategic cooperation. 

And as it happened, Poincaré, as president of France, visited Russia at the end of July. He had just left Russia on his yacht.

WALKER: Yeah, him and Viviani were on their way back when-

WHITE: Exactly, and with his [prime] minister, Viviani. The Austrians delayed the issuing of their ultimatum to Serbia—

WALKER: Until they were at sea.

WHITE: Until they were at sea. You know?

WALKER: Yeah.

WHITE: Like I say, the people in the room, you know?

WALKER: That's right. So on the Schlieffen Plan, Germany knew that if it was to fight either France or Russia, then it had to fight both.

WHITE: Had to fight both. Yeah.

WALKER: To avoid fighting a two-front war — and there was this cult of the offensive at the time — but the decision was just to overwhelm France.

WHITE: Yeah.

WALKER: Why France, not Russia? A large part of the logic was it would take Russia much longer, like several weeks, to mobilise because of their disorganisation, and also just the—

WHITE: The sheer distance.

WALKER: The sheer distance.

WHITE: The sheer scale, that's right.

WALKER: So we'll overwhelm France first, and then we'll swing back towards the eastern front.

WHITE: And it’s partly just a matter of distances on the German side as well. I mean, in order to achieve a decisive result in Russia, you had to travel a long way, as people keep on discovering. You know, Napoleon and Hitler and so on.

Whereas France is relatively compact. You know, you could get from the German border to Paris in a few days.

And so inherently it was a quicker war to fight because the distances were not as great.

The German troops as they came down, you know, they came through Belgium and then headed south down towards Paris, and at the last moment, so to speak, they swerved to the east, to the left of Paris, viewing it from their line of march. But at the closest point, those German troops could see the Eiffel Tower. They could see Paris in the distance. 

But they swerved away for reasons which one of our other books [The Guns of August] goes into at great length, and produced the debacle which produced the Battle of Marne, which produced the Western Front that we all know about. And that claimed so many Australian lives. 

But it nearly worked. That's the story of the Schlieffen Plan.

WALKER: Yes. A couple of the notes I had. If you wanted to boil down Taylor's account of the First World War into a sentence or two, it would be that Austria-Hungary, specifically Austria, wanted the war.

WHITE: Yes.

WALKER: They were the declining great power in Europe.

WHITE: Yes, yes.

WALKER: Germany didn't have a plan to start it. He basically says that Bethmann and the Kaiser and von Moltke were just incapable of timing [laughs] the war.

WHITE: Yeah. That’s right [laughs].

WALKER: But when the opportunity presented itself, they went along with it willingly because, for the reasons we've discussed and we'll come back to — but one theme I definitely took from Taylor was that in the background there was this strategic need to fight a preventive war against Russia.

WHITE: Yeah.

WALKER: So Germany went along with it.

Statesmen on all sides succumbed to military timetables and military planning — so these things like the Schlieffen Plan that were already in place that once that process started it was very difficult to stop or reverse it.

WHITE: Yes.

WALKER: And then the Allies fought for defence.

WHITE: That's basically right.

Austria, of course, didn't want the war they ended up fighting. They wanted to fight a war against Serbia.

WALKER: Yes.

WHITE: Their bargain, their gamble, was that they could go to war against Serbia without going to war against Russia, even though Russia had an alliance with Serbia.

It's clear from the archives, in the conversations in Vienna over those weeks, that they believed they could fight a war against Serbia without being attacked by Russia, because Russia would be deterred by the fear of an attack from Germany.

And when the Kaiser, as he did, said to the Austrians after the assassination, "Go ahead and punish Serbia. We'll back you," he probably thought what that meant — well, who knows, because it's the Kaiser — but it's perfectly plausible that what he really thought he was committing himself to was simply standing there to deter Russia, so that Russia wouldn't attack Austria, so Austria could have a war with Serbia by itself.

I think that's basically — although Taylor doesn't put it quite that way — Taylor's argument.

So the question is not just, do you go to war or don't you, but which war do you think you're going to fight?

And often you end up fighting a war contrary to the one you expect.

WALKER: So Germany was egging Austria-Hungary on.

WHITE: Yes and no.

WALKER: Yeah, so it was a little ambiguous as to whether, in Taylor at least, Germany expected that Austria-Hungary would invade Serbia.

WHITE: Yeah.

WALKER: Did they?

WHITE: Well, there was uncertainty, great uncertainty, and there was a lot of uncertainty in Berlin.

Taylor doesn't go into this in that detail because this, in the end, is one chapter in a fat book that covers decades.

But if you look at Albertini's, you know, whatever it is, [three]-volume history of the outbreak of the First World War, which is a sort of bible that everybody goes back to. That was produced between the wars. I haven't read all of it [laughs], but it's a remarkable book.

But, to my mind, the best of the books published in 2014 about what happened in 1914 is a book by a bloke called T.G. Otte called July [Crisis], which unpacks what happened in each capital in great detail.

What's clear from that is that there was a lot of debate in Germany. The Kaiser had given the Austrians the green light, and then sent some flashing amber signals, and then there was another green light from the Kaiser. The messages were very mixed, including messages from the Kaiser himself, quite apart from others.

One of the things that emerges from the detailed study of what happened in July 1914 is that everywhere, but particularly in Berlin, there was a lot of confusion. People weren't quite sure.

And they weren't unaware of the scale of what they were committing themselves to. The Kaiser himself said at some stage in July, quite late in July, that if it comes to war it will destroy European civilisation for a century. Which, for an idiot — which he was — is quite a perceptive observation.

So, the simple-minded version doesn't quite do justice to the complexity. And Taylor doesn't unpick all of that.

For me, the real strength of Taylor, that part of Taylor's thinking, is the way in which you get to it having gone through all of this other stuff about what had happened in Europe.

And one of the points is, we tend to see 1914 as kind of an isolated incident, as if the story begins with the assassination of the Archduke.

WALKER: Oh, no.

WHITE: No, that's the whole point.

I mean, it's ultimate versus proximate causes. All of this has been set up through a century of European history.

And, you know, the way in which things worked through the 19th century, from 1815, the defeat of Napoleon — why did they stop working?

In a sense, one way of interpreting Struggle for Mastery is that it's an account of why what had worked so well stopped working.

WALKER: Yeah. It's notable in both Struggle for Mastery and Guns of August (which we'll come to next) just how little attention is given to the event of the assassination.

WHITE: Oh, yes.

WALKER: In terms of how Germany is thinking about this, the note I had from reading Taylor's chapter is that they're not certain Austria-Hungary will invade Serbia. They're egging them on a bit.

But if Austria-Hungary does attack Serbia, Bethmann Hollweg and Wilhelm II don't expect Russia to defend.

And if Russia does defend, they think, "Well, war's better now than later, when Russia's a stronger power."

WHITE: Yes, that's exactly right. In some ways, the story of what happens in the last week of July is that everybody expects everybody else to let their allies down.

People often say that the cause of the First World War was that they had all these alliances and people stuck with them. But what's striking is that everybody expected them not to stick with them.

The Austrians thought they could attack Serbia without going to war with Russia because they thought the Russians would let the [Serbians] down.

The Russians decided they could go to war with Austria without going to war with Germany because they thought the Germans would let the Austrians down.

[The Germans] also thought there was a fair chance the French would let the Russians down.

But of course, there was a point… Once Germany had built its war plan around the assumption that the Franco-Russian alliance would hold, then it was going to happen.

This gets back to the point you touched on before: a very big factor in 1914 was that once preliminary decisions had been made, it was very hard to turn back.

It was a classic problem — and in fact, it's a very common problem in the management of military operations, even on a much, much smaller scale — that if you want to have a military option, you've got to start taking steps, and once you start taking those steps, you start losing flexibility.

For the Russians, for example, precisely because they were so big and they took so long to mobilise, if they were going to have the option of going to war with Germany, they had to start doing things earlier than they would have wanted to.

WALKER: Because there was a lag of weeks.

WHITE: Because there was a lag of weeks. And the poor old Tsar — and I say that advisedly, because it's hard to look at him; he just looks so sad and helpless in those photographs, and comes across that way in the documents — the poor old Tsar says, you know, "Well, can't we just mobilise against Austria and not mobilise against Germany?"

And his commanders say, "No, we can't do that."

There's a very clear technical reason for this. One of the things that's happened in the 19th century is that the combination of population growth and industrialisation and railways and telegraph massively increased the size of armies, because there were more people around and better social organisation, and massively increased the speed with which they can be moved.

You could bring together these huge mass armies and move them to the front within days. Vast amounts of energy and imagination, and so on, are devoted to perfecting the concentration and deployment of these forces.

But it required… I think Tuchman touches on it. You talk about another railway train going over the key bridges every seven minutes, 24 hours a day, for weeks.

The thing is so detailed and so sophisticated and so complex, you can't change it.

WALKER: Right.

WHITE: So at one point, the Kaiser, right at the last moment — I think on the 1st of August, maybe the 31st of July — says to von Moltke, his commander, "Well, can't we just go to war with Russia and not against France?" Just as the Tsar has said, "Can't we go to war with Austria but not against Germany?" 

And in both cases, what the commanders say is, "No, we can't. Because if we do that, the whole plan will fall apart."

WALKER: We lose the optionality.

WHITE: Exactly. It's chaos if you start disrupting the thing. The whole thing falls apart.

People often think, "Well, that's just the fault of the boneheaded military commanders who didn't have any imagination." Actually, they were themselves prisoners of the particular way technology had evolved, which produced these massive armies that had to be moved by railways with great speed, with great precision, which required incredibly elaborate forward planning.

And of course, we face our own version of that today with intercontinental ballistic missiles. Things move very bloody fast.

You can blame the military commanders for an awful lot of what happened between 1914 and 1918, but I don't blame the military commanders for the predicament they found themselves in in the last week of July and the first week of August 1914.

That was something the technology had imposed on them.

WALKER: Just back to Russia quickly.

So Russia wanted to mobilise only against Austria-Hungary, but they weren't capable of that.

WHITE: Well, the Tsar did.

WALKER: The Tsar did. So they had to do a general mobilisation instead. But at that point, their intention or their expectation wasn't to fight a war; it was to raise the bid.

WHITE: Yeah.

WALKER: And Germany asked them to stand down. They didn't, and then…

WHITE: That's right. Everybody, as I said, hopes that they can deter the other guy from fighting. The great attraction of that is that you achieve your objectives without paying the costs of war.

It's worth bearing in mind that everyone is trying to preserve their place in the European order. You have a European order with five great powers that emerges from the end of the Napoleonic Wars. With the emergence of Germany as a unified power, which is a fundamental change, you've still got those five great powers in 1914.

Austria-Hungary is hanging on by the skin of its teeth. And Germany is not even sure itself that it's got the power that it deserves to have. France is fundamentally weakened by demographic problems, some economic problems, some political problems, and so on, and by the fact that it's just losing out in the race with Germany and then with Russia. Britain is having big doubts itself. Britain had been the world's biggest economy forever, but it's been overtaken by America, probably sometime in the 1880s or 1890s.

So everybody is unsure of their position in the international system. When 1914 comes, all see it as a test of their status as a great power in that system, and all hope they can preserve their position without going to war because the other side will back down.

The Austrians hope to preserve their position as a great power by being mean to the Serbians and hope the Russians will back down. The Russians want to preserve their position as a great power, having been humiliated by Austria a few times in the past, by threatening to go to war and hoping that the Austrians will back down, et cetera.

Everybody is trying to strengthen their position as a great power, but none want to go to war to do it. They all hope that they'll strengthen their position by the other side backing down.

Now, just to foreshadow, that's what both America and China think about Taiwan.

China wants to assert its place as a great power in Asia, in the face of America's power, by threatening to go to war with Taiwan and making the Americans back down, therefore proving the Americans are paper tigers.

America wants to preserve its position in the Western Pacific by threatening to go to war with China if China goes to war over Taiwan, and they hope the Chinese will back down. 

Neither side wants a war, but both hope to bolster their status or achieve the status they seek by making the other back down.

And that works fine if the other backs down. But, of course, for precisely the reasons we see in 1914, you end up with a war that neither side wants because both hope they can achieve their objectives by making the other side back down.

And both can end up being wrong.

That's really the great story in 1914, which is why it's so resonant for today.

Barbara Tuchman: The Guns of August [1:25:07]

WALKER: So we have one more book, I mean, at least one more, but this is the only other that bears directly on 1914.

So, next book: The Guns of August by Barbara Tuchman, first published in 1962.

Tuchman was an American historian and journalist. She wrote in the genre of popular history, mainly. And this is essentially a military history of the first month of the First World War.

WHITE: Quite right.

WALKER: Brilliantly written, won a Pulitzer. Why is this on your list?

WHITE: For two reasons.

The first is that it's, in a sense, a book of great significance simply because so many other people read it and were so influenced by it.

It hit the shelves in 1962, as you said, and it had a huge impact and made people think a lot about how war had come in 1914, in the context of the height of the Cold War... The great story is that Kennedy was reading it at the time of the Cuban Missile Crisis, which I think is probably true.

And it does deal, in a very compelling way, with what we've just been talking about — that is, what unfolded between the 28th of June, the assassination of the Archduke, and the outbreak of war in the first days of August.

But you're quite right to describe it as you just did, as a military history, because the real weight of it is not so much its account of the outbreak of the war — although that's interesting and quite compelling in places, the way in which the war-fighting started — but what happened in that first month, which shaped the whole of the rest of the war.

WALKER: The course of the war.

WHITE: So it is really a military history, rather than what you might call a strategic history. It's a history of military operations.

But it does this in such a good way. In particular, it does such a good job of interweaving the impact of plans and technology on plans, the impact of individuals, of personalities — the great personalities of the commanders, for example, on both sides.

It's hard to look at those events without acknowledging how people like Foch and French and Ludendorff and a dozen [others]… You know, we have, as a culture, a tendency to discount the great man, great person, view of history, but the fact is, when big wars start, the capacities of individual commanders really matter.

There's a kind of drama and fatalism about the way in which the Schlieffen Plan which we touched on before — this massive movement of German forces, big right-hand sweep through Belgium down towards Paris aiming to encircle the French army — nearly worked, and it didn’t.

It didn’t work for a million different reasons, but partly just the sheer momentum. [Tuchman] is very good at describing how an army on the march, day after day, week after week — very hot weather, as it happens; it was August after all, a northern August… And at one level, the Germans just ran out of puff.

And the French and the British were withdrawing and in chaos and defeated, but the way in which they… You know, the famous words: they stand on the Marne. And push back, and therefore deny the Germans victory.

They don't, of course, destroy the German army, but leave the Germans in possession of a large swathe of France, and create the Western Front.

So it's a description not so much of… Because of its influence on Kennedy and so on, people think about it primarily as a book about the outbreak of the war, whereas it’s really a military history of that critical first series of battles.

WALKER: First month.

WHITE: And for that, it's hard to beat. You can read much more detailed, “professional” military histories of that moment and not come away with as much feel for what happened as she provides.

WALKER: Yeah, yeah.

WHITE: But the other thing about it is that I came to it early. I first got interested in the First World War at the age of 11. I can be quite precise about it, because in 1964, to mark the 50th anniversary of the outbreak of the war, the BBC did a television series called The Great War.

22 parts or 24 parts, something like that, which went to air in Australia on the ABC every Sunday night at six o'clock. And I watched it. It just blew me away.

It had a huge impact on me and really, to be honest, apart from the fact, as I said, my father was in the trade, my mother’s father had been a naval officer, so I grew up in a family that was a bit focused on this sort of stuff — but that television series, even now…

When I first saw it again — I didn't see it from then until about 10 years ago, when I found the DVD, and now of course it's all on YouTube, you can watch it anytime you like — but I hadn't watched it [until then]. And it all just came back to me.

Astonishingly vivid and very sophisticated. It wasn't rah-rah patriotism. It was very measured. Michael Redgrave did the narration in this lugubrious, plangent voice, which even now is kind of the voice of the First World War for me.

Actually in the first few episodes, it gave a wonderful description of how the First World War broke out.

Then a bit later, at school actually, I came across a small book on the origins of the First World War that I read probably at the age of 15 or 16, which really interested me because of the impact of this television series.

But then I came across [The Guns of August] in a moment of enforced idleness, in Kathmandu of all places.

I had to wait a few days for some friends to turn up. I was going to go and do some walking — not really climbing, but walking — with them. I had a few days to kill and I'd seen all the sights of Kathmandu.

I found the British Council library, and I found it on the shelf there. I don't know whether I'd known about it before, but anyway, I thought, "That looks interesting." So I sat down and over the next couple of days I read it.

This was in a moment where I was travelling from Melbourne to England, where I was going to study and do a graduate degree. It was a point at which I was thinking where the future might take me.

I suppose I always knew that I was going to work in government and I wanted to work on all this sort of stuff. But reading it there in Kathmandu, in that kind of strange, isolated netherworld, in a bubble, completely divorced from my surroundings, did make me think, "Oh yes, this is really interesting." So it sort of has, for me, an almost personal impact which goes beyond the quality of the analysis.

WALKER: So this sort of tipped you towards the direction you took?

WHITE: Tipped me towards it.

Really, by the time I'd finished reading it — so therefore by the time I'd arrived at Oxford to study philosophy, study more philosophy — I had really consolidated what had anyway been hovering in the background.

And that is that I wanted to work in government, and I wanted to work on this stuff, which is exactly what I've done.

WALKER: All because you stopped in Kathmandu on your way to Oxford.

WHITE: Exactly.

WALKER: It's an appropriate story of contingency, given the themes of this book. [laughs]

WHITE: That's right. I think, well, going back to what we said before, I wouldn't say it was inevitable.

WALKER: [laughs]

WHITE: But I do think there were strong predispositions anyway. 

And of course, it partly is a generational thing. I was born in 1953. Both my parents served in the war. All of my friends' parents served in the war in different ways. My grandfather — my mother's father — had served and was a naval officer in the First World War.

All of this stuff was very vivid. And of course, we were growing up in the Cold War.

The significance of big wars — not Iraqs or Afghanistans, but really big wars, world-changing wars, wars that fundamentally change one's own country and change people's lives — this was something closer to the surface for my generation than for yours, I think.

WALKER: No, definitely.

So, just to draw out a couple of things I learned from this book and test them on you. First, as you mentioned, the big theme is contingency at the level of the battlefield.

The Siege of Liège, but more importantly the Battle of the Marne, and the failure of that to be a decisive battle, shaped the subsequent course of the war. It led to a very drawn-out conflict, the stalemate on the Western Front. That was one thing.

It's also interesting in terms of the outbreak of the war — because she does cover that in some detail — it's interesting to compare and contrast Tuchman and Taylor's accounts. I had two similarities and two differences.

The similarities were: both emphasised contingency — the war was avoidable. We know this for both of them because the Germans could have gone with the elder von Moltke's plan instead of Schlieffen's; they didn't. And all the other examples of contingency we've discussed.

And both Tuchman and Taylor regard the generals and their plans as somewhat usurping the politicians and diplomats.

WHITE: Yes.

WALKER: In terms of the differences, I think Taylor discredits the view that the complicated alliance system was to blame. We spoke about that. His reason for that is that no one ended up abiding by the letter of their commitments.

Whereas Tuchman more emphasises the intricate alliance system as being something that led to that cascading effect in causing the great powers to join the war.

And the second difference was: Taylor seems much more sympathetic to a more structural explanation that Germany wanted to launch a preventive war against Russia, whereas I mainly get the theme of contingency in Tuchman.

Does that all sound fair to you?

WHITE: Look, I think that's right.

The point about the alliances not driving the war, the way Tuchman tends to assume, is right. I think Taylor does take a different view on that.

I think that aspect of Tuchman is really, in a sense, taken over from the very strong presumption that people made in the interwar years. Between 1918 and 1939, there was of course a huge focus on the causes of the war.

The idea that there had been all of these alliances made, these secret treaties that somehow imprisoned politicians, and the idea that the soldiers, too, had usurped the role of the political leaders by producing these enormously detailed plans — those were commonplaces of the analysis between the wars.

In some ways, Tuchman took those on without necessarily interrogating them very closely, because what she really wanted to do was get to the story of what happened after the invasion, after the war began. That's one thing.

The second point is, I do think it's worth separating Britain's decision from everybody else's. Because the fact is, as I touched on before, Britain was the only one of the critical European capitals where they really had what you might call a proper debate about whether or not to go to war.

The cabinet was split, and Asquith had to work really hard to bring them together. In the end, he didn't bring them all together. In the end, Belgium — the invasion of Belgium — provided the pretext, but not the reason.

Grey was very clear. Grey's speech to the House of Commons on the 3rd of August, which is one of the most moving documents imaginable — I think she quotes it in the book — in which he says, in just an unbelievable understatement, that for Britain, if Germany ends up winning and dominating the continent, it would be “disagreeable”.

WALKER: [laughs]

WHITE: Well, British strategic policy forever — back to Elizabeth — had been to prevent the domination of Europe by any one country, because if any one country dominated Europe, then they could threaten Britain. The balance of power: that’s been the great theme.

The real question the British cabinet confronted — and therefore us in Australia, because we followed them — was whether Britain could live with a Europe in which Wilhelmine Germany had succeeded in overpowering France and Russia. Because it could have. It was prudent of them to think about that. Now, Grey's masterly understatement about “disagreeable” suggested that was not something people were interested in. 

If you look at the debate in Britain in the years before 1914, there was growing anxiety about Germany; there was a real debate, and some famous memoranda written by a senior British bureaucrat called Crowe — the Crowe Memorandum — which talked about what a threat it would be to Britain if Germany ended up dominating the continent. It made people feel that they had no choice but to go to war, otherwise this ancient precept of British strategic policy would be violated.

But the question is: would a Europe dominated by Wilhelmine Germany have been worse than what actually happened? Because what actually happened was the First World War. And then the Second World War. And then the Cold War.

It didn't end well.

WALKER: No.

WHITE: One of the interesting things is you can see in the British debate, the debate in the cabinet — although they didn't address it, at least as far as the records show, very directly — that that was what they were thinking about: maybe we'd be better off sitting this one out.

And if they’d sat that one out, we would have sat that one out. There was no inevitability about Australia going to war in 1914.

I think, as a country, we don't interrogate nearly carefully enough our decision to go to war in 1914. Because we did make a decision. We present it as if we just went along because Britain went along, but there was a clear Australian perspective on it. We were, in fact, encouraging them to go to war at that stage.

So you're right, there's a fascinating dynamic there.

The other point I'd make is just touching on the first point you made about the military dynamic.

One of the interesting things Tuchman describes is that, after the first month is over — after the Battle of the Marne, after the Western Front gets established — you end up with a war which is overwhelmingly dominated by the extraordinary challenge of adapting tactics to new technology.

Heavy artillery, machine guns, tanks, aircraft — this is a different war than anyone had planned for. And the whole terrible story of the Western Front is trying to work out how the hell you can win a war under those circumstances.

But what's interesting about the month that Tuchman describes — really from the 4th or 5th of August to the 4th or 5th of September — is that actually it's much more primal than that. The technology's not playing a really decisive role. I mean, it is playing a decisive role — you know, French soldiers in red trousers are running up against machine guns…

WALKER: [laughs] Because they didn't want to change their uniform to something less conspicuous.

WHITE: That's right. The pantalon rouge was the spirit of France and all of this.

But the fact is — and I think Tuchman brings this out really well — in the end it was just that France, after this terrible series of defeats in August — well, of course, because their army had gone the wrong way, the army had gone that way when the Germans were coming this way — they steadied themselves. With good command and good staff work, they gathered bits and pieces of armies from different parts of the map, brought them together on the Marne, and they stood there and mounted a successful counteroffensive, really against all the odds.

And that's not technology. That's good old-fashioned courage, or leadership, or élan, maybe.

Of course, it's not the only time you see it on the Western Front. Because when you look again at what happened in 1918, when the stalemate is broken, first by the Germans with their spring offensives, but then by the Allied counteroffensive spearheaded by Australian divisions — that is the point at which the Anzac myth is actually pretty right. It was an astonishing performance by the Australian divisions, already after long, long years of war. They did a remarkable job.

But the Marne is the point at which, in the First World War, so to speak, the old warrior issues seem to have a place.

WHITE: And that's both interesting to the serious student of military affairs — because that stuff does still matter — but also kind of moving as well.

A. J. P. Taylor: The Origins of the Second World War [1:44:49]

WALKER: Alright, that’s Tuchman.

Next is The Origins of the Second World War.

We are back with A.J.P. Taylor.

WHITE: We are.

WALKER: This was first published in 1961. Taylor, as we know, eminent English historian.

As the title suggests, this book is about the build-up and causes of the Second World War. If I can distill the thesis for our audience, he's critiquing what you might call the Nuremberg thesis, which is the idea that if you want to explain the Second World War, it centres on this madman, namely Hitler. He wanted war, he planned for war in detail, and he launched the war. Taylor's breaking with that thesis, and this bolsters his reputation as an iconoclast and revisionist historian.

When it comes to the history of the First World War, Taylor says there's a preponderance of interest and analysis in the causes, but then the war itself is treated as an epilogue.

Conversely, when it comes to the Second World War, there's so much interest; the average person knows quite a lot about the course of the war and the specific events and battles within the war, but not as much interest in the causes. Everyone assumes it was just this madman, this evil individual, Hitler.

So he's trying to redress that state of affairs by interrogating the causes of the Second World War.

Now, what do you understand his thesis to be?

WHITE: I found it a terrifically impressive and important book, partly because it did just take on that orthodoxy that somehow the Second World War, the origin of the Second World War, didn't need to be explained. There was a one-word explanation: Hitler. And it all just flows from that.

What I take to be his primary alternative hypothesis is that the problem of Germany, the problem of how you fit Germany into the European order — which had caused war, in the grand scheme of things, in 1914 — was unresolved in 1918, because Germany was still there, battered and humiliated, its position in Europe was even more uncertain, and would have been there whether Hitler had emerged or not. Whatever happened, the problem of Germany and how you fit Germany — particularly post-1918 Germany — into a European order had not gone away and had to be solved. And it was a collective responsibility of European leaders, and you might say European populations behind those leaders, to find a solution to that problem, and they failed to do so.

He says, I think more or less in these words, that the most powerful countries in Europe in 1918 and in the decades after 1918 were Britain and France, and therefore the primary responsibility for finding a place for Germany in Europe lay with them. And they failed to fulfil that.

Now, he's not saying that Hitler wasn't a very bad person, but he is saying that war was not Hitler's fault, because, without using the “inevitable” word, the unresolved question of Germany's place in Europe had to be addressed somehow, and it was everybody's responsibility to address it. Germany’s, of course, but also Britain’s and France’s.

They failed to do that, and therefore Britain and France deserve blame for the outbreak of the war as much as Germany.

Now, this is a fantastically provocative thing to write. It created a firestorm, understandably. Taylor was expelled from the British Academy, for example.

WALKER: I didn’t know that. Wow.

WHITE: It was a real deal.

And, you know, it’s A.J.P. Taylor so [laughs] there’s some pretty wild stuff in there.

But I think underpinning the wild stuff is a very important thought: that it's everybody's business to manage the international order and that, when we ask ourselves — viewed from 1918, thinking where should we go from here? — and not just at Versailles, though obviously the Versailles outcome contributed to the whole problem, but the task of building a stable and effective European order that could accommodate Germany's power — and one might also say accommodate Russia's power, a very important part of the story as well — failed.

It’s a very important antidote to the idea that you can explain what goes wrong by saying there are bad people out there and the bad people have just got to be stopped, which is essentially the kind of rhetoric, the orthodoxy, about what happened in 1939.

There’s a terrifically provocative line at the end of Chapter One, I think, in which he says something like, “So mine is a story without heroes and even perhaps without villains.” I think that’s such a valuable…

“This is a story without heroes; and perhaps even without villains.”

You don’t have to agree with the whole proposition, because obviously — and I don’t think he denies this — obviously Hitler was a uniquely bad person and the Nazi regime was a uniquely bad regime. It’s pretty important to remember that in light of some of the other issues kicking around at the moment.

But the fact is that Hitler would not have been able to do the worst things that Hitler did — I mean, the Holocaust wouldn’t have happened — if the Second World War hadn’t happened.

France and Britain — and you might say Russia — failed to stop the Second World War.

The war was not inevitable. But very creative statecraft to reframe the European order to accommodate Germany was necessary, and made war very bloody likely if that wasn’t achieved. And that’s what Britain and France failed to achieve.

Now, the bulk of the book unpacks that by rebutting the argument that Hitler had a grand plan from the beginning.

He says Hitler was a guy who made stuff up as he went along.

WALKER: He’s sort of an opportunist.

WHITE: An opportunist. And I think there’s a lot of strength in that analysis. I’m not sure that I regard myself as a sufficient expert on every detail of that history to definitively adjudicate the correctness of his analysis at every point, but it’s a pretty compelling story.

Overall, even if you disagree with him on particular issues — the reoccupation of the Rhineland and the Anschluss and so on — the overall story, that Hitler was making it up as he went along, and therefore if the Allies had found a different way of responding, a more effective way of responding earlier, he could have been stopped... And that the traditional vision — that you just had to stand up to Hitler, the criticism of appeasement — doesn’t get you nearly far enough; it’s a much more complicated question than simply trying to push Germany back into a box.

WALKER: So should I read Taylor as saying, if we ask this question, “What was Hitler’s role in the war?” — if you subtract out the sincere and virulent antisemitism, if you substituted most other German leaders at the time for Hitler, they probably would have done the same things?

So we mightn’t have ended up with the Holocaust, but we would have ended up with World War II?

WHITE: I think that’s right.

I don’t think one can dismiss the antisemitism of the Third Reich just as Hitler personally. There was obviously something much deeper going on in German society.

WALKER: One point he makes on that is the difference between Hitler and the average German in terms of their prejudices was Hitler’s literalism.

He took the prejudice of the common German and then enacted it.

WHITE: Yeah, I think that’s right.

And nothing in this argument should for a moment suggest that Hitler and the attitudes of his regime — of the Third Reich — were not incredibly evil.

The difference is that he was put in a position where he could operationalise that evil in unimaginably evil ways, because the European order broke down.

There’s no sense in which a war like the Second World War was inevitable, because the whole underlying premise of Taylor’s argument is that Germany’s position in Europe could have been accommodated.

Actually in the end it was accommodated: after 1945, in the context of the Cold War and the end of the Cold War.

There’s no particular reason, he would argue — he doesn’t say how, I might say, which is a shortcoming of the book… But his basic proposition is that it was the responsibility of all the European powers together, including Germany, but above all France and Britain (because they were the strongest powers), to find a way to accommodate Germany’s power, and by doing that, to avoid a conflict, and therefore avoid the situation in which Hitler was able to do the terrible things he did. 

Now, that doesn’t in any way lessen Hitler’s responsibility for what he did. But it does suggest that other people carried responsibility as well.

And that's always an important lesson. It's always tempting to say that it's all his fault or it's all her fault. No, everybody's to blame when things go pear-shaped.

That's important because, if you too simple-mindedly attribute all the blame to the Germans in 1939, then you let yourself off the hook. And you don't want to let people off the hook. You want to focus people. 

This is not irrelevant to today. We all have responsibility for thinking about how to manage the international order, the evolution of the international order, to accommodate the new distribution of wealth and power that we confront today in a way that avoids a conflict.

WALKER: Yeah. Let me bounce off you two specific things I learned from this, and then I've got two additional specific questions for you relating to the Second World War.

Taylor did help me gain a more specific understanding of just exactly how the Treaty of Versailles set the stage for World War II. If I recall correctly, one of the points he makes was just the decision to require disarmament on Germany's part and to seek reparations from Germany required a unified Germany and a German state to do that legwork for you.

WHITE: Yes.

WALKER: In doing that, the Allied powers inadvertently left this kind of latent great power in Europe, with the central question of how do we accommodate Germany in the balance of power unsolved, because there was this problem of enforcement.

All Germany had to do, in a decade or so, was just to slough off the demands on it; was just to say, "No, we're going to start rearming. No, we're not going to pay reparations,." Which obviously is ultimately what it did. And then you're just back to the same problem. So that was one thing that I thought was interesting.

The other thing was that his criticism of appeasement was compelling. We have a few events. There's the remilitarisation and reoccupation of the Rhineland in 1936. There's Munich in 1938, where Germany annexes the Sudetenland, the German-speaking parts of Czechoslovakia. And the criticism of Britain and France here is that when Danzig finally happens, that is the cassus belli...

WHITE: Yes.

WALKER: And they've already let the Germans get away with so much.

Compared to those earlier things, like the annexing of the Sudetenland, Danzig appears minor in comparison.

So it's not so much that the Germans miscalculated, it's just that the Allied powers weren't terribly consistent with their policy.

Is that a correct reading of Taylor?

WHITE: That is a fair interpretation of Taylor. I don't think, in the end, it's the strongest part of his argument.

The fact is that, whatever happened, there was going to be a German state.

WALKER: Right.

WHITE: And one of the differences between 1918 and 1945 is that what the Allies did in 1945 was to occupy Berlin and destroy the system of government — I mean literally — and rebuild a new one.

Now, they rebuilt a new one with the assistance of some Germans. But the FRG, the Federal Republic of Germany on the western side, and the German Democratic Republic on the Soviet side, were artefacts of the conquering powers. They rebuilt the German state according to their wishes.

What happened in 1918 was that Wilhelmine Germany collapsed, and the Allies left it to the Germans to try and rebuild their own state. And the long and short of it is they failed. They left a very weak structure which Hitler could take over and pervert, the way he did.

Now, I think the problem is not that, by demanding things like disarmament and reparation from Germany, the Allies contributed to the re-establishment of a German state. There was going to be a German state. They just did nothing to design it.

All they did was put pressure on it — very difficult pressures, pressures that were hard to resist — whereas you could say that the success of the post–World War II settlements, actually both in Germany and Japan, is that the new political dispensations created by the Allies were designed to suit their interests.

Now, the good news is (and there's a whole story here) that that worked in the interests of Germany and Japan as well. In the end, you could accommodate these powers into a new order, but by the time you got to the position in both places in 1945, it meant you had to redesign their political systems from the ground up.

WALKER: So Versailles wasn't harsh enough? [laughs]

WHITE: Well, put it this way, it was a halfway house. I mean, it was very bloody harsh. But it left the poor old Germans struggling with how to rebuild themselves after this crushing defeat. The German political system couldn't do it.

As to appeasement, there's two points. The key [point] that Taylor's making is that the mistake that France and Britain made was not to resist the reoccupation of the Rhineland or not to resist the Anschluss with Austria or not to resist the occupation of the Sudetenland in the Munich crisis. By the time they got to that, they were already on a hiding to nothing.

The mistake they made was to not in the '20s and early '30s do much more effectively what they tried to do with things like Locarno, to produce a stable, effective, functioning World War I post-1918 order in which Germany had a place. And there were some subsidiary problems: the problem of dealing with Japan's invasion of Manchuria and subsequent bits of that history, and, of course, Italy's adventure in Abyssinia. So there were contributing factors, but right at the heart of it was a failure to start work in 1918 to rebuild an order which would give Germany an operative place. By the time you get to 1936, 1938, we're already in a world of hurt.

Now, Chamberlain was a very unattractive historical character, but I'm much more sympathetic to the choices he made, particularly in 1938, than other people are. Because I think anyone who had lived through the First World War — and I don't just mean Chamberlain, I mean the whole society — the fact that they really wanted to work very, very hard to avoid another war with Germany is something I find very hard to condemn.

The mistake they made — and this gets to the point about Danzig — was not to not go to war over Czechoslovakia. In the end, I don't think it was worth going to war over Czechoslovakia — a very harsh thing to say. But I'd also say I don't think it's worth going to war with China over Taiwan — harsh thing to say. But in order to reflect on that judgement, you have to consider the other side of the equation.

What was on the other side of the equation was the Second World War, and we know what that was like. What’s on the other side of the equation with Taiwan is a nuclear war. We don't know what that's like, but we ought to put some effort into imagining it. 

But the mistake they made that they didn't succeed in really convincing Hitler that they'd go to war over Poland.

You see, after Hitler moved on in early 1939 — because, you know, he took the Sudetenland in September 1938, and then in early '39 he took the rest of Czechoslovakia. That was the point at which Chamberlain swapped and gave the security guarantee to Poland and, I might say, a whole lot of other countries in Eastern and Southern Europe. The problem is he gave these guarantees, but he failed to convince Hitler that he was serious about them, because he didn't do anything to implement them.

It's very dangerous to say “I'm going to defend Poland,” and then do nothing about it. You just have to look at the map to see you've got to do something to make that real.

The evidence is reasonably clear: Hitler did not expect the British to go to war over Poland. Because although Chamberlain had stood up in the House of Commons and said that Poland was given a security undertaking, they didn't do anything to implement it. And they were right: actually the British did nothing to defend Poland.

So you could argue — I would argue — that the mistake they made in the lead-up to the Second World War, viewing it more narrowly, not in the very broad way that Taylor views it, wasn't that they didn't go to war over Czechoslovakia. It's that they didn't absolutely, unambiguously draw the line over Poland, given that Poland was where they decided to stop appeasing.

There's a message for us in that. We keep on saying, “You must not do this.” You know, “You must not invade Ukraine.” Then we don't effectively resist the invasion. That's a big mistake.

I'm a big believer in appeasement — that is, I’m a big believer in making concessions to avoid war. But to avoid war through making concessions, you have to make it absolutely crystal clear where the concessions stop. The idea that you can never appease, because whenever you give something the other guy always asks for more, that's only true if you fail very satisfactorily, very compellingly, to draw the line and say, “This is where we stop appeasing.”

Now, the Cold War is the absolute object lesson in this. What happened in the Cold War — you might say at Yalta — the Russians were appeased, essentially by FDR with poor old Churchill tagging along behind saying, “Yes, you can do what you like in Poland,” and, of course, they can have their half of Germany. But then they drew a line down the middle of Europe and said, “We will go to war over this.”

It was effective deterrence based on effective appeasement. If the Allies at Yalta in 1945 had tried to deny Russia the hegemony it sought over Poland and the rest of Eastern Europe (but Poland's the one that everyone focuses on), then they would have faced a war with the Red Army in Europe in 1945. And the Red Army was very, very good and very, very big. That would have been an unimaginable disaster. Tough to say to a Polish audience — and I've done it — but it was the right decision to make.

But then they drew a line down the middle of Europe and said, "No further," and made that line absolutely compelling. How? By sending hundreds of thousands of American troops to garrison it and by backing them up with an unimaginable nuclear arsenal. Now that's deterrence.

WALKER: What was the correct policy at Versailles? If you were in charge, what would you have done? What are Hugh White's Fourteen Points? [laughs]

WHITE: [laughs] Good way to ask the question, because it's not the Fourteen Points.

The Wilsonian approach — and we'll come to this — was to imagine a world governed by laws and upheld by American power, backed by American power. It was a surprisingly modern vision, if I can put it that way. And that wasn't going to work. You couldn't, so to speak, legislate the problem of Germany away. You had to actually manage Germany as a powerful sovereign entity in the heart of Europe.

Well, it’s a really good question, and I don't know the answer, but it would have entailed accepting Germany as a co-equal of France and Britain and Russia as co-equal great powers in the European strategic order. And that was, of course, an extraordinarily hard thing to do at the end of a very long and bitter war, and also at a time when Russia had disappeared from the European state system temporarily because of the revolution and because of the civil war that was then raging in Russia. Russia wasn't part of the picture, wasn't at Versailles, of course.

One of the things that stopped the European great powers in 1918 building a European order that would have accommodated German power peacefully was that one of the key players wasn't there. Even if it had been, what kind of role it would have played is anybody's guess.

The other problem was that you had, at the same time, because of the collapse of the Austro-Hungarian Empire and the application of Wilsonian principles, you'd suddenly developed this constellation of small weak states in the place of what had been the Austro-Hungarian Empire. Now, the Austro-Hungarian Empire, as we saw in August 1914, was a pretty shoddy operation. But the fact that you ended up with all of these weak states like Czechoslovakia, like Poland turned out to be and so on, made the management of the European order much harder. It made the creation of a new European order which accommodated German power, but also contained it, that much more difficult. In a sense, that's the tragedy of the '20s and '30s. 

I don't have a model as to what exactly that new order would have looked like, but it's going to look like what happened in 1815. Because the great story of 19th-century Europe is that after whatever it was, 23 years, of incredibly bitter, complex warfare between everybody in Europe and France during the long revolutionary and Napoleonic Wars, the victors got together at Vienna in 1815, after they’d defeated Napoleon a second time, and invited France to join them, and restored France to something like its old borders and acknowledged France as a great power in Europe.

Now, this was astonishing. We might tend to underestimate just how visceral and traumatic the Napoleonic Wars were. For their time, they were — I think almost literally true — an order of magnitude more devastating than any war that had ever taken place before.

WALKER: And the first total wars in history, right? Or the first modern total wars?

WHITE: Well, put it this way, more total because more industrialised. Not ‘total’ comparable with the First World War. The disconnect between the Napoleonic Wars and the First World War is still very great because of the astonishing transformations that happened in the intervening 100 years.

Railways, apart from anything else. There was a limit to how many men you could draw out of the population and put under arms, how many muskets and bayonets and pairs of boots you could produce to equip them with, and how you could move them and supply them. Simply because you didn't have railways and you didn't have modern logistic systems and so on. 

By the time of the First World War, actually via the American Civil War — the American Civil War is the fascinating midpoint in that transition... If I'd thought longer and harder, I would have put Bruce Catton's book on the American Civil War onto my list. It's a fascinating book which had a huge influence. I read it very young. 

But I wouldn't put the Napoleonic Wars in the same category as the First World War, but they still were, for an entire generation, extraordinarily dramatic and extraordinarily demanding.

So the fact that at the end of it they invited France in and re-established France as a great power, meant you had the foundation for a European order which — and this is the Concert of Europe, the Congress of Vienna, model — which lasted for 100 years. And that was the hundred years in which Europe ruled the world. It was the best 100 years in Europe's history, you could almost certainly argue. A lot better than the 20th century anyway, where they found no place for Germany.

So my short answer is that what they should have done in 1918 was to go to Vienna instead of Versailles.

WALKER: So I'm clear: are you implying the problem with Versailles was that it wounded German pride? Or what was the mechanism there?

WHITE: Well, when one says “wounded German pride”, it makes it sound a bit trivial. But the fact is that status in the international system turns out to be incredibly important for balance.

WALKER: But am I understanding you correctly in that the difference between Versailles and Vienna was the status was accorded to the loser?

WHITE: Yes. In 1815, the loser was accepted and re-established as a great power in the European system.

And in 1918, Germany wasn't. That sounds glib when you put it like that, because it's not just a matter of giving it a label. You had to actually think of a whole European system that would accommodate it, but that’s what they invented in 1815, and that's what they failed to invent in 1918.

And it was partly because, inspired by the Fourteen Points, or rather failing to dodge the Fourteen Points, they ended up with a structure which was too legalistic and insufficiently backed by force.

The point about the model of 1815 is not just that everyone was nice enough to say to the French, “Okay, you can join us at the conference table as a great power.” What underpinned that was an absolutely ironclad understanding that if any power, including France, sought to dominate Europe, all of the others would unite against it.

The Congress of Vienna was not just nice diplomats in powdered wigs dancing waltzes with one another. It had a very strong strategic underpinning to it. That is: “We will treat you as a great power. We'll treat everyone, the five around the table, as great powers. And we will respect your status as a great power, and we will respect your vital interests. But if you try and dominate, then the rest of us will gang up and defeat you.”

And that was a deterrent. The mistake at Versailles was neither to accord Germany that status nor to resolve on the deterrent. That's one of the points that Taylor makes: that the various attempts to impose a robust deterrent on Germany failed, and were failing long before the reoccupation of the Rhineland.

You can build a balance of power. There was plenty of power in Europe to frame and balance Germany's power. Harder without Russia, with the fact that Russia was, first of all, out of the picture, and then when it came back into the picture, it came back in a very complex way.

WALKER: So Russia withdraws after the First World War. Taylor says you can think of the [centre of] gravity of power in Europe as shifting from Berlin to the Rhineland after World War I.

WHITE: That's right. And then when Russia comes back in, as it does in the '30s, the French and the British think very hard about bringing Russia back into the picture to counterbalance Germany as part of the process of establishing a balance of power against Germany. But they keep on being very ambivalent about it because they're so ambivalent about Bolshevism.

The failure of Britain's and France's various attempts to call Russia in to help contain Germany is a big part of the tragedy of the late '30s, in some ways bigger than the “betrayal” of Czechoslovakia. So Russia eventually became part of the picture, but — and this is one of Taylor's criticisms of them — they weren't prepared to really take the Russian option seriously.

Mind you, it was made harder by the fact that the Poles were very resistant to Russia being a guarantor of their security as well, for reasons one can well understand. But the Poles had a choice between being monstered by Russia or being monstered by Germany. That's their position in history.

WALKER: The lot of Poland. 

WHITE: Yeah, exactly.

WALKER: I'm going to save my other question for the end because it makes more sense after we've discussed the other books. But anything else on Taylor before we move on?

WHITE: I think that’s good.

WALKER: I mean, there’s much more obviously.

WHITE: It's a huge book and very challenging and unsettling. 

WALKER: Yeah. It’s a disturbing book.

WHITE: It's a disturbing book. It's not a book, unlike The Struggle for Mastery, that you just pick up and read for fun. 

WALKER: No. It's dark. 

WHITE: It's edgy. I find it edgy, but that's one of the reasons why I like it so much. It really challenges you to think about things.

But also, it does push you back to the big question about the choices that countries face about how to manage changes in the international system, and brings the focus back on those choices. Whereas a lot of history aims at people trying to distract attention from that focus by saying that [war] was inevitable, nothing you could have done.

The orthodox account of the lead-up to the Second World War was a version of that. That once Hitler came to power in 1933, war was inevitable, nothing you could have done to stop it. That's a laziness and a complacency that you want to fight against.

E. H. Carr: The Twenty Years’ Crisis [2:21:13]

WALKER: Okay. Next book, The Twenty Years' Crisis.

WHITE: The other guys.

WALKER: 1919 to 1939. The author is E.H. Carr. He was an English historian and diplomat. He joined the British Foreign Office in 1916, participated in the Paris Peace Conference, and then resigned from the Foreign Office in 1936 to begin a career as an academic.

A little bit of a parallel to your career in a sense, right? [laughs]

WHITE: [laughs] Yeah. I don't think I'll accept that. [laughs]

WALKER: [laughs] So this book was first published in 1939.

WHITE: Yes. Before September…

WALKER Yeah, so he's writing the preface around the time Germany is invading Poland, with Britain and France declaring war a couple of days later. 

This is the foundational realist text in the international relations sense, and he obviously critiques the utopianism of the liberal idealists, exemplified by Woodrow Wilson.

Just a random question before we go into the substance. I first discovered Carr in high school. We read What Is History? He's also famous for, probably his biggest scholarly work, the History of Russia.

WHITE: The History of the Soviet Union.

WALKER: Sorry, A History of the Soviet Union. And he thought that that was his magnum opus, but [The Twenty Years’ Crisis] is probably the most influential book.

WHITE: That’s right, yes.

WALKER: So it's funny how authors themselves aren't always good at predicting which of their books are going to be the most successful. 

WHITE: The thing about Carr is that… A History of the Soviet Union was amazing. It's five, six volumes. It was the major attempt in English to sort out exactly what had happened. I can see why he thought it was his magnum opus, because of course at the time he wrote it, the Soviet Union was a very big deal. Now it is a kind of historical curiosity. 

When I was in my late 20s or early 30s, I read the whole thing. 

WALKER: Oh really?

WHITE: Well, you know, people did. It seemed important.

WALKER: Back in the days when people read books. [laughs]

WHITE: Back in the days when people read books, and back in the days when people thought that what the Soviet Union was all about and where it was heading, and therefore where it had come from, seemed really important.

I still have my copy; in fact, a couple of volumes in here somewhere. But I've forgotten most of it.

Whereas the questions he was addressing in [The Twenty Years’ Crisis] are the same questions as in Taylor's Origins of the Second World War. They're really books about the same subject: what went wrong in what he calls the “twenty years' crisis” from 1919 to 1939, that Britain found themselves back in the terribly perilous position they were in in 1939, even before the war broke out.

It had two waves of influence. It felt very relevant in the Cold War, and it feels again, I think, very relevant today because it's all about how you manage the international system to accommodate powers and avoid the problem of war.

He does that in a very different way from Taylor, by looking less at the diplomatic machinations — which of course is what Taylor writes about — and more at the intellectual, conceptual and ethical foundations.

And as you say, really the whole book is a critique of the Wilsonian model of an international system governed by laws and ideals — essentially, as I think he says somewhere in the book, the whole story of what happened in the decades after 1918 is an attempt to apply American ideals of sociology to the international system.

WALKER: Transferring individual morality — the kind of morality or ethics that would operate at the level of a society — onto the international system.

WHITE: Yes. Though not just ethics — we might want to come back to that. But more the idea of almost a political culture. That is that you have a system of rules that people sign up to, which they more or less, most of the time, voluntarily submit to because it's in everybody's mutual self-interest. And where they stray off the beaten path, then somebody slaps them back into line.

It's a pretty conventional model of how domestic societies work. And it was a very natural thing, particularly if you're an American with a very comfortable feeling about how your domestic society works back then, that you'd apply that model to the international system. And the bulk of the book really is a critique of that — which I think is accurate — but in the process, as you say, he articulates an alternative which people call realism.

The realism he articulated got picked up after the war, particularly by a series of American scholars, and I think somewhat perverted. The realism as it emerges with people like Morgenthau, who was one of the great 1950s post-war theorists of international relations, and establishing a tradition which is carried on these days by people like John Mearsheimer, is called realism — and people often call me a realist. I think it's actually a misunderstanding of what Carr was about, and [laughs] a misunderstanding of the way the world works. I don't think of myself as a realist in that way at all. I have quite a different view of these things. I do have a version of realism, but it's not theirs; it's much closer to Carr's.

WALKER: So can you tell me your understanding of Carr's realism?

WHITE: Right at the heart of Carr's argument is the idea that you have to be — not surprising for someone who’s writing about those decades — you have to be extremely conscious of the costs of what you're trying to achieve. You don't want to abandon hopes for a more orderly and disciplined international system, a more peaceful international system, but you have to be extremely conscious of the real costs of doing that, including the risk of war. One of the points he makes is that people in the post-First World War era underestimated the significance of armed force. 

In particular, as you contemplate the management of change in the international system, you have to put a very strong priority — not an overwhelming priority, but a very strong priority — on the imperative to manage that change peacefully.

What for me is one of two really key passages in the book ... is the one in which he critiques the idea that everybody really wants peace. Of course at one level, he’s right: everyone wants peace.

But in the words of Jackie Fisher, the British admiral who built the Royal Navy before the First World War, who thought about this stuff, Jackie Fisher said something like, “Oh yes, peace. Hmm. Everybody wants peace. But they want the peace that suits them.”

WALKER: Exactly.

WHITE: Carr has a line in which he says something like, “The universal declaration everyone makes that they want peace conceals the fact that some people want peace in order to preserve the international system, and others want to change it peacefully.” In other words, they want to improve their position without having to fight for it.

“The common interest in peace masks the fact that some nations desire to maintain the status quo without having to fight for it, and others to change the status quo without having to fight in order to do so.”

He's stressing that the idea that it's going to be easy for us all to agree on an international order which we're all going to be happy with is just not realistic. That's the first point about realism.

The second is that when confronted with a force, a country, that wants to change the international order, there's a kind of presumption — and for someone writing just before 1939 this is a very big thing to be saying — that somebody who wants to change the international order must by definition be in the wrong, and that it's always right to fight to preserve the international order and always wrong to fight to change it. But actually change is natural, and in some circumstances it might be as wrong or wronger to fight to preserve an old order than it is to produce a new one.

It's probably obvious why I think that's an important set of judgments, because that's where we are right now. As we ask ourselves, should we go to war with China over Taiwan — not a hypothetical question — clearly we're facing a China that wants to change the international order. The question is: are we so sure that the international order that we like, that we're used to, that we support, which tellingly we call the "rules-based order"...

The image of the rules-based order that we have, that we say — I think, ahistorically — emerged after 1945, is really a very Wilsonian image: the image of a world basically run by American ideas. Not that I've got anything against American ideas; I'd love it if this world worked. I just don't think it's realistic. 

But the idea that we live in a rules-based order and that China is challenging the rules-based order, and therefore we're justified in doing whatever it takes, including, if necessary, going to war with China in order to preserve it, which is the orthodox view of the mainstream of American foreign policy (though not the Trump administration...), is also the essential underpinning of Australia's position on these issues, certainly the underpinning implied by AUKUS, for example.

We've got to ask ourselves: is that right? Are we so justified in thinking that preserving the existing international order is so important that it's worth going to war to preserve it?

And of course that judgement has got to be heavily based on a judgement about what kind of war we're talking about. Well, in this case, we're talking about a nuclear war, almost certainly. So I would say — and I think Carr would have said too if he was alive and with us today — that we're much better off (going back to Taylor) trying to find a way to adjust the international system to accommodate China's power, rather than putting ourselves in a position where we find ourselves with no option but to fight to contain it.

Now, the point about that second sense in which that's realistic — my sense of realism — is that that doesn't deny the attractiveness of preserving the features of the current international order that we like. But it weighs against them the costs of doing so, the real costs of doing so. And if the real costs of doing so are fighting a nuclear war, then that cost is too high.

You've got to make a choice. It's a difficult choice. It's a choice between an order which in some ways is going to be less congenial to us, just as poor old Sir Edward Grey and his colleagues faced a choice between a Europe in which Germany's strength and power would be disagreeable, on the one hand, or the costs and risks of a war that would make the First World War look like a picnic.

Because I do think there's absolutely no reason to expect a US–China war over Taiwan not to become a nuclear war. Unless America starts the war and then surrenders quickly. Which is not the worst of all possible worlds. Nuclear war is the worst outcome. But whatever happens, you end up with a war that looks a bit like the First World War. That is, countries go into it hoping to preserve their position as great powers and then end up destroying it.

WALKER: You mentioned how we call the current order the rules-based order. There's a section in The Twenty Years' Crisis called ‘National Interest and the Universal Good’ where he talks about how statesmen like to dress up national interest in this rhetoric of their interests as being good for humanity. But he says that international moralities really just perpetuate the supremacy of the dominant group.

So there's this notion of the national interest in Carr, but at this point — and obviously international relations is really at its beginnings as a sort of “science” — there's not a clearly defined concept of what the national interest is.

What do you think nation-states are maximising?

WHITE: The most important conclusion to draw is that there's no simple answer to that. Nation-states face very complex choices. In the end, one of the things that makes international relations an interesting, difficult, and occasionally tragic study is that nations behave very much like people.

Thucydides, all the way back, said that wars are driven by three things: fear, greed, and honour, and the greatest of those is honour. To translate that into modern parlance, nations, like people, want three things fundamentally. They want to be safe. They want to be rich, or at least comfortable. And they want to feel good about themselves.

A lot of the tragedy of human life comes up because the last one overrules the first two. People make huge sacrifices for status in different ways — how they see themselves and how they see their place in society. Nations are just the same.

So when you look at a country making choices, you can see all of those factors in play. But most often, most destructively, it's the concern for status that really drives people. People are surprised by this. There's a sort of common pop cynicism that says, “Ah, you know, it's all just driven by economics really.” No, no. International relations would be a lot easier to manage if people were just driven by economics.

Economics is often a factor, but countries make huge sacrifices economically in order to preserve what they see as being their status in the international system. Really that’s what 1914 was about. That was the unresolved question about Germany's place in post-1918 Europe.

So you do keep coming back to this question. States are driven by those things. The question is: can leaders, and behind them populations, make intelligent, well-informed, imaginative judgements about how they balance one another?

Yes, Britain wanted to avoid being somewhat further subordinated, losing some of its international status, by confronting a disagreeably powerful Wilhelmine Germany in Europe, and therefore went to the First World War. But in the process, it destroyed its economy and killed most of a generation. In the end, was that price worth paying? Were they imaginative enough about what the price might be?

And it's worth making the point — a very important point — that people often present a contrast between a realistic approach to foreign policy or strategic policy, which just looks at interests, and an idealistic approach, or a Wilsonian approach, which looks at values. I very strongly reject that.

In the realist analysis, as I conceive it, there are values on both sides. On the one hand, you might say the values are embodied in the rules-based order, and although I smile at the title, those values are real. On the other hand, there's the value of avoiding a war. And that's for real. Peace is a value too.

So people who, as they often do, look at me askance when I say we should now declare that we would not go to war with China over Taiwan say, “You're sacrificing our values.” To which I say, “Well, yes, but actually what I'm doing is weighing them against the values in avoiding a nuclear war. And if you don't think that's serious, you've forgotten what nuclear war's like.”

WALKER: Or you can't imagine.

WHITE: You can't imagine what a nuclear war is like. But, I'm going to pull a generational point here. It does make a difference having grown up during the Cold War, even in Australia.

The prospect of a global nuclear holocaust, as it was called, was real, and it could have happened. And people — this goes back to the point about imagination — simply cannot imagine a nuclear war. Part of that is not imagining the reality that the machinery is all there right now as we speak. The missiles are in their silos. The crews sit at their consoles. The launch codes are in the safe on the wall behind them. The submarines are at sea.

I'm going to sound like someone from the Campaign for Nuclear Disarmament, which I'm not. But the only thing that stops a nuclear war breaking out is the decision-making of a very small number of political leaders around the world. The idea that we could be confident that that wouldn't happen in the event of a US–China war over Taiwan, for example, is just insupportable. There is no credible argument you can make for that.

I'm, going to allow myself to say, shocked by how insouciant a very large number of people, including people in Australia, are about the idea, “Yeah, sure, we might go to war with China over Taiwan.” Really? What on earth do they think that war will be like?

And how do they weigh the values involved in avoiding that against the values we'd seek to defend by undertaking it?

That's what this stuff's [The Twenty Years' Crisis] all about.

WALKER: A lack of imagination is a great way to put it. It's certainly a theme that has emerged for me from these books: at different points, a lack of imagination on the part of statesmen. A lack of imagination on the part of Athenian and Spartan statesmen to think that this could ever turn out to be the 27-year conflict that it turned out to be.

A lack of imagination on the part of, you know, the Kaiser and the Tsar and the kings in 1914 to think that this would be anything other than the decisive battles that they were expecting.

WHITE: And in that case, lack of imagination about the military realities, but also lack of imagination to recognise that their opposite numbers had exactly the same hopes that they did. They hoped that the other guys were going to back off, and they didn't think that the other guys were hoping they'd back off. You've got to think your way into the other side of the hill, see how the other guy sees things.

WALKER: Absolutely. Back to The Twenty Years' Crisis, the book. Carr infamously self-censored between the original edition in 1939 and an updated edition in 1946.

I think most of the substantive edits were made to Chapter 13 on peaceful change. He tried to remove some stuff favourable towards appeasement. For example, in the original, the 1939 edition, he justified Munich as an example of peaceful change.

Given everything we've discussed, did he kind of have a case ex ante, and the Allies just spoiled his...? 

WHITE: You mean that he was right in '39 about appeasement, for example, about Munich?

WALKER: Yeah.

WHITE: Well, I think there is a case to be made. But there are two parts to it. The first is that by the time you get to Munich, by the time you get to 1938, you already have a Germany that has become extraordinarily difficult to accommodate (perhaps not impossible, but extraordinarily difficult) because of the nature of the regime.

And you do have to keep coming back to the fact that in some ways what happened in 1939 is a bad source of lessons about management of the international system. Because most regimes, most of the time, are not nearly as bad as the Nazis. People, for example, looking at Putin's Russia today, or Xi's China, or sometimes the Ayatollahs’ Iran, say, “This is a very, very bad regime which simply must be resisted at all costs,” and they use the Munich metaphor.

But the metaphor breaks down for several reasons. One of them is that, yes, these countries have got their faults, but they're not the Nazis.

So in some ways I'm not sympathetic to Carr, because in the end, by the time you got to Munich it was all too late, because we were already dealing with the Nazis.

On the other hand, to be fair to him, in 1939 nobody knew how bad they were going to be. Nobody knew about the Holocaust. Nobody knew what the German armies were going to do in Russia. Nobody even knew how they were going to behave as occupying powers in Western Europe. So one can understand how in 1939 you might have thought that.

The other point, though, is that (going back to something we touched on before) Munich could have worked if, when Hitler in a sense violated Munich by going beyond the Sudetenland to occupying Prague, if France and Britain had stood up then and said, “We will guarantee the security of Poland by invading Germany from the West if Germany attacks Poland,” and had deployed massive forces onto the German–French border, French forces and British forces. In other words had done an analogue of what NATO did in the Cold War from 1948 onwards, then there's a fair chance that would have deterred Hitler.

That's the point. Even then, even in March 1939, World War II could have been stopped, had the British and French really marshalled the forces required to impose real costs on Germany and convince the Germans they were prepared to impose those real costs.

There’s strong evidence that that would have made a difference, and the evidence is made up of the way Hitler responded when the British actually did declare war in September 1939. There's a famous anecdote from Hitler's interpreter, who was with him a lot of the time. [Schmidt], I think his name is. He took the British ultimatum in to Hitler when it arrived.

And Hitler sat down and read his translation of it. And he said Hitler looked at it — and of course he was saying this after the war, and he was talking to the Allies, so… — but he looked at it, and then he turned his head and looked out of the window for a long moment, and then looked back and said, "Now what?" That is a very poignant moment.

“Now what?”

So there were things that could have been done, but it required imagination. Amongst other things, it required imagination to see that what was going to be required was not just to say something, but to do stuff, and to take the concrete steps which make what you say really credible.

That's why the Cold War never went hot. That's why that war didn't happen. Because actually both sides did it. Both the West and the Soviet bloc compellingly convinced the other that they would be willing to go to war rather than tolerate any change in the status quo.

They did it not just by declarations — though the declarations matter — but by the deployment of massive forces on either side of the Iron Curtain. The old line about strong fences make good neighbours is creepy but true. 

The converse to that is, if you're not prepared to take those steps, then don't try and draw the line. You want to accommodate up to the point where you really are willing to draw the line. 

This is not irrelevant to Europe today. The Europeans today face a choice as to where they're going to stop Russia, and they talk as if they want to stop them in Ukraine, but they don't do anything, at least they don't do much. They don't do enough.

At some point, they are going to have to draw the line and say to Russia, “You're really not going to be allowed to cross this line.” The great question for Europe is: where are they going to draw that line? I don't think the Europeans have decided yet.

WALKER: And will Russia view that as credible?

WHITE: Well, they will if the Europeans make it strong enough. In particular, what the Europeans have to do is to convince the Russians not just that they are willing to fight a big conventional battle, but that they're willing to deter any Russian use of nuclear weapons with nuclear retaliation.

That's the way these things work in the nuclear age. And that's, of course, what both sides did in the Cold War.

And that's a terrifically formidable bar to clear. It's a terribly hard thing to do. But that's what they did in the Cold War, and that's what they're going to have to do again, because we're still living in the nuclear age.

We've for the last 35 years had a sort of a holiday from nuclear weapons. Well, they're back — and they’re back in Asia as well as in Europe.

Michael Howard: The Continental Commitment [2:49:03]

WALKER: Okay. Let's move on to the next book.

WHITE: The Continental Commitment.

WALKER: The Continental Commitment. First published in 1972. The author is Michael Howard, eminent English military historian. Perhaps his most significant scholarly work was a book on the Franco–Prussian War.

He was also awarded the Military Cross for an act of conspicuous bravery during World War II, and he set up the Department of War Studies at King’s College London.

So this is a short book. I really enjoyed this book. Maybe I just have a soft spot for pithy books. 

One of his most influential, the book’s chapters are reprinted substantially from lectures he gave at Oxford in the spring of 1971.

As the subtitle implies, it offers a sketch of British defence policy as it unfolded in the first half of the 20th century.

In the preface, he says he will be advocating a “controversial thesis”. Correct me if I’m wrong, but my understanding of that controversial thesis was that, far from strengthening Britain’s hand against Germany, the empire actually dissipated its strength. Am I reading him correctly?

WHITE: Yes, I think you’re right. I mean, it’s embodied in the title.

WALKER: The Continental Commitment. Yes.

WHITE: It’s worth making the point there’s a change of pace here, or change of focus. Because what we’ve been talking about so far has been a series of books that have focused primarily on what you might call grand strategy in the grandest sense — that is, the way in which the international system works, the way in which it adapts, the way in which countries make choices about how the international system functions; in other words, the choices they make about whether or not they go to war.

The Continental Commitment really takes the focus down a bit: how do you prepare to fight wars? Obviously some of the issues are connected, but I often say my career has focused on two big issues. The first is: what wars should Australia fight? And the second is: what armed forces should Australia have? You obviously hope the answers will be connected, but they are different questions.

This is really a book about the second.

A whole lot of my career has been focused on what you might call quite technical questions about defence policy. What sort of armed forces should you build? What sort of aircraft do you need, and so on. What sort of battles do you want to fight, in the more detailed sense?

The reason I’ve always loved this book is that it provides such a vivid connection between the high strategy stuff on the one hand, and the actual choices that governments make about how they spend their defence dollars on the other.

All countries face big choices, but in Britain there’s been a very particular pattern to the choices it faces. Indeed, he outlines that pattern in a wonderful passage at the beginning of the first lecture, in which he says something like, “The student of British defence policy looking back over the last 70 years will notice many issues coming back. The way you make your choices between defending the empire or defending one’s interests in Europe; the way in which you make choices between maritime power and land power,” et cetera.

It’s a beautiful passage, actually. It’s a beautifully constructed sentence. But it also contains a deep truth.

And I found it, when I was thinking about Australian defence policy, very instructive to see how Howard had, by unpacking this history of Britain’s choices about the kinds of armed forces it needed based on judgements about the kind of wars it needed to fight... I always found it very inspiring.

Now, you’re absolutely right. The basic choice that Britain has faced — and you could say this goes back to the Armada, certainly to the early modern era — is the idea of Britain primarily as a maritime power focused on its global empire, and on the one hand just leaving Europe to one side, which very strongly motivates it to spend most of its money on its navy, and on the other hand is the idea of a continental power — that is, a country which happens to be separated from Europe by the English Channel, but whose most important strategic interests are nonetheless tied up with the prevention of the domination of Europe by any single power — and therefore, what Britain really needs to be able to do is to contribute forces to European continental conflicts, hence the [book’s] name, to prevent the emergence of a European hegemon.

And his controversial proposition is that Britain’s attempt to do both — which of course is what governments always try to do when they’re given a choice… But in the end, the really decisive challenges to Britain’s security have been continental hegemons. Therefore the most important thing Britain has to do with its armed forces is contribute to the prevention of European hegemony. And that has meant that repeatedly it has had to put its navy to one side and create big armies to send to the European landmass.

That’s not to say that the naval bit of it has no part. There’s often been an attempt to square the circle by suggesting the right way for Britain to contribute to continental wars is to use its navy to dot small armies around the place.

But in the end, when the chips are down, as they were in the First World War, as they were in the Second World War, as they were in the Napoleonic Wars, and as they were in the Seven Years’ War and the War of the Austrian Succession, the War of the Spanish Succession, then really the British have no alternative but to raise a big army and send it to Europe.

You might say, as you mentioned, he was an army officer during the war; he served in the Italian campaign with great honour, as you mentioned. And of course, he wrote this during the Cold War. And what Britain did during the Cold War was build a relatively big army and station it in Germany: very much part of the continental commitment to the containment of the Soviet Union. That’s the historical context in which he’s writing.

And I actually think that’s the right conclusion from Britain’s point of view — I think his argument for that conclusion is very compelling, which has big implications for the extent to which one can depend on Britain as an ally elsewhere in the world. Very relevant to Australia.

The fact is, in the end, committed as Britain always regarded itself as being to the security of its empire, when the chips were down, what happened in Europe really mattered. That’s why what happened in 1942 happened.

And that’s why the idea that Britain is somehow going to help defend us against China — which is sort of one of the underlying principles of AUKUS — is madness. And very ahistorical madness.

But I might say, I also like the book because I just love its style, you know what I mean?

WALKER: Yeah, it’s great.

WHITE: It’s beautifully, pithily… I mean, when you read something like that... When you read Garrett Mattingly, you couldn’t say, “I want to write like that”, because I’m just not in that business. Just like I couldn’t write like Gibbon. But I read [The Continental Commitment] and I think, “I want to write like that. That’s how I want to sound.”

WALKER: I’m with you on that.

WHITE: Very magnetic character, I might say.

WALKER: Did you meet him?

WHITE: Yeah, I met him a few times, and he was a very, very engaging character.

WALKER: I wonder if it’s something about the lecture format or something that translates well into that kind of style.

WHITE: Yes, I think it does. Or in particular, his lecture format. He was a very good lecturer. 

But it’s also just his style. He wrote a lot, but, for example, his The Franco–Prussian War is an absolute pearler. It’s beautifully written. As I think I mentioned before, I’m not really a great fan of military history in the sort of tactical sense; you know, “C Company advanced 300 yards up the road and met a machine gun.” That stuff leaves me cold. The Franco–Prussian War is a detailed military history, but he writes it so well and focuses on the most interesting aspects so resolutely that it’s a very compelling read.

WALKER: Let me summarise a couple of the things I took from [The Continental Commitment] and then check them with your understanding.

Obviously over the course of the first half of the 20th century, British strategists and defence-policy thinkers are kind of dragged to finally accepting this conclusion that Britain’s security lies with the European continent. It’s only by the end of World War II really, that they come to fully embrace that conclusion. Until that point there’s been this trade-off between defence of the empire and defence of the continent.

Just to underscore how non-committed they were to the continent at the beginning of this period: in the first chapter he writes about how, in the early 1900s, the main destination anticipated for the British Expeditionary Force was not the European continent; it was India, in expectation of a Russian invasion of India. All of the planning was around that. So the British Expeditionary Force that fought on the Western Front, et cetera, was really intended to fight in India, with Russian troops pouring across the Oxus.

WHITE: Which was always a long shot. [laughs]

WALKER: Right. [laughs]

WHITE: To put it mildly.

WALKER: In terms of the threat from Russia?

WHITE: Oh yeah.

WALKER: Another thing I learned was just — and in my naivety this wasn’t obvious to me — one might think that the dominions were an asset, but it seems that on net they were more of a liability defensively, at least after World War I. Because you would think they’d be able to provide the empire with manpower and money, but actually there was this policy of “never again”.

Canada and South Africa because they could afford to be, because of their geographic isolation, were isolationists. Australia and New Zealand were a bit different: they were worried about their vulnerability in the Pacific. But the sum total of that was this attitude of “never again”. Australia and New Zealand also felt that Britain was indebted to them for Gallipoli. At the same time, the dominions are expecting and demanding more autonomy. They don’t want to sacrifice their own defence for Britain. So it does amount to this kind of liability.

What else? I mean, this is maybe a little asinine, but there was just a basic theme about the reality of trade-offs in defence policy, and how countries ultimately need to prioritise their vital interests.

WHITE: Well, of course, that’s not asinine. That’s the heart of the issue.

WALKER: Sorry, yeah. That’s the wrong word. It’s just, when I say it, it feels a little obvious.

WHITE: Well, it is obvious, but that’s not to say it’s not worth saying. Because in the end, defence policy is all about making choices between conflicting priorities. Governments often say — our present government says — “We will make no compromise in national security.” No. You make compromises all the time. You decide you’re not going to do this because you want to be able to do that.

The most important defence decisions any government makes are the decisions they make about what not to do. The British faced very substantial commitments globally, against a declining share of global GDP, against adversaries that had an increasing share of global GDP, and when technology was working against Britain in a very fundamental way, because Britain depended on power projection by sea, and — this is a different story, but it's a very important one — from the late 19th century onwards, power projection by sea became harder and harder, as ships became easier to find and easier to sink. A really sharp and consistent technological shift from the maritime military domain in which Britain had thrived in the 17th, 18th, and 19th centuries.

So for all sorts of reasons, what Britain was trying to do in the 20th century became harder and harder. One of the reasons why it’s such an important book for Australians, why this story’s so important for Australians, is that it’s right at the heart of the choices Britain made [was] whether or not it was going to be serious about defending Australia and New Zealand against Japan in the Western Pacific. We’ll come back to this with Neville Meaney, but this was the great question, the foundational strategic question for Australia.

Howard’s unpacking of that choice, the fact that the costs of defending the empire were high, and went up, particularly for Australia and New Zealand... Canada and South Africa were in different cases for different reasons. Canada, because of the United States — the only country that could possibly threaten Canada was the United States, and you couldn’t possibly defend Canada from the United States. In a sense, Canada has always existed in a kind of strategic no-man’s-land. South Africa, because, although in some ways it doesn’t look as isolated as we are, because it’s at the tip of a vast continent, none of the countries on that continent could challenge it. Whereas Australia and New Zealand, although we’re quite remote from the main centres of power in Northeast Asia, because of all that water, which can either be a great barrier or a convenient bridge, we always felt ourselves to be — and, as it turned out, were — potentially vulnerable to Japanese aggression.

So defending Australia and New Zealand and Britain’s other possessions in this part of the world, including ultimately India, was a huge question. And that was the choice the British had to make.

It’s not quite true to say it was a choice between spending money on the navy and spending money on the army, but pretty near. It’s a pretty good model for the choices they made. 

In the end, Britain could not afford to defend the empire and contribute to the balance of power in Europe. And when they had a choice, they always ended up choosing the balance of power in Europe.

That’s a very important lesson for Australia.

WALKER: As I was reading this, I could see at least one of the reasons why this influenced you — which was the implication is Britain was always bound to choose the continent over the South Pacific.

WHITE: Exactly. And you can’t criticise Britain for that. 

WALKER: No.

WHITE: I criticise Australian political leaders for not realising what was patently obvious, which was that if forced to make a choice, Britain would always choose the security of the home islands, as it absolutely should. If I was a British politician, a political leader, if I was a British voter and taxpayer, that’s what I’d expect. The fact that Churchill famously told Menzies, “Don’t worry, if the Japanese come south, we’ll be there to defend you.” Who could believe that?

It’s as if I promised to buy you a Rolls-Royce. [laughs] What? Really? I don’t believe you. You know?

WALKER: Yeah. On the other hand, one of the other questions this raised for me was just the extent to which imperial defence was a factor in appeasement, because they were so stretched initially.

WHITE: They certainly were stretched, but I think that was a second-order issue. The primary issue was simply the horror of going back to the Western Front. Obviously, building the forces that would have been necessary to deliver the kind of deterrence of Germany that we talked about before, putting a vast Anglo-French army on the German border, would have been very expensive and probably precluded a strong position in the Western Pacific.

But the fact is that what was even more strong was not that they didn’t want to spend the money. They just didn’t want to face the possibility they might fight another war on the same battlefields. I find it hard to blame them for that. It was a mistake, for the reasons we talked about before, but I find it hard to blame them for that. 

The other point to make is that in the end their position in Europe wasn’t weakened by making provision to defend the empire, because they didn’t make provision to defend the empire, in the end. Britain really abandoned its strategic obligation to Australia before the First World War. In 1904, to counter the growing power of Germany’s High Seas Fleet, the British withdrew the major fleet units from the Pacific, including from the Sydney station. So the battleships and battlecruisers — the, you know, the real heavy hitters.

WALKER: The capital ships.

WHITE: The capital ships. They were all withdrawn to the North Sea to constitute the Grand Fleet, to counter Germany. And so, as Japan’s naval power grew, they depended on their treaty with Japan — they had an alliance with Japan — to make sure the Japanese didn’t attack Australia.

We looked to the Americans, as we sort of wanly did. That’s why Deakin invited the American Great White Fleet here in 1908. But in the end, the British were never in a position to defend us from Japan from about 1904 onwards. In the end, that die was cast long, long before the 1930s.

George F. Kennan: American Diplomacy [3:07:50]

WALKER: We’ll come back to that with Meaney. But next I want to do American Diplomacy. George F. Kennan. First published in 1951. My version is the 60th-anniversary edition, with a very helpful introduction by John Mearsheimer.

WHITE: Oh, that’d be interesting.

WALKER: Kennan was an American diplomat and historian. He was an IR realist, father of the containment strategy. He wrote the very famous ‘X’ Article in Foreign Affairs in 1947, probably the most famous ever article written about American foreign policy.

WHITE: Yes

WALKER: It was the X Article because he wrote under the pseudonym “X”, because he was a high-ranking official at the time and didn’t want people to think this was government policy.

WHITE: No, everybody knew.

WALKER: [laughs] Yeah, it came out only, like, a few weeks later. Or it was the worst kept secret? 

WHITE: It was a fig leaf.

WALKER: Okay. In that article he introduced the term “containment” and advocated it as a strategy against the Soviet Union. 

So this book covers American diplomacy in the first half of the 20th century. It’s probably the canonical book on its subject. In the introduction to my version, Mearsheimer calls it Kennan’s most important book.

The first part is drawn from a series of lectures he delivered at the University of Chicago in 1950. The second part is a couple of articles for Foreign Affairs, including that X Article. Then the third part, which was appended to an expanded edition, is a couple of lectures he gave at Grinnell College in, I think, ’84.

WHITE: Ah. My edition doesn’t have that.

WALKER: Well, my questions are really just about the first part. The central question he’s addressing is: why did America’s security decline from 1900 to 1950?

WHITE: Yes.

WALKER: How did this [book] influence you? Why is it on your list?

WHITE: Kennan was a very significant figure because he is seen, correctly, as the architect of containment. That’s not to say he invented it all by himself, and obviously containment wouldn’t have taken off if America’s posture vis-à-vis the Soviet Union in the Cold War had simply emerged from George Kennan. But the X Article and the Long Telegram, the formal telegram in which he really thrashed out the ideas that ended up [in the X Article], are a terrific piece of work. A wonderful piece of writing, very vivid, very strong, very revealing in some ways, and not all of them flattering to Kennan.

Kennan’s anyway a very significant figure. But what he does in American Diplomacy is to really deconstruct the story about how America got to that position. The usual story, the orthodoxy and still the orthodoxy today, is that the first half of the 20th century is a kind of Whiggish story of natural progression as America, having absolved itself of slavery in the Civil War, having developed enormously economically in the second part of the 19th century, starting to engage globally at the very end of the 19th century and early 20th century, the Spanish–American War, that sort of thing, having eventually got itself into the First World War and made a decisive contribution at Versailles, and then, after the mistake of failing to join the League of Nations, somehow got itself slowly and painfully, through the ’30s, back into a position of global power and influence in the Second World War, and emerged victorious at the end of the Second World War, only to confront the Soviets.

But it was a positive story. It’s a story of the American century, the famous Luce image of America. And it’s a story that still underlies the reverence and faith that we — we Australians, Americans, Europeans — have in the validity and durability of the US-led global order. Very much part of where we are today. 

Kennan completely turns that on its head and he says, “What the hell’s gone wrong?” In 1900, we’re the most secure country in the world, and here we are in 1950…

And remember, 1950 is an important year. The Soviets tested a nuclear weapon in 1949. When Kennan wrote the X Article in 1947, the Soviets didn't have a nuclear weapon and nobody in America expected them to have a nuclear weapon for a decade.

In that article, Kennan, at the end, says something like, “You know, this is all… Containing the Soviet Union is going to be a bit of a big deal, but we can…” — this is a paraphrase — “we can give thanks to providence that America has been given this opportunity to prove our worth as a nation by facing this great challenge.” Well, that was before the Soviets got nuclear weapons.

He was [laughs] much more sober after that. And he should have been. He was dead right. 

What this book does is go through it in a very critical way and say, “What has America screwed up?” In many ways, it's the American version of Carr’s The Twenty Years’ Crisis.

He goes back further. He talks about American policy in relation to China. A lot of it is focused on Asia, which makes it very interesting from our point of view. In fact, he does see Asia as the principal focus. He talks about China, he talks about the deterioration of America’s relations with Japan and America’s intervention in the First World War, and about the long process of decline in the relationship with Japan that led up to the Pacific War, and so on. And he sees a lot to criticise.

Kennan in some ways, of course, because of his role in appeasement, would seem to be absolutely at the centre of the centre of American policy circles. In fact, he was always an outsider, and this is very much an outsider’s book. And I quite like it for that.

WALKER: I loved this book. It’s almost in some ways a work of political philosophy as well.

WHITE: Oh, yeah. It is.

WALKER: It might be the one I have the most questions on. Because I want to leave time for the other books, can I rapid-fire some questions at you?

WHITE: Yep.

WALKER: Okay, so a key premise here is that American security is bound up with the balance of power on the European continent.

WHITE: Yes.

WALKER: Similarly, the Asian continent.

WHITE: The Eurasian continent, I would say. And I think he does.

WALKER: So, this is something I don’t understand. I know Kennan’s nightmare was a single power dominating Eurasia.

WHITE: That’s right.

WALKER: But he was equally concerned with a power dominating either Europe or Asia, am I right?

WHITE: I don’t think so. That’s not the way I read him. I read him very much as focusing on the risk of a Eurasian hegemon.

This is an old idea but he articulates it very, very strongly. Interestingly, Kissinger talks about this as well. But it has been the great organising idea of American strategy, going all the way back to George Washington, that the vast oceans — what Donald Trump calls the “big beautiful oceans” — on either side of the continent that separates it from Eurasia, keep America secure from any country that doesn’t have power to project power across those vast oceans. That is a huge undertaking, particularly to project power across those oceans in the face of what America can do to stop you.

The reason why isolationism worked for the United States all through the 19th century is that no power in Eurasia — and the only powers in Eurasia that counted in the 19th century were European powers, because of the distribution of wealth and power at the time — could possibly acquire that strength unless it dominated the whole of the Eurasian landmass.

If it didn’t dominate the whole of the Eurasian landmass, (a) it wouldn’t have enough strength of its own, and (b) it would face rivals closer to home. So if it started putting all its energy into sending maritime forces across the Pacific or the Atlantic, their next-door neighbours, would seize on them. So only a country that dominated the whole of Eurasia would have the power and the freedom of manoeuvre to threaten America at home in the United States.

You can say the grand narrative of American strategic engagements in the 20th century was that three times that contingency threatened, and three times America intervened to stop it.

The first was in 1917 after the Russians collapsed, and it looked like the Germans were going to win the First World War. That wouldn’t have just meant them dominating Europe, because — as the papers of the German General Staff make plain; Adam Tooze has written about this very well in his book about the end of the First World War — the Germans seriously looked at going back to Russia. And if they dominated Russia, then they’d dominate Eurasia, because there wasn’t much else. So that was the first time. 

The second time, of course, was the Second World War. By the time the Americans got into the Second World War, December 1941, the Germans looked like they were going to take over the Soviet Union, and Japan was on their side, and Britain looked set to be crushed. The prospect of Germany and Japan together dominating the whole of Eurasia was very, very real.

The third, of course, was after the end of the Second World War, when the Soviet Union really looked like it was going to dominate Eurasia, because everybody else was flat on their backs and it had emerged from the Second World War with, roughly, the most powerful army the world has ever seen.

So, consistently, America has — and this is really Kennan’s point — the mainspring of American strategic policy has been to prevent the emergence of a [Eurasian] hegemon. It’s not Kennan’s idea alone; for example, Zbigniew Brzezinski wrote a lot about this as well.

Now, the question as to whether the same is true of either a European or an Asian hegemon is a very different one.

Because, for example, today we might well face the prospect of an Asian hegemon that doesn’t control the European end of the picture.

The reason I focus on Eurasia rather than either separately is that I don’t actually think they’re that easy to separate, because you’ve got Russia in the middle. Russia connects them. Russia’s in both.

I think the chances of a Eurasian hegemon emerging today are very, very, very low. Diminishingly low. It’s a very important part of my argument. And a country that doesn’t dominate the whole of Eurasia has no chance of being powerful enough to threaten the United States.

WALKER: One final quick piece of context, and then I’ll rapid-fire my questions at you. As I understand it, his thesis is that American security declined from 1900 to 1950 because America pursued a misguided liberal foreign policy, principally by fighting for total victory in World War I, and thereby leaving a shattered balance of power on the continent, laying the seeds for World War II and the Cold War.

WHITE: I think that’s right. Certainly, that is a strand of his argument. But he’s also got another argument running, and that is that it wasn’t just that America fought for total victory in World War I. (And to a certain extent that wasn’t America’s fault, because its allies by that stage were fixed on total victory. Or they weren’t actually allies — they were associated powers — but its partners.)

But he’s also criticising the hopes that Americans have of a world order that basically conformed to America’s wishes. He says America should be prepared to live with regimes it doesn’t like, as long as they don’t actually threaten America’s security at home in the Western Hemisphere. He’s arguing against the idea of the establishment of a US-led global order, which was a Wilsonian idea from the beginning of the century, after the First World War, but also after the Second.

So his critique is a bit broader than that.

WALKER: I see. So let me rapid-fire a few questions at you.

Kennan says that democracies tend to pursue total wars and seek unconditional surrender. Do you agree with him about that?

WHITE: The dataset is too small. We did in the First World War and we did in the Second World War, and you can see why people have that instinct, but I don’t think it’s impossible for democracies to reach compromise-peaces. Britain, for example, did in the Napoleonic Wars, and it was a democracy.

WALKER: I see. Do you think diplomacy matters as much as he seems to think it does? If he’d been in charge of US foreign policy between 1900 and 1950, would America’s strategic situation have looked that much different in 1950? It’s not clear to me that America could have prevented World War I, and if World War I was the original sin…

WHITE: I don’t think it could have prevented World War I.

To be clear, diplomacy really matters, but by “diplomacy” we don’t mean what the diplomats do by going to cocktail parties. What matters is the choices governments make about how they manage their relations with other countries and what they’re prepared to accept. In particular the choices they make, not about the day-to-day stuff, but about how they see the structure of the international order and the sacrifices they’re prepared to make to turn the international order into the one they want. That really matters.

For example, he’s absolutely right: America could have avoided war with Japan. A very big part of the book is talking about: what we could have done to prevent going to war with Japan? He makes this really important point about the Second World War, that the basic alignment of forces at the beginning of the war was about Russia as well as Germany and Japan, and that the West — Britain and America and France — could not have defeated any of those major adversaries without the support of the other, and that was always going to compromise the outcome.

So the seeds of the Cold War were laid in the Second World War. And the seeds of that — and this goes back to the sort of stuff that Carr is talking about, and for that matter A. J. P. Taylor — is that the failure to find a way to accommodate a defeated Germany, but a still very powerful Germany, in the European order, and the failure to find a way to accommodate Japan in the Asian order, really led the way to war.

That was the failure that the countries of the West, including America, have to hold themselves accountable for and learn lessons from.

Neville Meaney: The Search for Security in the Pacific, 1901-1914 [3:25:19]

WALKER: Okay. I have other questions. We’ll skip them for now, and go to Meaney. 

Okay, next book. The Search for Security in the Pacific, 1901–1914. Volume one, published in 1976. The author is Neville Meaney, an Australian historian who specialised in Australia’s defence and foreign policy. He was a professor at UNSW and then at the University of Sydney. 

WHITE: One of my favourite books.

WALKER: This is a history of Australian defence and foreign policy, as the subtitle says, from 1901 to 1914. The second volume goes up to 1923. 

Tell me how you encountered this book and why it’s on your list.

WHITE: This is the first of the books we’ve discussed that really talks about Australia. It’s a bit perverse in some ways, because Australia is very much the focus of my work.

But one of the problems about thinking about Australia’s role in all of this stuff is that we tend to think of ourselves not as a player. We tend to think that all of this stuff goes on at a sort of stratospheric level and we just go along for the ride.

And in some ways we quite like that. We don’t think of ourselves as having made a choice to go to the First World War or made a choice to go to the Second World War. We just sign up and go along.

Now, that is profoundly wrong, and I always had the sense that it was wrong, and that therefore Australia shouldn’t excuse itself from thinking very carefully about where its own strategic positioning and contribution to the wider debates led us. But I didn’t have a factual basis for that instinct until I came across this book.

It was just after I’d actually started working professionally in this field. At that stage, I was a journalist at The Sydney Morning Herald. Kim Beazley had just become defence minister. I was in Wellington with Kim on a visit that was all about New Zealand’s anti-ship visits policy, which had just been introduced, so this is 1984. In a second-hand bookshop... I’d had a couple of hours off, I wandered around Wellington, which is a lovely city, and up a little lane running up from Lambton Quay to The Terrace, there’s a little lane and a little second-hand bookshop, and I can never walk past a second-hand bookshop without going in. So I wandered in.

And there I saw this spine: Search for Security in the Pacific, 1901 to 1914. “What the fuck’s that?” I wondered. “What’s that?” So I pulled it out, and there it was, about Australia’s decision-making at this absolutely critical time, in the lead-up to the First World War, how Australia saw its strategic situation. “Now this is it.” I bought it, took it back to the hotel, and literally stayed up all night reading it. I could not put it down.

It provided a huge frame for the way Australia fits into this stuff.

WALKER: Did you give it to Kim? Or did he know about it?

WHITE: He knew about it. He knew about Neville and was way ahead of me. The delight of working for Kim for all of those years I was with him — I wasn’t working for him then, I was a journalist, but not very long after I went on his staff and was with him for five or six years — and one of the delights of it was that he knew so much history. I sometimes say that my years with Kim were just one long peripatetic seminar on strategic history of all descriptions. Sometimes it was, “What the hell happened at the Battle of Blenheim?” or “Why did Hitler go to the rescue of Greece?” And a lot of the time it was focused on Australia.

So he knew all about Neville. And actually later, Kim and I spoke at the launch of Neville’s second volume, which was a bit of a privilege.

But the really big point [Neville]’s making is that, far from that image of Australia being a kind of strategic naïf or even a strategic non-player, the people who were instrumental in the establishment of the Australian Federation and who steered Australian foreign policy in that critical time were very sophisticated strategic thinkers who thought very carefully about Australia’s place. They absolutely did not take Britain’s support for granted. In fact, the whole structure of their thought was a very prescient recognition that Britain’s global position — its capacity to defend the empire — was declining (for all the reasons that Michael Howard spells out). And that Australia absolutely could not take Britain’s support for granted, and that we therefore needed to think very carefully about how we responded to that. Part of it was to develop our own forces. A big part of this story is the decision to develop our own navy, for example, rather than contribute to the Royal Navy. To develop our own army. The question being do we build an army to defend Australia, or to send overseas to support the United Kingdom? These were the big debates people were having, and thinking about what kind of threats might develop, which focused very strongly on Japan.

Partly there was what you might broadly call a racial basis to that. But leaving aside the racism embedded in it, it didn’t mean there wasn’t a genuine strategic concern there, as we saw in 1942.

But the way in which these guys analysed Australia’s situation and recognised the choices we faced, and made those choices explicitly, to put it politely, contrasts favourably with the way in which Australia is debating and confronting the choices we face today.

Out of nowhere, really, for reasons I have no explanation for, we found ourselves with a group of very sophisticated strategic thinkers.

WALKER: And it struck me, reading this book, that the independent defence and foreign policy thinking that was happening in Australia was being driven by the political leaders themselves, as distinct from their military and international-relations advisers.

WHITE: Exactly. Well, they were all there were. There almost wasn’t a bureaucracy to start with. And you had people like… Deakin is by far and away the strongest, but George Reid comes out of a lot of this very well, and so did a lot of the others. But Deakin stands above them all. He was a remarkable man and a remarkable strategic thinker.

He’d started to understand this stuff very clearly in the 1880s. Through the ’80s and ’90s, initially as a very young man, he was thinking really seriously about where Australia stood as British power declined.

They were very frank about it. We sort of think of them as being sentimentally attached to the “home country” and Rule Britannia and all that sort of stuff, but they were very cool and realistic in their assessment of Australia’s predicament.

And yes, it was very much the political leaders, because there wasn’t really a bureaucratic structure underneath them. 

But what it tells you is that these people saw thinking deeply and reading widely, informing themselves about global strategic affairs as they affected Australia, as a very important part of their job. Which I don’t think it would be fair to say is true of the present generation of Australian political leaders, and that’s a worry.

WALKER: Yeah. Anything else on Meaney?

WHITE: I could talk about Meaney all afternoon, but no — that’ll do.

WALKER: One other interesting fact that I learned — again, probably in my naivety — was that the Australasian colonies adopted a Monroe Doctrine for the South Pacific in the 1870s.

WHITE: Oh yes, the Monroe Doctrine in the South Pacific. It’s alive and well — you know, we signed a defence treaty with PNG last week, or this week.

And the use of the phrase “the Monroe Doctrine” was very resonant. A lot of what they were concerned about initially was not just Japan as a strategic challenge, but other European powers colonising the South Pacific.

Henry Kissinger: Diplomacy [3:33:39]

WALKER: Tenth and penultimate book: Diplomacy by Henry Kissinger, published in 1994. He doesn’t need much of an introduction. American diplomat and political scientist, Secretary of State in the US from ’73 to ’77.

This is a sweeping history of international relations, beginning in Europe in the 17th century and going through to the end of the Cold War. It concentrates mostly on the 20th century.

While the bulk of the book is a history, the final chapter is a forward-looking one. We might discuss that chapter — it’s the only forward-looking chapter in the book and allegedly he really sweated its details. So he was rewriting that final chapter constantly revising it almost until publication day.

WHITE: Ah, I didn’t know that. I’m not surprised.

WALKER: So, if you could condense what you took from this book, how did it influence you?

WHITE: Kissinger… you described him as a political scientist. I’d describe him as a historian.

He wrote a lot, in different ways, about the management of international conflict. It’s important to separate Kissinger’s capacities as a historian from his capacities as a statesman. Some of what he did as a statesman was reprehensible. But that doesn’t mean he didn’t have a lot of interesting things to say about the way the international system worked.

This book, in a sense, is a placeholder for a whole lot of other things Kissinger wrote, including A World Restored, his book about the Congress of Vienna, which is all about how they built that international order after the Napoleonic Wars that we talked about before.

But the reason I mention this book is twofold. First because, in those earlier chapters, he describes in a very neat and compact and accessible form a lot of very complicated diplomatic history, particularly the history before the 19th century. He really starts in the 16th century with the establishment of the Westphalian order after the Thirty Years’ War and all the various terrible things that happened in Europe, and the way in which that evolved over the ensuing centuries. It’s a really handy textbook.

Then he gives a very good account of what happens in the 20th century. It’s the counterpoise, if you like, to Kennan’s account. And he’s very good — although not, I think, always very honest — about highlighting the tension between what one might very crudely call the realist and the idealist wings of American foreign policy. He’s always identified very much as a realist, but he’s always very careful, sometimes misleadingly careful, to salute the Wilsonian components.

And because he was not just an academic but very much a player, he’s always trying to preserve his position in the debate, he’s always trying to doff his cap to the Wilsonians, so that he doesn’t get himself presented as being too out of step with the mainstream of American life. Partly because, of course, he wasn’t born in America. He was born in Germany; he was a teenager when his family fled Nazi Germany. So he always felt of himself as an outsider and so he had to talk his way back into the American mainstream.

But also, that last chapter is very interesting. And it’s a pair with the Kennedy [book] that we’ll come to last. Because what he does is draw all this together to say, “Well, what sort of world are we heading into?”

And this is 1994, so this is the high point of the end of History. America is the unipolar power that’s going to dominate the world. He says, “No. No, this is just history going on as usual,” and he talks very explicitly about the evolution of a multipolar order. He says, “We’re going to have a system in which there’ll be a number of great powers. America’s going to have to learn to live in this system. And the great challenge will be to try and accommodate its Wilsonian instincts and values and aspirations with the reality that it’s going to be living in a very complex and difficult world.”

When I read it, when the book first came out, it wasn’t the first time I’d thought of that. I’ve got to allow myself to say I’d already thought my way through to that point myself. 

But the book came out, and I read it only a few months after I had, myself, sat down over the summer of 1992–93. Early 1993, I sat down wrote out for myself what I thought the end of the Cold War meant for Australia’s predicament.

WALKER: Do you still have that document?

WHITE: Yeah, I do.

WALKER: Have you ever published it?

WHITE: No, I haven’t.

WALKER: I’d love to see that.

WHITE: Well, I’ve got a copy here. I’ll send it to you. 

WALKER: Thank you.

WHITE: It’s very rough. I literally sat down over my summer holidays, and just in intervals between going to the beach and things, I thought, “What the hell does all this mean?”

It was a nice moment because I’d been working for Hawke …

WALKER: Does it hold up, your document?

WHITE: Pretty well. Not a hundred percent, of course. I overestimated Japan, actually, as Kissinger does.

WALKER: And Kennedy.

WHITE: And Kennedy, yes. None of us predicted how far Japan would… and underestimated China. But I got the China story basically right.

But it was a moment for me because I’d been working in Parliament House for eight years or something. In my last few years, I’d been working for Hawke as international relations adviser, very much at the centre of things and very exciting. Then Hawkey gets the boot, Keating takes over, and I end up back in ONA in a job which was fascinating but much quieter. So I had a lot of time to think.

This was 1992. The Soviet Union had collapsed at the very beginning of the year. A few weeks later, I find myself in an office with the phone not ringing anymore, with that map on my wall, and with some very good and very knowledgeable colleagues. I spent a lot of that year just talking to others and thinking to myself “What the hell does the end of the Cold War mean for Australia?” Everyone thinks “Oh, this is fundamental — Europe transformed,” all the rest of it. But what does it mean for us?

And so the notes I wrote — Tathra notes, I called them, because we were at Tathra — was my summary of all of that. 

Hugh White’s Notes on Australia’s Strategic Circumstances (1993)

Hugh White’s 1993 Tathra note.

The Joe Walker PodcastJoseph Walker

Anyway, when I read [Diplomacy] and then got to that last chapter, it was both challenging and reassuring. I was thinking, “Okay, yeah, right, that really makes sense.”

It had a big impact on the way I thought about our situation through the ’90s, when I was working in Defence. A lot of the policy that we developed in Defence in the ’90s, both under the Keating government and under the Howard government, did strongly presuppose — really took as its starting point — the idea that China’s rise was the most important shift in Australia’s strategic situation, far more important than the end of the Cold War.

The way in which Kissinger comes to that conclusion on the basis of this very comprehensive history of the evolution of the international system, and drawing on so much of his other scholarship, and to a certain extent his experience in the Cold War — he wrote some fascinating books about the way détente works, for example, and détente is all about accommodation, appeasement you might say, to avoid war — it just seemed to me a very helpful summary of a very big set of issues.

What’s fascinating, of course, is that although Kissinger was this revered figure, nobody in the United States paid the least attention. The mainstream of American foreign policy was then, and continues today, to be based on the proposition that America is the world’s leading power.

Kissinger provided all the arguments as to why it wasn’t going to be, in 1994.

WALKER: Two specific questions for you about this book. First, toward the end of the book he says that the most analogous period in history to the world in which America finds itself in 1994, after the Cold War, is 19th-century Europe, and American statesmen should be thinking more in terms of the balance of power.

WHITE: Yes.

WALKER: Is that still the case, especially in light of China’s preponderance? Maybe now we’ve more got two hegemons in two different hemispheres?

WHITE: I wouldn’t frame it that way, and I don’t think he would’ve framed it that way. I think it is right, but I think the point he was making was not that the analogy was with the balance of power, the concert of power in Europe. It’s that as there was a multipolar order in Europe — which actually functioned as a multipolar global order, because Europe dominated the globe — he’s saying we’re now going to have a global multipolar order, and the multipolar order will function not in Europe, but globally.

And he says in there — I’m pretty sure it’s Kissinger, who says in that last chapter — that this is going to be the first time in history that we have a genuinely global international system. In other words, that the world is so interconnected now that countries, great powers in particular, all over the world will affect what happens everywhere.

Now of course, you could say we kind of had that after the Second World War, with the bipolar order, which was a genuinely global order. But because there were only two of them, we’ve never had a global multipolar order.

So I think what he was saying is: the world in future is going to function as a multipolar system, the way Europe used to function. America will be part of that multipolar system, rather than standing aloof from it, which is what it always used to do, and America has to learn to function within that multipolar system.

That’s exactly right. And that’s exactly what America has failed to do.

And exactly what I’ve — not me alone — been arguing for years that America needs to do. The “choice” in my book The China Choice was America’s choice to start treating China as another great power in a multipolar system.

WALKER: Yes. Final question on this book. In the ’90s, people still viewed Germany as a threat after reunification. And that comes through in here.

WHITE: Yes. Still there.

WALKER: Now that Germany’s rearming because of Russia and Ukraine, should people be taking it more seriously? I mean, it’s the third-biggest economy in the world. If it rearmed, it would be the most powerful state in Europe, by far.

WHITE: No, I don’t think that’s a worry, and that’s because sometimes things in international relations really do change.

Whatever else has gone wrong, something really remarkable happened in Europe in the decades after the Second World War. In Western Europe initially, but spreading throughout Europe after the Cold War — “throughout Europe”: I’ll come back to where you draw the boundary. But we really did see the evolution of a post-strategic international system, perhaps for the first time in history. I don’t think a powerful Germany poses any threat to other European powers.

I do think — and this is the old line from the Poles — the trouble with Germany is that it’s either always too reticent or too active in using its power. And what Europe desperately needs now is a Germany that accepts the strategic leadership of Europe, which only it can exercise. Because Europe collectively is compelled — because America won’t do it for them — to decide where to stop Russia. And nobody’s better placed to lead that enterprise than Germany.

It can’t be led by the kind of structures that have led Europe’s economic and social integration under the EU, because security strategy is different. Anyway, those processes and structures and institutions have lost a lot of credibility. But Germany is fated, by its place as both the most powerful country in Europe and because of its central location, as being the only country that can do it. You can’t lead Europe from Rome anymore, and certainly not from London or Paris.

So I think, no, the threat to Europe is not Germany’s strength, but Germany’s weakness — or at least its political weakness.

Still, you’re right: it’s instructive that even in the mid-’90s people were still anxious about that — as they were anxious about Japan. Boy, doesn’t that seem like a long time ago.

WALKER: Yeah. Japan is present in Kissinger. It’s present in this next book we're going to talk about, but also in other books of the time, like there’s the Lester Thurow book Head to Head…

WHITE: Oh yeah.

WALKER: Before the bubble burst, its economic rise meant people extrapolated its military power.

WHITE: It’s worth bearing in mind just how big the was delusion that Japan could overtake the United States. 

And it’s a cousin of the delusion that China wouldn’t overtake the United States. People looked at Japan — serious people — and said, “You know, this country is a potential global competitor to the United States.”

Look, Japan has one quarter of America’s population. For its economy to overtake America’s, its per capita GDP would have to be four times America’s. Now, America is an extraordinarily productive economy. It simply defies the laws of economic physics that Japan could overtake America four times. That’s just out of the question. Japan’s economy was never going to be bigger than America’s because its population is so much smaller.

If you turn that coin over, people used to say — they said it to me all the time; they say it less now — “Don’t worry, China is never going to overtake the United States. I mean look: that’s what people said about Japan, and it didn’t happen.”

To which my response was: “Well, the difference is that China’s population is four times America’s. So it overtakes America’s GDP when its per capita productivity is one quarter of America’s.”

That’s not hard. That’s going to happen. That’s happened.

But the idea that people still say, “Oh, you know, China’s economy is lagging miles behind the United States.” No, it’s not. No, it’s not. Which, of course, gets us to The Rise and Fall of the Great Powers.

Paul Kennedy: The Rise and Fall of the Great Powers [3:48:59]

WALKER: Yes. I can’t believe it — the final book. The Rise and Fall of the Great Powers by Paul Kennedy, published in 1997.

He was a British historian, specialist in the history of international relations, economic power and grand strategy, professor at Yale. I think one of his thesis advisors at Oxford was A.J.P. Taylor.

WHITE: That’d be for sure.

WALKER: This is his best-known book, smash hit, maybe the most influential history book of the 20th century.

WHITE: I wouldn’t go that far. But still.

WALKER: That’s putting it a bit strongly?

WHITE: Yeah.

WALKER: You’re right. But it’s sold about two million copies.

WHITE: Oh did it? Wow.

WALKER: Yeah, globally.

The section at the end where he reflects on what all this means for America was included at his publisher’s request, and that is what turned this into the hit that it became.

WHITE: That’s why it took off.

WALKER: His analysis is confined to the modern era, post-1500, post-Renaissance, and he looks at the interaction between economics and strategy.

We can talk about his thesis in a moment, but just one fun fact in terms of the influence of this book is that after Osama bin Laden’s compound was raided in Abbottabad in 2011, US special forces found a copy of this among bin Laden’s books.

WHITE: [laughs] I didn’t know that.

WALKER: So why is this on your list?

WHITE: Because right at the heart of everything we’ve talked about is the way in which international orders change because of shifts in the distribution of wealth and power. That is the big story of our time, and the big challenge we face: that is, how does the international system adapt to the rise of new powers, and how can it adapt peacefully?

We have lots of textbook examples of how it fails to adapt peacefully. You can say that the rise of Athens and the fear that caused in Sparta was the first example we’ve looked at. But the First World War was, in the long run, a response to the collapse of the old post-Napoleonic order in Europe, caused by this fundamental shift in the distribution of wealth and power between those countries. The failure to deal with that effectively gave us the Second World War. And you can say that, because at the end of the Second World War we ended up with just two powers worth a damn — the Soviet Union, and America — we were still wrestling with that same set of problems.

Now we have a completely new set of problems, because out of nowhere, we’ve seen the fastest, biggest shift in the global distribution of wealth and power since the Industrial Revolution. One of the problems we have is getting our head around the scale of that shift.

The rise of China is not just another day in the office. For that matter, the rise of India is not just another day in the office. This is a really big historic moment.

The thing about Kennedy’s book, when it came out, still in the Cold War, was that it gave a really good, compelling, and I think broadly right account of the way in which the distribution of wealth and power had shaped the evolution of the international order in, as you say, the centuries since the collapse of the Habsburgs’ attempt to dominate Europe.

So at that moment at the end of the Cold War, when I and others were asking ourselves, “What does all this mean?” and we came to the conclusion, I can remember very clearly: there was a moment — and I would have had [The Rise and Fall of the Great Powers] on my shelf in the room, because I read it when it came out, gobbled it up... There was a moment standing in front of that map, I mean that actual copy of the map, with a very dear colleague of mine at ONA.

WALKER: Do you want to just quickly explain?

WHITE: That map is a map of the hemisphere, half the world, centred on Darwin. Which seems eccentric, but Darwin was, at least at the time when we bought the F-111s, the furthest north of our major air bases. It’s called the Air Staff Planning Chart, and it’s designed to help you work out how far your F-111 can fly to drop how many bombs on which target.

But what it does is capture Australia, the Southwest Pacific, the Southeast Asian archipelago, and the coast of East Asia all the way up to Japan, and India just touches the side. That’s Australia’s strategic world.

That particular map was on the wall of Kim Beazley’s office. A version of that map was reproduced in the 1987 White Paper that Kim produced. It was on the cover of a later white paper [as well].

WALKER: And he gave you that?

WHITE: He gave me that map. When I left his office when he ceased to be defence minister, in our final conversation of many, many conversations, he said, “I’d like to give you something as a memento,” and I said, “I know exactly what I want.”

WALKER: [laughs]

WHITE: He said, “Oh? what?” I said, “I’d like that map.” He said “You bastard.” But he then stood up and and signed a dedication to me, and I’ve carted it around ever since. It’s been in every office I’ve occupied since then.

But I stood in front of it at ONA with a very dear, very knowledgeable colleague, and we were just batting backwards and forwards what all this meant. All of a sudden it came to me. I said, “Okay, so actually, the collapse of the Soviet Union is not the most important thing that’s happening. The most important thing that’s happening is the rise of China.” He said, “Yes, that’s right.”

It’s that basic Kennedy insight: that the thing that really frames things, in terms of going back to Thucydides and Kagan, the difference between ultimate and proximate causes of wars is that the ultimate drivers are shifts in the distribution of wealth and power. That’s what you’ve really got to keep your eye on. The growing power of Athens.

Today, it’s the growing power of China and how we respond to that. Whether we respond by just trying to contain it, or whether we respond by trying to accommodate or appease it, that’s the big choice we face.

And that’s the choice that Australia has still, I think, not seriously embraced.

WALKER: There’s a great quote by Lenin. Do you recall this one? On page 436.

It’s short, and may be worth reading out. This is Lenin himself to a Bolshevik colleague in 1918.

WHITE: Bloke who knew a thing or two about this sort of stuff.

WALKER: Yeah. Realising that the uneven economic growth rates of countries would lead to the rise and decline of specific powers. So this is Lenin:

“Half a century ago, Germany was a miserable insignificant country as far as its capitalist strength was concerned compared with the strength of England at the time. Japan was similarly insignificant compared with Russia. Is it conceivable that in 10 or 20 years’ time, the relative strength of the imperialist powers will have remained unchanged? Absolutely inconceivable.”

WHITE: Yes. That’s right. Whereas of course what people do is attribute the status quo, the status quo they like, with an almost eternal sanctity. Kissinger talks about this, that the very phrase “international order” seems to presuppose permanence, whereas in fact it’s always changing. 

The process of managing those changes, sometimes the timeframe is quite long. It can take decades. China started rising, you could almost say the year I first came to Canberra, 45 years ago. 1979 was the point at which Deng Xiaoping initiated the big changes. It’s been a 45-year story so far. It’s not over yet.

But adapting to those changes, recognising that change is happening, this is something that E. H. Carr talks about. Change is not bad in itself. We’ve just got to make sure we manage it to survive it as best we can.

WALKER: Having said all that, one thing I did learn from this book was about Britain’s second wind. So, the financial revolution underpins British strength as a great power in the 18th century and then the Industrial Revolution takes them to a sort of new height in the 19th century.

Maybe you could draw analogies today: so if, for example, AI turns out to be as transformative as some people think it might, the US might get a second wind relative to China or whatever, but…

WHITE: Well, it might. I mean, the reason why the financial revolution gave Britain such a lift in the 17th century was that nobody else had it. 

WALKER: In the 18th.

WHITE: In the 18th century rather. Well, it actually it started in the 17th century with the establishment of the Bank of England. But really the War of the Spanish Succession was the first great victory of that Bank of England source of British strength.

But nobody else had anything like it. They had, if you like, a monopoly on this stuff. So they could raise taxes and therefore build ships at a rate that nobody else could.

Whereas the trouble is, the Chinese have already got AI. [laughs] America might stay ahead, but it’s going to stay ahead by a relatively narrow margin, if at all.

Whereas Britain had a monopoly on what we’d call modern state finances. 

WALKER: Thirty-three per cent, on average, of [Britain's] wartime expenditure between 1688 and 1815 was through loans. 

WHITE: Yeah. The fact is they could raise that money because they had a highly reliable way of paying it back, and people believed they’d pay it back. Large sections of British society functioned on the basis of lending money to the British government. You know, you read Jane Austen and people talk about having so much money “in the funds”. That’s what they mean. British war debt kept British upper-class society afloat. And they ruled the world.

WALKER: Anything else on Kennedy?

WHITE: No. Again, we could talk about Kennedy all day.

WALKER: I mean, we didn’t really touch his key thesis.

WHITE: Well, his key thesis… The mistake he made was to presuppose that America was overextended at the very end of the Cold War. It proved something of an embarrassment to him because he predicted that America was overextended and was going to start declining about two years before the Soviet Union collapsed, which didn’t look that compelling.

But the underlying message — which was “keep your eye on what’s happening to GDP” — that was the right message. And that was the message about China.

General questions [4:00:14]

WALKER: So we’re finished with the 11 books.

I want to ask you some general questions. Just before that, you have kindly given me permission to publish a long list, with some annotations.

We’ve mentioned a few things that would appear on the long list. There’s Bruce [Catton]’s history of the American Civil War. But not only books. Things like the BBC’s 1964 documentary of the First World War. 

So we’ll put that up for people interested in an even longer list of the books that have shaped your thinking and that people might benefit from in shaping their thinking about these strategic questions as well.

Hugh White’s Strategy Reading Long List (with Annotations)

An annotated list of more than 50 titles on strategy, international relations, and defence policy, curated by Australian strategic analyst Hugh White.

The Joe Walker PodcastJoseph Walker

But some general questions now.

Firstly, if we take World War I and II together, what is Hugh White’s grand, parsimonious explanation of those two events?

WHITE: It’s the collapse of the very stable and successful European order of the 19th century, caused by a fundamental shift in the distribution of wealth and power, both within Europe, with the rise of Germany; with the rise of Russia/the Soviet Union coming out of nowhere; the collapse of the Ottoman Empire, which fundamentally destabilised relations particularly between Russia and Austria, which was a big part of what happened in 1914; and with the rise of Japan, and the relative decline of Britain, and of course the rise of America. 

So you’d had this very stable international order all through the 19th century, which didn’t mean they didn’t have wars. They did have wars. But the wars didn’t become systemic. The Germans fought the Austrians, or the Germans fought the French, or the British and the French fought the Russians, but they were contained and they didn’t lead to fundamental change.

Whereas once you get to 1914, the whole thing comes apart at the seams. It came apart at the seams in 1914. They failed to put it back together in 1918. The same problem — with Hitler added as an additional appalling catastrophe — but it was the same fundamental problem in 1939. And having destroyed Germany, or at least having destroyed that German challenge, because of the way Western Europe evolved after 1945, Russia of course takes its place.

So the whole unfolding of the 20th century, through indeed to the end [of the Cold War] — because I’d include the Cold War — is the unpacking of the consequences for the European order of those fundamental shifts in the distribution of wealth and power which really occurred in the 19th century. They continued in the 20th century, but a lot of what happened in that continuation was driven by the wars themselves. Russia emerged as the strongest power in Europe because it was the one that survived the Second World War best.

WALKER: Briefly, for someone wondering why these books mostly focus on European history, what would you tell them?

WHITE: Really good question. The answer is that the question we face is how a system of modern nation-states manages its relations with one another, and particularly manages those relationships either by going to war or by avoiding going to war.

One of the things that makes 5th-century Greece so continually fascinating is that, although they were very different, actually they functioned a bit like modern states, [if] you look at that system.

But the fact is there was no system of states elsewhere around the globe that functioned the same way.

One of the consequences of the success of the European system in the 19th century was that their model of states and of state system spread to the world. So we now have states all around the globe, including here in East Asia, which function a lot like the European state system of the 17th, 18th and 19th centuries.

And although the analogies are always imperfect, it’s by far and away the best textbook we have for how these sorts of states interact.

There is an underlying logic in the fact that studying what the Europeans got right and got wrong is the best basis we have for understanding what our choices are today.

I should just say: there are some very good books focusing on what happened in East Asia, particularly (from my reading) in the 20th century. The way in which the Japan–China relationship evolved in particular. 

But one of the reasons why there aren’t more is that, as Southeast Asia emerged from colonialism in the ’50s and ’60s, we ended up in a strange period in which America’s primacy in East Asia was essentially uncontested.

So there was very little power politics in East Asia, particularly after Nixon went to China in 1972, but you could even say before then. There’s a whole new history of the geopolitics of Southeast Asia and East Asia to be written. It’s only just beginning. It’s going to be pretty exciting.

WALKER: So, abstracting away from the subject matter — the events dealt with in each of these books — how would you describe the underlying philosophical framework or frameworks they’ve given you?

WHITE: Well it is that nation-states have a formidable propensity to violence. States really do go to war. And most states, most of the time, spend a lot of money on preparations to go to war. So you’ve got to take the propensity to violence seriously.

“Nation-states have a formidable propensity to violence.”

Of all the terrible things that can happen to humankind, major war is the worst thing we inflict on ourselves. There are earthquakes. There are bushfires. There’s global warming. There’s famine. There are pandemics. There are all sorts of terrible things that happen. But of all the terrible things that can happen, major war is the worst thing we do to ourselves.

Therefore finding ways to avoid that — but one might also say recognising there are points where you probably shouldn’t avoid it — and deciding when not to fight and when to fight are amongst the most important decisions that societies can make.

That was the sort of thing that enthralled me about the early episodes of the BBC’s program. It dramatised the fact that people made these choices. It wasn’t a natural… It wasn’t like an ice age that just happened to us. It was something we did to ourselves.

Working out under what circumstances we should go to war, particularly big wars — because big wars are driven by major shifts in the international system — and working out how we can manage international change, major systemic change in the international order, peacefully is one of the most important tasks we face.

We thought about this a lot in different ways during the Cold War. We stopped thinking about it at the end of the Cold War. We thought it was the end of history — some of us did. And we’re still not really thinking about that nearly carefully enough.

Although our political leaders keep saying that we live in the most dangerous strategic circumstances since the end of the Second World War — which suggests they see something’s going on — they stop there. They don’t then explain why, what’s happening, what’s the cause of the danger, and what can we do to manage it. And when they even start venturing into that area, they just say, “It’s China.” Well, no, it’s not China. This is a story without heroes and maybe even without villains.

WALKER: [laughs] If you could force every Australian statesman and stateswoman to read only one or two of these eleven books that we’ve discussed, which would you pick?

WHITE: Oh, that’s a good one.

The Origins of the Second World War.

WALKER: Huh.

WHITE: It’s the hardest. It’s the starkest. It’s the one that most challenges you.

WALKER: If you could somehow guarantee that every member of the CCP’s Politburo read a Mandarin translation of one of these books, would it also be Origins of the Second World War?

WHITE: They’ve read them all.

That’s the point. They understand this much better than we do. I wouldn’t say the Politburo, but the Standing Committee. That’s the point. They’ve thought about this a lot.

Our problem is not that they don’t understand what they’re doing. In some ways, our problem is that they do understand what they’re doing and we don’t.

"Our problem is not that they don’t understand what they’re doing. In some ways, our problem is that they do understand what they’re doing and we don’t."

WALKER: This next question feels a bit more frivolous in light of the [laughs] previous ones. But I went through and calculated the average age of the authors in the year that their books were published.

WHITE: Ah.

WALKER: The average age is 50.

WHITE: [laughs]

WALKER: So the oldest author was Kissinger. He was 71 when Diplomacy was published. The youngest was Kagan. He was 37 when The Outbreak of the Peloponnesian War was published.

WHITE: Both of those are interesting.

WALKER: So the average age of 50. Why do you think that is?

WHITE: Does 50 seem old to you? [laughs]

WALKER: I mean, in some other disciplines maybe your peak achievement might be in your 30s or your 40s.

WHITE: Yeah. Even in your late 20s. It’s a good question. I do think this is an issue in which there’s a kind of sedimentary principle: the impact of ideas floats down and settles and then builds up.

To look at Kissinger, for example, as the oldest of them. Bit scary: a year younger than I am now. But he started writing about this stuff in his 20s. The World Restored was his PhD thesis. It’s an astonishingly pretentious, courageous book, and as I said, it could have been on my list. It’s always been very influential.

But in the end, what he built up [in Diplomacy] was a lot more of his own experience stacked up there. It’s less brash and more measured and a bit more pessimistic, actually. A degree of pessimism is a pretty important component of one’s mental equipment in this field. People do become more pessimistic as they get older, or at least more attuned to how things can go wrong.

WALKER: That seems true. And maybe this is a different way of making the same point, but because these are mostly history books, maybe for historians crystal intelligence is more important. You’re sort of accumulating a lifetime of facts and insights, and that’s more important to something like history.

WHITE: That’s a good point. I guess that’s kind of what I was trying to get to with the sedimentary thing, that these ideas build up cumulatively over a long period of time.

It’s not a matter of going out and trying to find a particular formula which links phenomenon A to phenomenon B, as for a physicist or something like that. It’s a much more complex process.

WALKER: Two final opportunistic questions. These don’t necessarily connect to the books we’ve discussed, but just because we’re here, and the mics are rolling, and you’re Hugh White, I just wanted to ask you a couple of things.

The first is putting you on the spot a bit. Any anecdotes about your time, your five years as Hawke’s international relations advisor, or before that, working for Kim Beazley when he was Defence Minister? Any anecdotes you haven’t shared publicly that you can share with me today?

WHITE: Well, I think one moment… And, you know, most days in the office when you’re working for a minister are much like every other day. 

But sometimes something happens.

One of the most interesting moments was in May of 1987, when the first Fijian coup occurred. A Labour government, as it happened the Fiji Labour Party, had been elected a week or two before, and the Fiji military pushed it out and tried to take its place.

I was working for Kim at the time, and Kim and Hawke and Gareth Evans, who was acting foreign minister — Bill Hayden was the substantive foreign minister, but he was overseas — were gathered in Hawke’s office and started talking about how to respond.

I insinuated myself into the conversation after they’d been at it for a while, and I was surprised to discover they were seriously considering a military intervention. This was the first time in my professional experience — and I’d only been in the business for seven years at that stage — that I’d been, so to speak, witness to, participant in, a conversation about, in very broad terms, ([and at an] almost trivial scale) going to war, using the armed forces in that kind of way.

These were three very sophisticated people. What I’m about to say is not in any way a criticism of them. I know them all well and admire them all immensely. But the idea that we might send the ADF to overturn this coup and restore the Bavadra government was very seriously uppermost in their minds.

I was fascinated by how quickly even these very sophisticated people, who were all absolutely of the generation who’d learnt the lesson of Vietnam and all through the 1980s were extremely allergic to the idea of using armed force precisely because Vietnam had been such a traumatic experience, it was an idea that came to them very naturally. I never forgot from that how...

Now, in the end, of course, they decided not to. Or rather, they kind of decided not to. We did deploy the ADF, but not to overturn the coup. Just to make sure that if any Australians got into trouble, we could rescue them. But that in itself was a halfway acknowledgement of the fact that they wanted to do more.

They quickly reached a very sober and conscious and correct decision that an intervention would be a mistake, that it wouldn’t work.

But the fact that they initially thought this was something they really wanted to seriously consider taught me a lesson about the way governments and people react in such situations.

Now, to compare that to the British Cabinet on 2 August 1914, weighing whether to go to war with Germany, is trivial at one level. But for me it just illustrated that these decisions are made by very few people, often on very short timeframes.

We touched before on the idea of whether Australia would decide to go to war, support the United States in a war with China over Taiwan. If the Chinese do attack Taiwan, the decision confronting Australia will need to be made within hours, and it won’t be made by the full Cabinet. It’ll be made by three or four people in the Prime Minister’s office.

The question is, are they prepared to make that decision? Have they thought about it? Do they think they’ll have long to think about it when the time comes? So that experience, trivial in itself, of watching ministers confront that choice of peace or war for the first time — and it was not the last time, because I was involved in other decisions about conflicts later on, bigger conflicts — but there’s always something about your first time.

WALKER: Was there anything in particular that surprised you about it, watching them wrestle with that decision?

WHITE: Just that the idea of going to war seemed appealing.

WALKER: Right. It was a decision that they could make.

WHITE: It was a decision they could take.

It was a decision they quite wanted to take — and decided against it. And decided against it for the right reasons. I don’t think their approach or their processes were inappropriate or illegitimate, and I think their decision was the right one.

But it was striking to me... And these were very sober people. These were not silly people.

WALKER: Final question. I feel I have a good sense of how you think Australia’s defence and foreign policy should adapt to China’s challenge. I’m curious, though: do you have any thoughts — even half-baked ones — on how our domestic policy should adjust, even at a high level?

So, for example, one might say that a “populate or perish” policy would be appropriate to increase our manpower, increase our GDP. That would be an example of a domestic policy shift in order to adjust. Do you have any thoughts?

WHITE: Let me start by slightly reframing the question. Because although I myself have spoken about the rise of China as the great dynamic in our international setting, which we and other countries have to adapt to, it’s not just China. The real story is the end of the long era of Western — and one might say Anglo-Saxon, English-speaking — domination of the Western Pacific.

Ever since European settlement in 1788, the world’s biggest economy, the world’s primary maritime power, and the dominant power in this part of the world has either been Britain or America. That has always framed, and continues to frame, our whole thinking about our place in the world.

Now that’s what we have to adapt to. And what challenges that is China, of course, but it’s also India — never forget India. It’s also Indonesia, which, well before the middle of the century, will have the fourth-biggest economy in the world. Now, that’s going to be different. And it will be the emergence of a whole new strategic order in Asia, including in East Asia, which will work completely differently from anything we’ve known.

So that’s what we have to adapt to. It’s not just responding to China, although China’s a big part of it.

Now, what does that demand of Australia? Well, it demands of us that we find a way to make our way in an Asia which is no longer dominated — made safe for us — by an Anglo-Saxon power. And we’re going to be more on our own than we’ve ever been before. 

That is, I think, frightening, and certainly challenging.

That has big implications for our defence policy, because we do have to think about how we defend ourselves independently in a way we haven’t had to do before. That, in turn, has implications both for our demographics and our economy, or the association between them. That is, the bigger our economy, the more we’re going to be able to look after ourselves. That’s a very straightforward thing. But anyway, you want your economy to grow — so I don’t know whether that’s a new dimension. For all sorts of reasons you want the biggest economy you can have.

It is an argument in favour of — I wouldn’t quite put it as “populate or perish” — but it is an argument in favour of a bigger population.

But I don’t think that’s the real issue for us. Much more importantly, it’s going to demand of us a rethinking of who we are. In the end, how you relate to other countries always depends on how you see yourself.

In a sense, the great drama of the Australian story — one of the great dramas — has been an adaptation to the fact that, although many of our ancestors came from other parts of the world, European parts of the world, Caucasian parts of the world, we’ve found ourselves in this continent off the end of Asia. And reconciling that contradiction between history and geography has always been part of our story.

For a long time the reconciliation was eased by the fact that our mates left over from the other part of the world still dominated this part of the world, and so we never really needed to think about how to make our way in Asia by ourselves. Now we do. Because a very big part of my argument is that, in the world I’ve just described, the United States will not play a significant strategic role in Asia. There’s no reason it should, and I’m as sure as I can be that it won’t.

People find this an extremely challenging idea, because they think that America has been the leading power in this part of the world for, roughly speaking, 125 years, and that something which lasts for 125 years lasts forever.

No. Things that have lasted a long time collapse all the time, and that’s what’s happening now. It’s partly a Trump story, but not just Trump by any means.

That’s going to require us to think of ourselves as Asians, and to identify ourselves with our region. Keating and Hawke used to capture something of this idea when they spoke about Australia looking for its security not from Asia but in Asia. But we need to go a lot further than that.

Of course, in a sense this is already happening, because demographically we are becoming more Asian and that’s not going to stop. I think we have to accept that. I think most Australians, most of the time, think that whatever else happens as we respond to the rise of China and India and Indonesia and other regional countries, we need to “remain true to ourselves.” We don’t want to change.

We will change. We will be a different country in the way we think about ourselves. We are going to have to make choices — contrary to John Howard — between our history and our geography. Our history, that bit of our history, is disappearing in the rear-view mirror. Our geography is looming larger and larger. So, thinking about how we adapt to that is a very big part.

If you want a really simple one-line point about the cutting point, it’s language study. Nothing is more striking than that Australia’s — at the individual level, you might say at the emotional and intellectual level even — engagement with Asia has weakened, not strengthened, in the last 25 or 30 years. That’s completely contrary to where we need to be going.

WALKER: I said that was going to be my last question, but something you said earlier has just been bugging me.

WHITE: [laughs] Good.

WALKER: You said that Australian political leaders probably haven’t read many, if any, of these books, at least in comparison to, you know, members of the Standing Committee of the Politburo.

And yet these are potentially the leaders who’ll be making that decision at 3 a.m., maybe in a few years, about whether to follow America into Taiwan, to defend Taiwan, if that eventuates. 

Is it true? I mean, this kind of appalls me, that our key members of Cabinet maybe don’t have a better-than-average understanding of the causes of the First World War, the causes of the Second World War, haven’t read many, if any, of these books. Is that really true?

WHITE: Yes, it really is true. And it’s not just that they haven’t read the stuff, but they don’t have what you might call the social memory of it.

So there’s a contrast here between this generation of political leaders and earlier generations. I spent quite a lot of time over the years — both as a staffer and as a public servant — talking to ministers and prime ministers about scenarios in which Australia might go to war.

When you talk to people like Hawke or Keating or Howard, all of whom were of a generation for whom the Second World War was a vivid recent memory, the Cold War was absolutely what they grew up with, and the Vietnam War fundamentally shaped their politics one way or another. These people had — even if they hadn’t read the books — a kind of instinctive, intuitive understanding of these things.

So that when you explained things to them they’d [say] “Oh yeah, got it.” Things slotted into place. Now, that’s not to say they always got things right, but they had a kind of framework for thinking about this stuff.

The generation of political leaders that grew up after the end of the Cold War, which includes our current leaders, were very strongly influenced by the, so to speak, utopian optimism of the 1990s, the idea that we lived in a world framed by American ideas and upheld by American power. Which, for Australia, was an ideal world.

[Their] thoughts about war were very strongly influenced by events like the First Iraq War (1991–92), the Second Iraq War, and Afghanistan. The first one was a great success. The second two were terrible failures, but they were small failures. They didn’t really matter. They did matter to some people, but didn’t matter to Australia overall. You might say that’s shameful. We lost 41 people in Afghanistan. Those were wars we went into, particularly the second two, with very little thought.

But my impression is that the current generation of political leaders remains very unreflective about the realities of the strategic choices they potentially might have to face. And very anxious about the domestic politics of this issue.

Politicians are always focused on domestic politics — they should be, that’s their job — but they also have to balance that against what you might call the bigger national issues. [Today’s] are very anxious about the domestic politics, and very unconscious of the bigger strategic questions.

If you want a data point, then look no further than AUKUS. AUKUS is a really dumb idea for a number of reasons. Apart from anything else, we don’t need nuclear-powered submarines, and anyway we’re not going to get them.

But the really fundamental problem is that they are a very unambiguous declaration of commitment to support the United States if the United States decides to go to war with China, over whatever reason, but most probably Taiwan.

Our political leaders either understand that and just pretend they don’t, or they don’t understand it. I’m giving them the benefit of the doubt. I think they don’t understand it, which just shows they have not thought about this.

This seems shocking, it is shocking, but I think it’s the reality we deal with. Those of us who engage in the national debate on this have to reckon with the reality that, politically speaking, we’re talking into a vacuum. Because neither side of politics — the point I’m making is purely bipartisan — wants to engage in it.

That’s a disaster, actually. We are living through the most difficult transition in our national history, strategically, since European settlement, and yet we’re so much less focused on it, and so much less prepared at our political leadership, than the men (and they were all men) who managed our way through the transition at the end of the British Empire towards federation.

I was talking before about how Australia has to rethink what sort of country it is. One of the things Australians did at the end of the 19th and early 20th century was recognise that, as Britain’s strategic leadership in our part of the world collapsed, we had to rethink who we were and stop thinking of ourselves as Victorians or New South Welshmen or Western Australians and start thinking of ourselves as Australians.

It was not an easy sell. [laughs] We had to have two referendums to get it through. People bitched and moaned, but in the end they bought the argument. 

No-one’s taking on that kind of argument now.

WALKER: Hugh, we’d better leave it there.

WHITE: Better leave it there.

WALKER: It has been so interesting learning about some of the texts that have most influenced your thinking, as I’ve been reading them over the last couple of weeks. But I feel like I’ve learned even more from you today. [laughs]

Thank you and thanks for being so generous.

WHITE: My pleasure. Thank you very much. I really enjoyed the conversation.

He led the most complex overhaul of Australia's tax system in the postwar era: introducing the Goods and Services Tax (GST) — a value-added consumption tax — while abolishing a range of indirect taxes (notably wholesale sales tax) and cutting income-tax rates.

I wanted to learn from Peter what it actually takes to achieve a reform at that scale — and why we haven’t managed anything like it since.

In this conversation, we discuss:

• GST implementation war stories;
• lessons on how to get big things done in government;
• why major reform became so much harder after 2000;
• why Peter would sometimes hide revenue estimates even from the prime minister; and
• the baby bonus (introduced in 2004), which led to an uptick in Australia's total fertility rate — making Australia one of the only western countries to increase (albeit temporarily) its TFR since the demographic transition began.

Video

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Transcript

JOSEPH WALKER: Today it’s my great honour to be speaking with Peter Costello. He is Australia’s longest serving treasurer, serving from 1996 to 2007.

My specific interest in speaking with Peter today is that he was the last person in Australia to achieve a major tax reform, namely the GST. For international listeners, that’s essentially like a VAT. That came into effect 25 years ago now.

Back when it was being debated, I was a very young kid and I remember hearing about it on the radio and thinking, “That’s not good that the government’s trying to make things more expensive.” Of course, at that point in my life I didn’t comprehend the importance of broadening the base and lowering the rate. I was more interested in Batman at that stage.

But not only was the GST our last major tax reform, it was arguably the most complex reform of the reform era. And, moreover, if you exclude the NDIS, we arguably haven’t achieved another major economic reform in this country since the GST.

So Peter, welcome to the podcast.

PETER COSTELLO: Great to be with you.

WALKER: I want to chat with you about your experience shepherding the GST through, and some lessons for getting shit done in government. I also want to talk about the baby bonus you introduced in 2004, because I’m very interested in understanding policy for increasing fertility, and new evidence has shown that that baby bonus was quite cost-effective.

But before we get into all that, by way of background, this is fast-forwarding now to when you’re in government: 1996, the Premiers’ Conference. The Commonwealth floated changes around the wholesale sales tax and exemptions, and then the states went feral and Howard pulled it back.

I’m curious what that experience taught you about how to sequence reform, how to build consensus for reform, the reform process. Is there anything interesting about that?

COSTELLO: Well, this was the lead-up to my first budget. We were desperately trying to put the Commonwealth on a path to balancing its budget.

What happened was that state governments were exempt from what was called wholesale sales tax. So they could buy cars tax-free. They would use them for a year and then they could sell them for more than they’d bought them for, because they didn’t pay any tax.

A private buyer who did have to pay tax could buy it from the government for less, and without tax, than they could buy it from a dealer in a normal commercial transaction. So it turned out [laughs] that we found out the state governments had basically gone into the car business.

They were buying huge fleets. They would use them for a year and they would sell them off and make a profit. It was an income generation scheme for state governments. They were essentially arbitraging their tax-free status into the used car business.

So, I’m desperately looking for money and I said, “Why are we allowing state governments to do this?” If you buy from a dealer, the dealer has paid the wholesale sales tax. If you buy from a state government, the state government hasn’t paid the wholesale sales tax. It’s taken a profit margin, arbitraging the tax-free status.

So anyway, with the agreement of the cabinet and everybody else, I announced that we would end this. Well, of course all hell broke loose. State premiers went into riot mode.

But I had gone through the due process. I had got cabinet agreement. Unfortunately for me, however, the state premiers got round to the prime minister and said, “You can’t go through with this. You’ve got to rein in your errant treasurer.” And he did a side deal with the state premiers.

We did eventually solve the whole problem another way — we got rid of the wholesale sales tax and replaced it with a GST. So I had the last laugh, as it were, but the premiers had the first laugh in that little episode.

WALKER: Was there anything specific you learned from that little episode about how to get reform done?

COSTELLO: You’ve got to make sure that you cover all the pressure points that could be used against you [laughs]. All the pressure points — even pressure points on your own side. You’ve got to make sure you cover off all the bases.

WALKER: Yeah, and that certainly feels relevant to the GST story, where you were meticulous about covering off those pressure points.

COSTELLO: Absolutely. I learnt from that that if you could neutralise the state governments and the state premiers, that would be very important. And of course I learnt that you had to lock in your colleagues and your prime minister, so that when the going got tough they couldn’t get through the back door.

I actually think the most clever part of the GST design — it has many elements — but the most clever part, which I as a result of that came to the conclusion we should do, was to give all the money to the state governments. All of the GST goes to the state governments.

So I could lock in these state premiers, many of whom were Labor and therefore opposed to GST. I would say to them, “You’ve got to understand this point: you’re going to get the money.” And they still do. Under the legislation, the state premiers, the states, get all of the GST revenue.

I remember when we were signing the agreement, Bob Carr was the premier of New South Wales at the time. We did the whole agreement and I produced the agreement – it’s time for everybody to sign this agreement. And I remember Carr saying in a very theatrical voice, “I am opposed to the GST, but New South Wales will be the first to sign up for its fair share.”

And he walked up to the table and signed the agreement — for something he was totally opposed to introducing. Why? Because he got the money, you see.

It was a much better deal for the states because all of the GST revenue goes to the states. And at 10% of goods and services, it grows.

This was the best deal they’d probably had since Federation. Before they got the GST, all they got was a grant from the Commonwealth, and the grant could be fixed, could be cut. It didn’t have to go up. The Commonwealth could do whatever it liked with those grants.

But by giving them this tax base — 10% of goods and services — they knew they’d have a fair idea as to how it was going to go and it would grow roughly in proportion to the economy. So I guess I learnt if you can neutralise state premiers and states — Australia’s a federation — you had a much better chance of getting on with the reform.

WALKER: That’s really interesting. Later I was going to ask you about the lock-in mechanism with the states, but it’s interesting to learn that it was that experience in the 1996 Premiers’ Conference that inspired that idea of yours.

COSTELLO: Yeah. If you want to do broad-based reform (I’m sure we’ll get to that in a moment), try and lock in as many centres of opposition in advance. 

Another thing I had learnt from the previous attempts to do broad-based indirect tax reform was that the social welfare sector had become a very strong opponent.

So I thought, we’ve got to try and lock these people in, in advance, and that led to increases in pensions. Sure, people on welfare benefits or government payments would have to pay more under a GST — I acknowledge that, I accept that.

But what I can do is increase their benefits to compensate them so their disposable income will be the same. That was another very important compensation mechanism, and it was done in advance so that we didn’t go to war with the social welfare sector.

How do we avoid a war with the states? How do we avoid a war with the social welfare sector? Churches had been great opponents. How do we avoid a war with the churches? So organised religion got a very good deal — they were exempt basically from the GST.

But just because you did all these things didn’t mean that they understood it. You had to go round and explain to people why this would protect their position whilst giving an overall benefit to society as a whole. So, yeah, I learnt some lessons.

If you can neutralise the opposition before it materialises, you’re in a much better position. Once it materialises, you’re in hand-to-hand combat from then on.

WALKER: Just briefly — and this feels like a naive question — did you have a physical list of the different stakeholders you needed to lock in?

COSTELLO: Oh yes. Hundreds.

WALKER: Lock-in lists [laughs].

COSTELLO: Hundreds. I remember going around and seeing archbishops and going around and seeing social welfare people, going around and seeing business groups, and of course negotiating with premiers and negotiating with state treasurers.

WALKER: It was a society-wide thing.

COSTELLO: Well, it was. Because the thing about a broad-based indirect tax — GST, goods and services tax (value-added tax sometimes, VAT) — is you’re taxing (and our objective was to tax) nearly every good and nearly every service, every day, every transaction.

This is much bigger than income tax or company tax or superannuation tax. As was famously said, when you get up in the morning and pull out your toothbrush, there’s a GST on the toothbrush and there’s a GST on the toothpaste. You go down and turn on your toaster, and there’s the GST on the electricity and there was the GST on your bread, because we wanted to include food. And then you hop on the train and there’s a GST on the ticket. You go into the workplace and there’s a GST on your coffee and there’s a GST on your pen, there’s a GST on your computer.

And this is what our opponents would say — and it was true, by the way. So if you are introducing a broad-based consumption tax — a GST, a value-added tax — the dimension of it is enormous. This affected billions of prices in the economy. Billions.

So it was capable of an enormous scare campaign. And, by the way, our opponents gave us an enormous scare campaign. Don’t worry about that.

So, in advance, I was basically trying to neutralise as many centres of opposition as possible.

WALKER: Okay, I want to take a step back. We’ll come back to lessons of the GST experience later, but I want to go through almost chronologically and draw out some of the war stories from you.

First, in August ’97 you stood up a taskforce in Treasury under Ken Henry. They worked in a separate building outside Treasury, it was very secretive — they had a safe room, special passes to get in, unauthorised members weren’t allowed in — and they began work designing the GST and modelling its economic impacts. That lasted a whole 12 months to August ’98, when you finally announced the proposal: A New Tax System.

Concretely, how did your daily routine change between 13 August ’97 and 13 August ’98? What did an average day look like for you?

COSTELLO: Well, the scare campaign started immediately, right?

WALKER: In ’97?

COSTELLO: Absolutely. This was not new ground for Australia. You’ve got to remember that Australia had been through many GST debates. Keating, as treasurer, hadn’t proposed a value-added tax but a broad-based indirect tax.

WALKER: Yeah, a retail tax.

COSTELLO: Yeah, so-called Option C. And that didn’t fly.

Then the Coalition, which I was part of under John Hewson, in 1993 proposed a GST. This time Keating — from being a proponent — became an opponent. He ran an enormous scare campaign and defeated the Coalition on the issue in 1993.

So Australia was fully attuned to this issue and to scare campaigns. In fact, Ken Henry had helped Keating defeat the GST in 1993, so I thought, right, for your penance, you’re going to help me introduce it. So I put him in charge of this taskforce.

To come back to your question, this started the day we announced we were going down this track. The scare campaign started. All the lines were there. They’d been well and truly primed from previous election campaigns.

So basically, at this point we’re working feverishly and I’m trying to quell the horses. “Don’t worry, we’ve got great plans [laughs], you’re going to see it all.” And of course our opponents, in order to get political advantage, had started a scare campaign already: “It’s going to murder you, it’s going to throw Australia into recession, you’re not going to be able to afford it. The poor are going to starve, the homeless are going to go homeless.”

So, basically, I would say for those 12 months we were in this full-on debate — scare campaign — even though we didn’t have a policy. But everybody knew where it was going.

What didn’t they know? They didn’t know the rate — which we came in at 10%, but you could have figured that out. They didn’t know the lock-in mechanism — that was a real surprise. That was an original, that. They didn’t know the compensation — what compensation would there be in welfare benefits? They didn’t know the trade-off in income-tax reductions that we would get.

They didn’t know what other indirect taxes we would abolish, although you could have worked out we were going to get rid of wholesale sales tax and a few other indirect taxes. But the bare bones — that this would be on as broad a base as possible — were pretty well known. And that was enough for the scare campaign.

WALKER: But what did your average day look like? As a fly on the wall, I’m kind of curious, for that 12 months.

COSTELLO: Get up early in the morning, go on talkback radio with all the hosts, do some morning television, probably go into Question Time where you’d be peppered with questions, do a debate in the Parliament, come out, do the evening radio.

In those days we used to have night-time television programs — Lateline, these sorts of programs — go on that, speak to the print journalists who were putting copy to bed for the next morning, go to bed for a few hours and get up and do it again the next day.

WALKER: Rinse and repeat. At the end of that period, you presented the GST to cabinet in a PowerPoint presentation. And I read in The Costello Memoirs that this was the first time that PowerPoint was used in the cabinet [laughs].

COSTELLO: Yeah, it’s funny [laughs]. PowerPoint was the most modern thing, you know? I’m not really a tech guy, but I had some people who said, “Can we put these graphs up?” And they brought this PowerPoint to me — there were graphs, colours — “This is the rate and this is how it’s going to apply, and these are the income-tax changes and these are the social welfare changes.”

Ultimately, once we’d settled the policy, I went into the cabinet and said, “Right, I’m going to present the policy.” I came in with the PowerPoints — the first time PowerPoint had ever been used in the cabinet in Australia — and I think I went for, I don’t know, seven or eight hours or so, explaining it. And it was obvious they didn’t have a clue what I was talking about.

They were asking questions and it was going on and on and on. Finally, after about seven or eight hours, we called it quits and I said, “Right, we’re all on the same page here, we’ve all got this,” and I remember walking out of the cabinet room with one of my colleagues and I said, “How do you think it went?” He said, “Gee, I like the colours in those graphs.” [laughs]

WALKER: How important do you think that tool of PowerPoint itself was to gaining cabinet’s approval?

COSTELLO: I think it was very important, because what we could do is we sort of built a model of the income-tax system.

What we could show is, if you move the threshold to this amount, you could save tax at the various thresholds by that amount. And we also had another thing which would show winners and losers — you’d have so many winners, so many losers. If you moved a rate between these thresholds, the distribution of tax cuts would be as follows, and another winners-and-losers.

So we could basically play around. I’d never seen anything like this before — just play around with all sorts of thresholds, all sorts of rates, distributional analysis, winners and losers. So it was really good. It can all be done now, but you couldn’t have done any of that without PowerPoint.

If somebody said, “If you cut the 30% rate to 28%, what would happen?” I could do a distributional analysis, and you could explain to people why you couldn’t do that, but why you could do this.

So it couldn’t have been done — it just could not have been done — without that.

WALKER: Oh, that’s interesting. On this point about technology, would the GST have been possible without PRISMOD and that technical capability?

COSTELLO: Well, this is what Ken and his team were doing. You get rid of a wholesale sales tax, right? So there was a tax at the wholesale level, and that had rates of zero, 10, 20, 30 — different goods, different rates. Get rid of all of that and you put 10% on final consumption. Right. Now here’s the question. What impact will that have on inflation? 

Because we know it’ll push prices up, because that’s at the final consumption level. These are all at the wholesale level. But will it push it up by 1%, 5%, 10%? And that’s what the models were designed to try and work out.

What is going to be the overall price effect? Now, you say, “Why did you need to know the overall price effect?” Well, first of all, I needed to know because you had to put compensation in there. So if there’s a 3% price impact and I give a 3% increase in benefits, I can say nobody’s worse off.

But if it’s a 10% price impact and I’m only giving a 3% increase in benefits, right? You can’t. And then for people who are in the workforce, you’ve got to know what the price effect’s going to be so you can figure out your income-tax cuts. So again, they’re going to be in front.

So that was where the macroeconomic model was very, very important — to try and work out the key price impact.

WALKER: So would the GST have been possible without that? Very difficult?

COSTELLO: No, no. I don’t think we could have done that either. We could come out with a price impact. Now, of course, a model’s only as good as a model, right?

WALKER: It’s not reality.

COSTELLO: Well, one of the things that sort of caught us in the middle of all of this was oil prices went up. And so we’re doing all this modelling on the assumption of constant oil prices. Oil prices go up, right? So petrol goes up. 

So people said, “You promised us petrol would only go up this amount. It’s gone up that amount.” Try as I may, I’d say it’s got nothing to do with the GST — it’s the underlying oil price. Well, that wasn’t acceptable to the media, as you can imagine. We got into a bit of trouble.

Then in your model you’ve got assumptions about the exchange rate, for example. The exchange rate’s got a life of its own independent of GST. So all of that’s going on.

So your model basically just produces an outcome, all other things being equal. The trouble is all other things aren’t equal.

WALKER: [laughs] So just to give our audience some context on the time constraints here: you obviously wanted the GST legislated by mid-’99 to give business a year to prepare before it came into effect on 1 July 2000. And that date was important because it was before the Sydney Olympics — we’d have a lot of foreign tourists spending here and they were already used to VATs in their home countries. Also, it would give a year to bed the tax down for Australians before the next federal election due in 2001.

Under those time constraints, do you think there was a plausible path to getting basic food included?

COSTELLO: Well, our policy was to include food, right? And we won the election on the policy of extending the GST to food.

WALKER: Sure, but once Brian Harradine voted against it—

COSTELLO: So we go into the Parliament, right? We say, “This is our policy.” Get it through the House of Representatives. It goes into the Senate. The Senate, by the way, set up six or seven select committees — the longest debate, almost, I think the second-longest debate in Australian history.

The opposition did everything it could to defeat this legislation in the Senate. And we needed one more vote to get food in. And the key guy was Senator Brian Harradine. I thought he was on the team right up until the time he went to vote, and he said, “I cannot.” So, at that point, food comes out.

That wasn’t the plan. If food had been in, it would have been easier to implement. It wouldn’t have been harder.

WALKER: My question was: at that point, after Harradine votes it down and then you’re forced to negotiate with the Democrats, was there a plausible path to getting food included, or no chance?

COSTELLO: Well, the Democrats wouldn’t allow food to be covered by the GST. The legislation just wouldn’t have gone through the Senate. We wouldn’t have had anything at that point. I fought to try and persuade the Democrats that they should include food.

WALKER: In your negotiations with the Democrats, did you and Howard explicitly agree with each other to play a good-cop bad-cop routine?

COSTELLO: I don’t know that we explicitly agreed, but it was pretty obvious that I’d live with this whole thing and I wanted the GST on everything. I was doing my best to keep as much in as possible.

The Democrats were doing their best to get as much out of it as possible. And, in the end, I think Howard was more amenable to compromise. We had to compromise — I knew we had to compromise.

That was obvious. It was just a question of how big the compromise was going to be. I was going for the smallest compromise possible.

WALKER: So it wasn’t a conscious negotiating tactic — it just sort of emerged organically?

COSTELLO: Well, yeah, I think that’s right. It was pretty obvious who was fighting for a small compromise in there.

And, of course, the Democrats used that. They sort of blamed me. It wasn’t a problem. If they took out their objections on me, it gave us an opportunity to do compromises elsewhere.

WALKER: When it came to implementing the GST, if you think about all of the practical problems raised by that: three billion price tags flipping at midnight on 30 June 2000, hoarding and buyer strikes, the threat of margin creep, etc. Of all those different practical problems, which one turned out in reality to be the trickiest?

COSTELLO: The practical problems were enormous. Now, the first thing is every business had to register for an Australian Business Number. That was the first thing. 

We thought a million businesses would register. After a few weeks, we got two million registrations — and rapidly going north. Where are all these businesses coming from?

WALKER: So at least twice as many businesses in Australia as you thought?

COSTELLO: Oh, more than twice. So that’s our first problem. Who are all these? Why don’t we know about them? Where are they?

WALKER: Most of these are mum-and-dad type businesses? 

COSTELLO: Oh yeah. The big companies, we knew all about. But these are mum-and-dad businesses we’d never heard of before, just coming out of the woodwork. So that was the first problem.

The second problem is all these businesses, including all these mum-and-dad businesses, have to remit the GST. They’ve got no experience of this. There’s no form, there’s no precedent.

So now we’re running training schools all through Australia on how to remit GST.

Then we establish help lines, so businesses can ring in and ask questions in call centres. That was great, but the problem is the people on the help lines didn’t know either. They didn’t have any more idea as to how this is to be done.

So it’s this huge registration task, this huge educational task, this training task. The passing of the legislation was hard, but this is just the beginning of the whole thing. So that’s why we wanted a year to bed all this down.

And then — and this is what I didn’t appreciate until pretty late in the piece — the two big supermarket chains here in Australia came to me and said, “You realise the GST comes into effect at midnight on 30 June? So there’ll be one price up till midnight, and there’ll be another price from 12:01. Do you realise we will have to change the price of three billion items — three billion — between 11:59 and 12:01?”

I thought, “Oo, that’s a problem. What are we going to do here?”

This is the dimension that you’re [dealing with].

WALKER: In that situation, isn’t that kind of just their problem? What kind of help were they expecting to get from you?

COSTELLO: Well, I think barcoding was coming in, but not everything was barcoded — point one. Point two: we’d assured people that we’d stop businesses from price-taking, using the tax changes to basically fleece the customer. So I had to have a pretty good answer to that sort of thing.

And, because the atmosphere was so febrile, people were saying, “What’s going to happen? What’s going to…” — sort of like Y2K — “What’s going to happen?” at midnight on 1 July.

So there were enormous technical and practical problems. And it was complicated by the fact that as part of the compromise with the Australian Democrats, we had to take food out. So you go to a supermarket: here’s a prepared bagged salad which might have GST, and there’s a fresh salad that doesn’t have GST. What’s the price differential going to be?

So the simplest way of doing a value-added tax is just put it on everything, right? You don’t have these demarcation, classification-type issues.

But we were unable to do that. So now we’re getting into this complexity, which I tried to avoid.

And our opponents are saying, “Ha, ha, ha, ha,” you know? A fresh chicken’s not taxed; cooked chicken is. How do you tell the difference between a fresh chicken and a cooked chicken? What temperature does it have to go to to be cooked? This is one of the questions.

WALKER: This was Simon Crean, right?

COSTELLO: Stick a thermometer into the chook and decide whether it’s taxed or not. It was a fair point, but, you know.

So in the end, as we were leading up to it — and there were no tax rulings, because we’d never done this before — there were no tax rulings. So I just said to the Tax Office at one point, “Bring up your 50 hardest issues, and I’ll give you a ruling in my office.”

So they came in. They said, “What do you want to do with this?” I said, “We’ll do that.”

WALKER: So as the responsible minister, you had the right to issue those rulings?

COSTELLO: Well, there was no precedent. And I’d drawn the policy — I might as well do the ruling. 

I remember a guy from KPMG said to me, “Look, the accounting firms would discuss this — they’d agonise over this for months, you know, trying to figure out a ruling.” I said, “We don’t have months, right? I’m going to do it in my office today.”

WALKER: It’s interesting, when I was reading about some of the history around this reform in preparation for our chat today, that story of you calling in the ATO Commissioner and issuing the indicative rulings yourself. That story, and then also, I think maybe this is late ’98, but correct me — when you set up Phil Gaetjens, your then chief of staff, in a sort of war room. He went offline, and his job in this separate unit in your office was just to fight the attacks on the GST. 

It struck me as a bit analogous to a startup where you don’t have a playbook, you’re using intuition, you can be quite creative, and you’re just making decisions without precedent. There’s not really a question here, but it’s interesting.

COSTELLO: You might as well do it, because who else is going to do it, you know? The tax commissioner doesn’t know. I’ve written the policy, I might as well do it. That was basically where we were.

Some of them probably had to get refined over the years, but I reckon I got about 95% of them right.

WALKER: It’s quite a creative act, politics. You’re doing things without a playbook or precedent. You realise you can do stuff within the bounds of the rules, and so you do it.

COSTELLO: Particularly if you’re in virgin territory, right? You can make the rules. We’d never had a GST. Nobody had any experience. We didn’t have any rulings. The courts hadn’t yet interpreted any of the legislation.

We had to administer it somehow, so who was going to do the rulings? Well, I’ll do it myself.

WALKER: [laughs] So, of all the practical problems, which one turned out to be the hardest?

COSTELLO: The hardest in the end, I think, was… We’re getting there, we’re getting there, we’re getting there. The first quarter went very well. But then I think business basically said, “Well, we’ve got through the first quarter, we’ve survived. Do we have to do this every quarter?” We started getting resistance on the second quarterly return. That was hard.

The other thing that was hard that people don’t realise is the interplay between GST and excise was unbelievably complicated. Take alcohol: you had to reduce excise so that by the time you put the 10% on, it came back to where it was.

You might say, “It’s not that hard.” The trouble is you had low-alcohol excise, medium-alcohol excise, heavy excise, 10%. Then you had packaged beer and fresh beer — different prices because there was a service component in fresh beer poured in a pub. And then, of course, you had wine, and then you had spirits.

All of these variables had to be interplayed to produce a particular outcome. It was the same with petrol: there was a petrol excise and a 10% GST. You had to amend the petrol excise so that when the GST goes back on, you move the price by the requisite amount. 

But whilst that’s going on, oil prices are moving. The exchange rate’s moving. So your carefully constructed calculation, which was right for the tax change, wasn’t right for the exchange rate.

You’ve got a million variables going on, political opponents down your throat, the press breathing fire against you, and an election in a year’s time. I just don’t think I thought about anything else for two or three years.

WALKER: One other story. When the tax finally comes into effect on 1 July 2000, I think you quite effectively leveraged the then head of the ACCC, Allan Fels. Can you tell me about that and the role he played?

COSTELLO: People said, “You change the tax system — get rid of wholesale tax, put on a GST — businesses are going to price-take. They’re going to rip us off. What’s to stop us being ripped off by businesses?” We’ll get the ACCC to price monitor. If they found anybody, under cover of the tax, increasing their margins, it would come down on them like a ton of bricks.

So Allan Fels was the head of the ACCC at the time. By the way, he loved media. He just loved media. He was out there every day giving expositions on what he was going to do to this business and that business.

WALKER: He’s like a war correspondent or something.

COSTELLO: Oh boy, yeah — the scene of the action. I’m sitting in my office and he’s ringing in during the day: “We found a coffee shop in Sydney that did this, and I rang them up and fixed them,” and “We found a bike shop down in Victoria.”

It’s like a war room. “Well, good on you, Allan. Keep going. Get up on the media.” He didn’t need any encouragement to get up on the media, I can tell you that. [laughs]

WALKER: Were there any other individuals like that who turned out to be unexpectedly very useful?

COSTELLO: He was very good; he was doing what we’d asked him to do.

WALKER: Were there any other individuals who turned out to be unexpectedly useful?

COSTELLO: On the implementation — well, that was hard. There were people who certainly helped with the arguments. As I said, I think we neutralised the state governments. The welfare sector never supported us, but it didn’t go for us in the way it could have. That was good from my point of view.

I think business was mostly supportive, because business gets all of its GST back. It was good from a business point of view. You pass it on to the consumer and they get tax back on all the inputs, so they came out well in front.

But you get opposition in unexpected places as well.

The only thing I’d say about all this is: remember, we got rid of wholesale sales tax, got rid of about five state taxes, introduced the GST, cut income tax, changed all of the benefits, and gave the revenues to the state governments, which changed Commonwealth–state financial relations. There’ll never be anything as big as that again.

And I wouldn’t want anyone else to have to go through that.

Here’s the point that always intrigues me. The GST has been in place now for 25 years — 1 July 2000. Do you know, in 25 years, the rate has not changed? And the base is practically unaltered.

It will be the most enduring part of the Australian taxation system now. In those 25 years, income-tax rates have changed, thresholds have changed, the coverage of income has changed, company tax has changed, superannuation tax changes, every year.

But the GST has become a very permanent cornerstone of the Australian taxation system. It’s now raising $100 billion a year. That’s not bad.

If you’d said to me 25 years ago this rate and this base would be unaltered in 25 years time, I would have thought you had two heads.

I think that’s an achievement. It has been the most certain part of the Australian taxation system for a quarter of a century. From time to time, people say, “We should change the base, we should change the rate,” whatever. But it’s been fixed and it’s been certain. I actually think the key to that whole thing was giving the revenue to the states.

See, the Commonwealth doesn’t want to increase the rate because the money goes to the states. It’s a lock. It’s been a very successful lock — much more successful than I thought it would ever be.

This addressed vertical fiscal imbalance — a much better deal than they’d ever had before. Up until then, they used to just get a grant, and the Commonwealth could cut it or increase it by 1%. They never knew what was going to happen; they had no certainty.

With this, they got a revenue base which was a growth revenue, where they could get projections, where they had some certainty, and it was theirs.

So it’s the only meaningful thing that’s addressed vertical fiscal imbalance, probably since the Second World War. But you can’t stop subsequent governments coming around and playing with the formula, as in fact happened, which I think has undermined its credibility.

WALKER: Right, with the WA deal. 

So, the agreement with the states isn’t legally binding, so a future Commonwealth government could always raise the GST if it wanted to?

COSTELLO: Well, it is legally binding, but the Commonwealth could legislate itself out of that agreement, if you know what I mean.

WALKER: Without needing to get the states’ consent?

COSTELLO: Yeah, exactly. It’s legally binding by act of the Commonwealth Parliament. If the Commonwealth Parliament were to change that act, it could undo the legally binding. But without a Commonwealth undoing that act, it is legally binding.

WALKER: Okay, one final object-level question on the GST and then I want to talk about some general lessons for reform. True or false: you have a gold dental crown inscribed with the letters “GST”? [laughs]

COSTELLO: True.

WALKER: [laughs] Do you still have it?

COSTELLO: Yeah. Up here. Inside the crown…

So, during this, I had a lot of dental trouble. I had to get a crown on my tooth. When the dentist came to put the crown on, he looked at it and started laughing. I said, “What are you laughing at?” He said, “My technician’s got a sense of humour.” “What do you mean?” “Well, the technician who made this crown has inscribed the letters “GST” into the gold crown on your tooth.”

And then the dentist looks at me and says, “The good news is, if you’re ever killed in an aircraft accident or something, we’ll be able to identify you very quickly.”

WALKER: [laughs] That’s great. 

COSTELLO: Unless there’s someone else out there who has GST on their crown.

WALKER: That would be, in their case at least, an odd decision. [laughs]

Before we go on to the general lessons, I have one completely unrelated question. I’m just interested in how government works.

I was chatting with someone the other week and I learned that when it came to the budgets — and the important context here is the early years of the mining boom, revenues flowing into the government coffers — someone told me about the “hunting licence letter”, and how, in order to keep spending under control, you wouldn’t even tell the prime minister about revenue until the very last minute. 

I found it interesting that even the prime minister wouldn’t know those numbers until the eleventh hour. Can you talk about that?

COSTELLO: I look at it as two phases. There’s a first phase: Australia was in the doldrums and mining was a very unfashionable industry, right up until — I did my first budget in ’96 — right up until 2004.

In 2004, the China boom starts taking off and we’re starting to get upside on revenues. I wanted to run surplus budgets and pay off debt, and I was concerned that if it was known that revenue was booming, my colleagues would spend it.

WALKER: Including the prime minister? [laughs]

COSTELLO: My colleagues. Basically, I was holding back the revenue estimate. Anyway, after a while, he figured this out and demanded the revenues much earlier in the piece. So I held back a little more than I had last year.

The expectation was, he’s only holding back 1%. Now he’s holding back 2%.

So we could run surplus budgets, and I think at the end we got the surplus up to about 2% of GDP — unheard of.

But the pressure in government is always to spend money. You don’t have to encourage a minister to spend money — that just comes with the turf. That’s ingrained. What you’ve got to do is try and restrain their expenditures.

They’ll keep on spending until all the money’s gone, and they’ll spend after all the money’s gone because you can borrow the difference. I felt I was one out against all these spenders in government.

WALKER: It’s interesting, the dynamic even between a treasurer and prime minister in that regard. 

COSTELLO: Sure, sure.

WALKER: Okay. Let’s talk about some lessons. How much of the attraction of the GST for you was simply that it was an insanely ambitious reform and would put you in the pantheon of great reformers?

COSTELLO: Well, it had been tried before. Keating — it wasn’t the same, it wasn’t as well designed as the GST — he had a go in ’85 and failed. Hewson and the Coalition in ’93 had failed.

My view was this had to be done in Australia, and we’d never get it out of our system until it was done. It just had to be done.

Even if I’d said, “Look, I’m against it,” it would have kept coming back and coming back. It’s got to be done. We all know it’s got to be done. It’s going to be very politically costly to do it, but we’ll never get peace until we do.

The big economic issue in all of this was: if we can increase the revenues from indirect tax, we can decrease the revenue from income tax. So it’s what’s called a tax-mix switch.

You take an increasing amount out of consumption — out of spending — so you can take less out of earning — income. That was the big macro point. There was a switch. Not as big as it would have been if we’d included food as well, but there was a switch. We didn’t say it like that, but that was the big economic point in all of this.

WALKER: It’s interesting that the GST was the Howard–Costello government’s most significant economic reform, and yet it happened in your second term less than halfway through the life of the government. After the dust had settled on the GST, was there a conversation internally about other reforms of that scale?

COSTELLO: You’ll never get anything of that scale. It just can’t be done. That was a tax-mix switch, a federal–state switch. It was an indirect tax on three billion prices. There was nothing more to do of that dimension.

But we did do other things. After that, we did company tax reform. We cut the company tax rate and changed a whole lot of things on company tax.

But nothing to do of that dimension anymore. That affected indirect tax, personal income tax, welfare, Commonwealth–state — the whole thing. Even if you picked up a pencil tomorrow, you couldn’t do anything as big as that.

WALKER: People often date the so-called reform era as beginning in 1983 with the Hawke–Keating government, finishing in 2000 with the introduction of the GST. Between when you got into government and when you left, did you notice that the environment had gotten generally less conducive to getting big things done? 

Not necessarily that you got less done by the end, just that it had gotten harder over your time in government. Did you notice any shifts?

COSTELLO: I think my experience in government was that, as you go on in government, you get worn down. Bit by bit, you get worn down. Seldom do you have the reforming zeal in a fourth term that you had in your first term. That was my experience.

We were still doing stuff and I was still doing stuff — the Future Fund, for example, 2004, is very important to Australia’s future. We tried to do labour-market reform in 2006–07.

But you get worn down, you get more tired, your opponents get a fix on you. You’ve expended enormous political capital doing this. Bit by bit, you get worn down.

That’s why I always say, if you want to do stuff, you’ve got to go for it in your first term, because it doesn’t get any easier after that.

WALKER: So Albo and Chalmers have missed the boat to get anything big done? [laughs]

COSTELLO: Well, I don’t know what they want to do. Obviously they want to put up the tax burden and increase spending. They would probably say to you, “That’s reform.” I don’t regard it as reform. But they would probably say that’s reform.

It all depends what you define as reform, actually.

WALKER: It’s striking that if you compare that period from 1983 to 2000 with the period from 2001 to today, there are many more major economic reforms in the first period than in the second. In the second, you could maybe really only count one — the NDIS. Now, obviously, it’s subjective how you define major economic reforms.

COSTELLO: I wouldn’t regard that as an economic reform. 

WALKER: Okay, sure. Well, okay.

COSTELLO: That’s a spending program.

WALKER: So maybe you’d say there have been zero in the second period, but that just starkens the conclusion. If we take a step back, what do you think is the biggest thing that’s changed — either in the political system or the world at large after the 1990s — that’s made it so much more difficult to get major reforms done?

COSTELLO: See, it all turns on what you mean by reform, right? Now, here’s what I mean by economic reform. I think economic reform is things that make a country more productive.

WALKER: I’m very happy with that definition. So, stuff that increases productivity by a meaningful percentage—

COSTELLO: —and leads to higher living standards, right? That’s what I would describe as reform.

WALKER: Yep, that’s good.

COSTELLO: Now, I agree with you: there hasn’t been much in recent years. But if you want to say spending programs are reform, well, we’ve had lots of reform, because we’ve had lots of big spending programs. 

We had a big spending program after 2008. The pink batts and the school halls. And we had a spending program for COVID. But that’s not what I’m talking about when I talk about reform. 

So, if you’re saying we seem to have walked away from enhancing productivity, or focusing on enhancing productivity, I would agree with that.

I think partly it’s because the political class have lost interest in it. That’s a big part of it.

WALKER: But why have they lost interest?

COSTELLO: Because it’s hard. And they’ve found another way of getting votes, and that’s borrowing money.

WALKER: So we’ve become a victim of our own prosperity?

COSTELLO: In a way, yes. We got rid of debt. We became debt-free — 2004, debt-free. A lot of work; we became debt-free. People look at that balance sheet and say, “Wow, there’s a lot of room in there for borrowing.”

So from now on, we can fund a lot of our promises and programs by borrowing. And basically that’s what we’ve done. We’ve run down the balance sheet. It’s sort of like: if you’ve paid off your mortgage and you’re sitting there with a house that’s worth something, you could either buy a better house, or you could say, “Yeah, I could run up the mortgage again and live off the borrowings.” And that’s easier. That’s basically what we’ve been doing.

We went from having no net debt to having over half a trillion of net debt. This allows the political class to make promises and keep the whole thing running quite well because they’re running down the balance sheet. And they can still say — because we came from such a strong position — “Our balance sheet is still better than most other countries.” 

It’s not because they’ve managed it well; it’s because they inherited a very strong position. I think that’s what’s been going on over the last, particularly the last 15 years.

WALKER: So it’s just too tempting.

COSTELLO: It’s easier. 

WALKER: It’s easier. And there’s no wolf at the door to motivate –

COSTELLO: And there’s no wolf at the door yet. So everything’s gone on quite well. My view is, at some point, there will be a wolf at the door — maybe not next year, but the next decade — and then we’ll be more exposed. But it’s working quite well at the moment.

WALKER: So that’s what you think is the biggest thing that’s changed?

COSTELLO: Yeah. In a funny kind of way, I think we were victims of our own success. Having got the balance sheet so strong, it just invited people to run it back down again.

WALKER: Has there been a time in Australian history where we’ve had a decade of prosperity and managed to resist the temptation to get complacent? Or is that just the natural order of things?

COSTELLO: Probably not. You look back through times of prosperity in Australia — they generally ended badly.

WALKER: Like the post-war era ended badly. Ended with the ‘70s.

COSTELLO: Well, you know, the Korean wool boom and all of that kind of thing — it ended in the inflation of the 1970s. And then we sort of got our act together again. And now I think we’re running things down again.

In many respects, managing prosperity is harder than managing adversity.

WALKER: There’s that famous line that The Economist wrote about Australia: we’re great managers of adversity and terrible managers of prosperity.

COSTELLO: Yeah, I think there’s something in that. It’s very hard to say to the public, “You’ve got to keep working hard on these things year after year.” The public says after a while, “Oh, gee—”

WALKER: “Are you sure?” [laughs]

COSTELLO: “Let’s make some whoopee.” So you make some whoopee, and it generally ends badly, and the public says, “Okay, now you can fix things up.” But every now and then they like to make some whoopee to get some benefit.

WALKER: So the compensation for the GST exceeded what it brought in in revenue by a full 1% of GDP. It feels like that particular reform ushered in this new norm in which there couldn’t be any losers from reform. Firstly, do you agree with that claim? And secondly, on balance, do you think that norm has been a good thing or a bad thing?

COSTELLO: The nature of politics is that your opponents will exploit any losers. My view is that in order to get big reform through, you may have to, in the short term, cushion people. But a big reform over the longer term will produce benefits well in excess of anything that had to be done for the adjustment.

And of course, when the GST came in, it wasn’t a fully fledged tax like it now is. It wasn’t raising $100 billion. So it was important to give compensation to get it through. But once you add it in, it just keeps on growing in proportion to the economy.

Politics being what it is — there’s easy stuff and there’s really hard stuff. I would say tax reform’s the hardest, particularly tax reform that affects every person every day. That’s just of a dimension all itself. That’s why it can be done once every 30 or 40 years or something.

There are other things that are more minor in impact, where you can have winners and losers because they’re minor in impact. But I wouldn’t draw any particular lessons from the GST. That's a one-off. That’s sui generis. You’re never going to see that again. Other, more limited things will not be governed by the same rules, I don’t think.

WALKER: I imagine since you’ve left politics that various political leaders have sought you out for advice on how to go about getting major reforms done. I’m sure it was always clever advice, but was there any particular piece of advice that you thought was especially clever?

COSTELLO: That I gave them?

WALKER: Yeah, after you left politics.

COSTELLO: I remember once speaking to the Russian minister. He was trying to broaden his indirect tax base. And I said, “Is it true, as I read, that tax collectors in Russia have Kalashnikov rifles?” And he said, “Yes, but only for self-defence.”

WALKER: [laughs] That’s great.

COSTELLO: Good advice — only for self-defence.

WALKER: Any general advice on reforming that you’ve given?

COSTELLO: The most important thing is to actually know what you mean by reform, and know what you want to do. I hear a lot of people say, “We should reform the tax system.”

Okay — what part of the tax system? “Oh, I don’t know. I think everything should be on the table,” they say. Okay, put everything on the table. Now tell me what you’re going to take off.

You’re not doing tax reform until you announce rates and thresholds and coverage and trade-offs and economic benefit and everything else. This is tax reform on the cheap: “I’m in favour of reform; I just can’t tell you what it is.”

That’s not tax reform. So the most important thing is: if you want to go down the reform path, tell me what you mean by reform. What outcomes do you expect from it? Why are you doing it? How are you going to explain it? Until you’ve thought about those things, you’re not even in the ballpark. It’s just wish fulfilment up until then.

WALKER: Reminds me a little bit of people who want to be a startup founder but without having any idea of what particular problem they want to solve.

COSTELLO: That’s right. When you’re a startup founder: “Oh yeah, could be in this.” “That’s good. Or that?” “Could be in that too. As well as that.”

“I’m involved in a startup. Don’t ask me what it does. Don’t ask me how it makes money. I’m just involved in a startup.”

WALKER: [laughs] What do you think is the most non-obvious skill that a successful productivity-enhancing reformer needs?

COSTELLO: I think the most important thing is the ability to communicate the benefits.

WALKER: But what’s the most non-obvious thing? I know that’s putting you on the spot a little bit.

COSTELLO: Well, I only deal in obvious things.

WALKER: [laughs] Okay. What do you mean by being a good communicator?

COSTELLO: If the public hears “productivity”, they think, “Oh, that’s bad.” I remember once I said, “Because we’re living longer, we can’t afford to retire at 65 anymore.”

My opponents went right down my throat and they said: “Costello wants you to work ’til you drop.” That’s pretty powerful — people hearing I was going to make them work until they dropped, until they died at work. That wasn’t what I was talking about at all. But your opponents are entitled to misrepresent you and make political capital out of it. For a while it was, “Work ’til you drop, Treasurer Peter Costello said today,” and the media were in the whole thing.

So when people hear “productivity”, they think it just means working harder, working longer, getting less. They don’t like that idea. The most important thing is to be able to communicate. What will they get from productivity? Ultimately they will get higher wages and better living standards. That’s why we’re doing all this — not to satisfy some equation somewhere, but to give you a better life. The most important thing is to be able to communicate that.

WALKER: Okay, to finish with some questions on the baby bonus. We’ll spend much less time on this, but there are some things I’m quite curious to learn from you. Last week, the total fertility rate number for 2024 came out. The TFR has now dropped even further — it’s down at 1.48.

Take me back to the internal conversations in government in the early 2000s. The first Intergenerational Report comes out in 2002; it makes salient a lot of these concerns about an ageing population and the fiscal and tax consequences of that. 

What was the main rationale for the baby bonus? And I suppose there was also the early incarnation of the first child tax refund announced in the 2002 budget, then superseded by the baby bonus in 2004. Was the main rationale raising fertility? Supporting families?

COSTELLO: No. It wasn’t, you see. When the baby bonus first came in, it was actually a tax concession.

WALKER: This is the first child tax refund? This is in 2002, right?

COSTELLO: Yeah. Basically, the idea was we’re trying to help new families. If you went out of the workforce, you lost the tax-free threshold you would have got for the years you were at home raising a child. So we’d give you a tax break. This is how it all started off.

You’d get two and a half thousand. But you had to apply for it, subject to income tests and all the rest of it. And the take-up was very weak.

I was just thinking to myself: we’ve got that baby bonus, which is basically a tax break. We used to have a maternity allowance. We used to have an immunisation allowance. Different qualifications, different income tests, different ways of claiming it. We’ve got to cut through all of this.

So I said: I’ll get rid of all the income tests and all of the different rates. We’ll just have one thing — universal — on the birth of a child. So I added up all the benefits that then existed and I think it was $3,000. Lump sum, $3,000 — ka-boom. I didn’t even call it the baby bonus; it was called a maternity payment when it came in. It was simple, universal.

I remember — this is how politics gets made — I’m in the pre-budget press conference, and a journalist said to me, “But I’ve already had my kids. I’m going to be locked out of this.” I said, “How many have you got?” The journalist said, “Two.” I said, “Well, why don’t you have one for the country?”

Right? That’s how it happened — in the press conference. It’s not in the budget speech; it’s not in the budget. I said in a press conference, “Have one for the country.” I got into a lot of trouble because someone on my staff said, “You shouldn’t encourage journalists to breed,” you know?

That’s how it happened. Then it got into the press — “have one for the country” — and the British press picked it up. One of the papers over there — might’ve been The Daily Mail — covered the budget under the headline, I’ll never forget this: “Australian Treasurer Says Bonk Down Under.”

That was the headline. The British press, then it gets pushed back to Australia, pushed back to Britain. That’s how it all happened.

So it wasn’t actually at all a measure to increase fertility. It was a rationalisation of all these other programs into one lump sum, which would be universal.

WALKER: Interesting.

COSTELLO: Alongside that, we had published the Intergenerational Report a couple of years before and alerted Australia, I think for the first time, to the danger of the ageing of the population and the declining fertility rate. 

So I was saying we had to arrest the declining fertility rate, and I was also saying we’d simplified the maternity payment. The two got conflated together, and it became a little humorous anecdote of Australian political life.

Now, the interesting thing is, much to my amazement, the fertility rate did kick up. So it wasn’t done to kick the fertility rate up, but I think it had an effect. The most important thing was not the bonus itself. The most important thing was we talked about the need to arrest the decline of the fertility rate.

I think it was talking about the issue — how the declining fertility rate would affect us badly, how it would be good for society if we could arrest it. The baby bonus just fitted in with that narrative. But I think it was the narrative that actually had an effect.

I think you could introduce a baby bonus tomorrow and it wouldn’t have any effect at all. Because unless somebody’s talking about fertility—about the effect it will have on society—it wouldn’t go anywhere. It’d just be another benefit.

I think it was the tilling of the ground with the Intergenerational Report, the talking about it, and then this other thing comes along and the two get conflated and off we go.

WALKER: Firstly, that’s very interesting to learn that influencing the fertility rate wasn’t the main original rationale. On the importance of the narrative, there’s been some excellent new research by e61 on the baby bonus and (this wasn’t the main finding but) one of the things I noticed in their research was that the biggest percentage increase was for third births which is consistent with the narrative being important, because that’s obviously the one—

COSTELLO: Absolutely. That’s the “one for the country.”

WALKER: —that’s the one for the country. [laughs]

COSTELLO: Right? So if you’re thinking about arresting the fertility rate—well, if a family has two, replacement level’s 2.1. That doesn’t get us back to replacement. The only way is if we had, on average, three. 

And obviously people who know how to have kids and enjoy kids and have two—they’re probably the most receptive to having three. And when you actually look at what happened, it was people having the third one—or sometimes fourth, fifth. People would come up to me in the street: “I’ve had one for the country.” “Fantastic, good on you.” 

But they weren’t doing it to get a baby bonus. Nobody in their right mind would have a child—which costs you, I don’t know, a million bucks or more over its lifetime—to get a $3,000 bonus. I don’t think that was the point at all. 

The message was: it’s good for society, it’s good for you, don’t feel bad about being out of the workforce and having kids. You’re actually doing a good thing for you, and it helps us all. I think it was the message that made the difference.

WALKER: The e61 research pleasantly surprised me in a couple of ways. Let me tell you what they were and then why I was generally excited by it. Firstly, it showed that the baby bonus created “counterfactual babies” rather than just bringing births forward—

COSTELLO: [laughs] It’s a funny expression—counterfactual babies.

WALKER: —not the most romantic. 

COSTELLO: I don’t know what a counterfactual baby is, but go on. [laughs]

WALKER: Births that wouldn’t have happened anyway. 

A couple of reasons we can be fairly confident about that: one is that birth spacing didn’t change, and secondly there was a big jump in births exactly nine months after the announcement. 

So births increased by about 6.5%. 

The second big update for me, it was much more cost-effective than I expected. The cost of an additional baby, using the $3,000 benefit, was about $50,000 in 2004 terms—about $86,000 in 2025 terms. 

The reason I’m excited about this is because global fertility decline is a big, mysterious problem. We don’t quite know what’s driving it. It’s even affecting countries like India now. It doesn’t seem to have a simple explanation about the opportunity cost of having kids increasing. It seems like there are these broader cultural forces at play.

There’s this question of, can we use policy to influence the fertility rate? We need lots of experiments around the world to help us answer that question, and [Australia’s baby bonus] seems to be an interesting and important experiment.

To some people that might seem like an expensive price tag for a “counterfactual baby” but I don’t think it is—and at least we know what it might cost to save civilisation. [laughs] 

So I was quite excited to see that. I don’t know if you have any reactions to the research.

COSTELLO: We first of all arrest the decline in fertility in 2004, then we marginally tick it up. This is very unusual. I’ve heard people come up with all sorts of explanations as to why that happened. Then, when the government changed, Labor dismantled that whole program and you see it go down again.

Something happened to the TFR between 2004 and 2008. You can come up with a lot of explanations. I’ve never really heard a satisfactory answer that doesn’t involve the baby bonus and the Intergenerational Report.

I think somehow it’s related to the Intergenerational Report and the baby bonus—not totally, but somehow. There’s no explanation that can exclude them.

Then we’re thrown out of government. Labor comes in, starts dismantling the baby bonus, and replaces it with paid parental leave. Paid parental leave was much more expensive than the baby bonus ever was. Paid parental leave comes in and the fertility rate starts declining again.

I’m not criticising paid parental leave. But the one thing we can conclude is that paid parental leave doesn’t increase the fertility rate. We can see on the graphs. Paid parental leave comes in and the fertility rate starts declining.

That’s not to say we shouldn’t have paid parental leave; I think we should. But the one thing we can conclude is that paid parental leave doesn’t affect fertility. You can leave the question open whether the baby bonus and the Intergenerational Report did. 

And this is a point I make. You want to look at the marginal cost of additional children and you say, well there’s $50,000. I don’t think it’s the right way of looking at it and certainly the baby bonus was never designed to actually do that.

But what then is the marginal cost of paid parental leave if it produces no additional children? It must be infinity—it’s the cost over zero. 

Now, I don’t think that’s a reason to say paid parental leave is no good. Paid parental leave is not to produce more babies, it’s to help people who are having babies. And that’s exactly the way I would explain the baby bonus. It wasn’t there to produce another child here or another child there. It was to amalgamate all of these payments and do it in a universal lump sum way.

I think it may well have turned the fertility rate, but it was going to happen regardless of that. It was a simplification of these benefits. The fact that it might have had that result, that’s good. Pleased about that. But you wouldn’t measure its value on the number of additional kids alone. That’s my point here.

WALKER: Although it wasn’t the original rationale, did you start thinking about how it could be used as a tool to influence the fertility rate? And did you ever look into how feasible it would be to “buy” your way back above a replacement rate?

COSTELLO: Because something undoubtedly happened between 2004 and 2008, people around the world have noticed this. This is one of the few Western countries that, for a moment in time, turned the decline of the fertility rate — probably the only one. 

I have a lot of people from overseas come to see me about this, to talk about the experience. And it’s noticed. It’s so rare. It’s so unusual, it’s noticed around the world. A lot of countries are trying to experiment. 

I say to visiting ministers and visiting heads of government, I don’t think you could introduce a baby bonus tomorrow and see your fertility rate tick up. In fact, if you reintroduced it in Australia tomorrow, I don’t think anything would happen. That’s not the key. 

The key is to talk about the issue and to talk about the importance of children and families and the contribution they make—and to value them. A bonus might just be a monetary way of saying we value children. But it’s the message that we value children that’s important to people.

You can’t get away from that. If the attitude is, “A child spoils your life — interrupts your career and costs a million dollars; you’ve got to buy a new car because your car’s not big enough, build a bedroom because your house is not big enough, pay for childcare.” If the message is that a child’s a bit of a burden. And having children is hard, we all know that. 

But if the message is, “it’s a bit of a burden,” don’t be surprised if people have less of them. If the message becomes, “Actually, this is a good thing; it’s a vote of confidence in our future; it’s actually good for our society; it will help prevent the aging of the population,” then I think you might be in the business of arresting the decline. 

But it’s the message that counts — not the dollar sum. That’s the point I always make to these visiting people. We’ve got much more benefits for kids now than we did in my day — we’ve got paid parental leave; childcare benefits are much bigger than they were in my day — but the fertility rate is still declining, because it’s not really a monetary thing. It’s the message I think that’s important here.

WALKER: Which might imply that it’s the cultural causes that are more important here.

COSTELLO: I think that’s right.

WALKER: When I say culture, I mean it’s sort of perceived to be less “cool” to have kids or lots of kids.

COSTELLO: It’s a bit of a burden that gets in the way of your life.

The thing that always amazes me is, where the highest fertility rates are highest are generally in developing countries. It seems to be a fact of life that as societies become wealthier, they have less kids. 

So you can’t say it’s a monetary thing. It’s much more than that. It’s culture, it’s lifestyle—all of these things.

WALKER: You could say it’s an opportunity cost thing, but I think the fact that it’s coming down even in countries like India—if you take Uttar Pradesh, a province of about 200 million people, one of the poorest provinces in India, it’s coming down even in Uttar Pradesh. Which wouldn’t be consistent with the opportunity-cost story. So it’s a weird thing.

COSTELLO: Undoubtedly as societies become wealthier—and as India becomes wealthier—they have fewer children. That’s the conundrum. So it can’t just be about money. Then, someone will say, “That’s because as they become wealthier they learn about birth control.” 

People know about birth control in developing countries. It’s more a lifestyle thing. Some countries have high birth rates for religious reasons. But in developed societies the fertility rate just seems on an inexorable decline. 

We’re lucky in Australia: we’re still having more kids born than people dying, so we’ve still got some natural increase in population. But many countries don’t—the countries of Europe; look at Russia, Italy, Japan. There are more people dying than being born in these societies. 

These societies are starting to die on themselves. It’s a very bad inflection point for these countries. We’re not there yet, but if this fertility rate continues, around 1.5 or a bit below, we’ll be there in a decade or two. And that’s bad for a society, in my view. 

Now, some people might say, “Oh, it’s not bad, what does it matter if everyone’s old and more people are dying than being born?” Well, it’s a decaying society, in my view. Some people won’t see it that way, but I do.

WALKER: Last question on all this. Australia hasn’t had a population policy since the post-war era. In the post-war era, Calwell and Chifley set a target for a certain population by a certain date and they wanted 2% population growth per year: 1% from natural increase, 1% from net migration. 

I was having lunch on the weekend with the great demographer Peter McDonald and he was saying that, at least to his knowledge, no country in the world at this moment has a population policy and as far as he’s aware, that example of Australia in the post-war era is the only example he can think of of any country in history to have had a population policy.

Partly this is just because it’s so difficult to calibrate population. But obviously the benefit of being Australia is that you’re an island surrounded by very hazardous sea routes and you can control migration, calibrate migration, relatively well.

Do you think we should have a population policy?

COSTELLO: There are two elements to population: natural increase and immigration. I think we’ve just decided we’re not doing anything about natural increase—that’s declining and baked in now with these fertility rates, baked in for the next 20, 30, 40 years. 

So when you talk about a population policy, you’re actually talking about a migration policy. Should Australia have a migration policy? Yes, I think it should. 

We should have in our minds—and I think it should be announced—what the sustainable level of immigration is. At the moment it varies very widely; the government doesn’t seem to be able to control it. 

I think we should have it very clearly stated, so that everybody knows—this is what we think is the sustainable migration policy and that’s what we’re going to work towards. I would agree with that.

WALKER: But migration’s an input here. Do you think we have a target for the population as a whole?

COSTELLO: Migration’s the biggest input—it’s sort of more than three-quarters of the input here. 

WALKER: But should we be thinking about a percentage or a target for the Australian population as a whole, that we want it to hit?

COSTELLO: I think we should be thinking, what is a sustainable increase, and we should also be thinking to ourselves about what kind of migrants are going to be the best migrants for Australia. I think that’s another part of the whole thing.

You raised Curtin, Chifley and Arthur Calwell. They were operating a White Australia policy, by the way, and we wouldn’t operate a White Australia policy today. And we shouldn’t. 

But I personally believe the migration policy should be totally focused on skills. That’s where it should go. We should get much more serious about skilled immigration.

WALKER: Just to finish: I want to come back to something in our conversation about why the reform era ended, and the fact that it’s ended. 

As a kind of broad reflection on Australia’s deep political culture, it strikes me that implicit in this consternation about the reform era ending, is this quintessentially Australian attitude that government has a role to play, and should be playing a role.

You’re a fabulous representative of the “small-l” liberal tradition in Australia, but even you are worried about the fact that the reform era has ended. This is so far from an American-style libertarian view where that wouldn’t even be a concern.

There’s not really a question here, but it’s sort of an interesting reflection that this worry about the reform era ending seems to be a quintessentially Australian worry.

COSTELLO: I think it’s a mistake to try to draw lessons from the United States into Australia. The United States is one of a kind. It’s the biggest economy in the world by far. Whether policy is good or bad in America, it’s just an economy that rolls on. It trades with itself; it has huge momentum. 

Australia is different because we’re a mid-size country. If we want to be strong, we’ve got to have good government and good policy. America can be strong without it—and is. They can afford bad government in America. I don’t think we can afford bad government in Australia.

We might be able to afford it in the short term, but we won’t be able to sustain it in the longer term. That’s my message: we’ve got to work harder at these things. 

Just because the Americans are doing whatever they’re doing, don’t think we can escape. We’ve got to work a lot harder at this kind of stuff if we want to stay where we are as a mid-size nation, looking for a prosperous way of life with higher living standards.

We’ve been running down; but we won’t be able to do that forever. That’s my message.

WALKER: That’s a good message. Alright, this has been a lot of fun. Thanks so much, Peter.

COSTELLO: Thank you. Thank you very much.

1. I'm hosting an 'economics in the pub' chat with Justin Wolfers and Richard Holden in Sydney on 16 October. Get your tickets here!
2. New OpenAI paper measuring AI's performance on economically valuable tasks.
3. 'AI isn't replacing radiologists', a new Works in Progress article.
4. Seb Krier on 'Coasean Bargaining at Scale'.
5. New Peter Turchin book. And a review in Nature.
6. 'How Common Is Accidental Invention?', a new Brian Potter article.
7. Notes from Peter Thiel's first Antichrist lectures.

Thanks, and have a great weekend,‌
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Joe

1. I’m launching a $2,500 YouTube Shorts editing competition—and it starts now. The purpose is to hire a talented video editor for future episodes. (You don't have to be a video editor to enter the competition.) For details, go here.
2. It's been a while since my last newsletter. In the interim, I've published three new episodes: Francis Fukuyama; Greg Kaplan & Michael Brennan; and Barry Marshall. At the bottom of this email, I've included two highlights from each conversation (hard to pick just two!).
3. Nassim Taleb is publishing the transcript of our podcast conversation in his technical book. He published the draft chapter online on Friday.
4. Three guys from Adelaide have just released what is currently the most popular video game in the world. (Bloomberg interview with them here.)
5. 'The Demographic Future of Humanity', a recent keynote by Jesús Fernández-Villaverde.
6. Australia is #1 in the world for having two equally dominant top cities.
7. 'City sizes, housing costs, and wealth', 2001 RBA discussion paper by Luci Ellis and Dan Andrews.
8. 'Flounder Mode: Kevin Kelly on a different way to do great work'.
9. The Launch Sequence, a new collection of essays by the Institute for Progress on how to use AI to catalyse science and security projects.
10. 'Two-Sigma Tutoring: Separating Science Fiction from Science Fact'.
11. Inflection Points: a new Australian policy journal.
12. 'The Europoors Are Choosing To Have Less Than Americans. It Doesn't Have To Be This Way.', a recent article by Sam Bowman.
13. 'China Unveils Mosquito-Sized Microdrone for Covert Surveillance'.
14. 'Political courage: Some Australian examples', 2007 article by the late, great John Hirst.
15. Casey Handmer reacts to two of my podcasts.

Thanks, and have a great weekend,‌
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Joe

Two excerpts from my podcast with Francis Fukuyama

1. Wars at the end of History

JOSEPH WALKER: Hegel thought that there would still be wars at the end of history, but Kojeve thought that there wouldn’t be. How do you make sense of Kojeve’s view?

FRANCIS FUKUYAMA: Well, I think that Hegel is probably more correct. I mean, if you take thymos seriously … In fact, I think I said that in one of the last chapters of The End of History, that there’s actually nothing like the risk of violent death in a struggle, in a military struggle, that makes people feel as human, fully human. And I think that that’s going to continue to be the case. I think that a lot of the political turmoil that we see around us now is really driven by that kind of desire. People want struggle for its own sake. They want risk and danger. And if their lives are so contented and peaceful that they don’t have it, they’ll create it for themselves.

So why are all these kids at Stanford and Columbia and Harvard and other places camping out on behalf of the Palestinians, right? I mean, why do they care about the Palestinians? What they want is to be seen as people that are struggling for justice, because that’s a noble human being. And I think that desire is really not going to go away. And that’s why the ultimate struggle for justice is really one where you actually do risk your life. And I think that’s the sense that Hegel had about why war wasn’t going to disappear.

WALKER: Yeah, but how do you make sense of Kojeve’s view?

FUKUYAMA: I don’t know.

2. An exclusive preview of Fukuyama's next book

WALKER: What, if any, books are you working on at the moment?

FUKUYAMA: Well, I’ve just written a little bit of an autobiographical memoir.

There’s actually a thread that runs through a lot of my writing that might not be obvious but that connects different books I’ve written. So one of them is something we’ve talked about already, which is the idea of thymos, which starts in The End of History, but it continues to my most recent book about liberalism [Liberalism and Its Discontents], but the other one is about bureaucracy and why I actually spend a lot of time worrying about the state and the nature of the state and how that’s all related to a bunch of different ideas I’ve had over the course of my career.

So, for example, I’ve got a chapter in the autobiography on delegation, because at a certain point I began to realise that delegation within a hierarchy is one of the most difficult and most central questions to management, to public affairs, to law. And it’s something we’re still fighting about, right? Republicans believe that we’ve delegated too much power to the state and people on the left think we haven't delegated enough. 

So there’s a lot of things like that aren’t obvious to a lot of people. So, anyhow, this is going to try to tie those threads together in a more comprehensive way.

WALKER: When will this be published?

FUKUYAMA: I have a contract. I’m going to have to revise it, but probably in the next year or so.

WALKER: Okay, so your stuff on delegation, it’s not readily apparent, or that theme isn’t readily apparent or organised in your existing published body of work.

FUKUYAMA: Right.

WALKER: Could you share your most interesting takes on delegation?

FUKUYAMA: Well, I’ll start with an anecdote, which is why I really started thinking seriously about this. In the late 1990s, you were in the midst of the first dotcom boom and the whole of Silicon Valley was arguing in favour of flat organisation. They’re very opposed to hierarchies of various sorts. And there was a feeling back then, in this very libertarian moment, that everything could be organised on the basis of horizontal coordination. The idea was the Internet was going to reduce transaction costs involved in this kind of coordination and nobody would actually have to listen to a boss in the future. And that is not true. You actually need hierarchy because actually you can't coordinate on this horizontal basis.

So in any event, this being the zeitgeist in the 1990s, I was still working at the RAND Corporation and the last study I ever wrote for them was called ‘The “Virtual Corporation” and Army Organisation’. Because it seemed to me and a colleague of mine, Abe Shulsky, that the army is quintessentially the hierarchical organisation. And here was Silicon Valley organising itself in a much flatter thing, without these hierarchies. And could the army learn something from Silicon Valley? 

So we went around – this was sponsored by the Training and Doctrine Command in the army – to a lot of different military bases, talked to a lot officers. And we realised that actually Silicon Valley didn’t have anything to teach the army because they understood this already, that after Vietnam they had done a lot of soul searching about why that war went so badly. They began to change their doctrine. They borrowed it a lot from the Wehrmacht and from Germany military practice. There is a tradition in the German army called Auftragstaktik, which is basically a doctrine about delegation. And it says that if you’re going to be a successful military organisation, the senior leaders, the generals, have to give only the broadest strategic direction and you have to delegate the maximum amount of authority to the lowest possible command level. Because in a war, the people that actually know what’s happening are the second lieutenants on the ground that are trying to assault this village. And it’s not the general way back 100 kilometres at headquarters that understands that. 

And then I began to realise that in corporate organisation that’s true as well. The Toyota just-in-time manufacturing system: every worker on the assembly line had a cord and if they saw a production problem or a defect, they pulled the cord and stopped the entire assembly line. If you think about what that means, you’re delegating the ability to stop the entire output of the factory to every single individual low-level factory worker. And that requires trust, but it also requires this huge amount of delegation.

And it’s for the same reason the army was delegating authority: it’s the lowest levels of the organisation that actually know what’s really going on.

WALKER: Right, so it’s like a Hayekian point.

FUKUYAMA: Yeah. So the article that I always have my students read is Hayek in 1945 wrote an article called ‘The Use of Knowledge in Society’. And he said that in any economy, 99% of the useful information is local in nature. It’s not something that's known centrally but it’s you in your particular local context. And that’s why he said that a market economy is going to work better than a centrally planned one because price making in a market economy is based on local buyers and sellers that haggle and set prices and therefore allocate resources efficiently. And so all of a sudden I said to myself, yeah, this really is important, that in any hierarchy you need the hierarchy because you need the generals to set the broad targets. But most dysfunctional organisations are ones that don’t delegate enough authority. 

And the army really fixed itself. I mean, the US army has become the best fighting force in the world. The IDF in Israel had a similar kind of doctrine and that’s one of the reasons that they got so good at warfare. That’s why the Ukrainians have been beating the Russians, because they absorbed a lot of this American doctrine about delegation, basically.

That’s where this all started. The only thing I wrote systematically about delegation was actually this Rand study on army organisation. But it shows up in other things that I’ve written. 

So lately I’ve been taking on the whole DOGE, stupid effort. This ridiculous effort of Elon Musk’s to combat waste, fraud and abuse in the government. He’s so wrong about so many of the things. But he repeats this conservative mantra that the bureaucracy has too much autonomy, that it makes all sorts of decisions that are leftwing, out of touch with the American people and out of the control of the democratically elected leaders. And it’s 180 degrees wrong. The problem with the bureaucracy in this country and in most other countries is that it is too controlled by the political authorities. There are too many rules that bureaucrats feel they have to follow. If you want to fix the bureaucracy and make it more efficient, as Elon Musk claims, you have to delegate more authority to them. You have to let them use their judgement. You don’t try to control them through thousands of pages of detailed rules and regulations for buying an office desk or a computer or something like that. 

So I think this delegation issue plays out in contemporary American politics, as well as in military affairs and as well as in factory organisation. All sorts of places.

WALKER: Right. That’s super interesting. Yeah. For me, as an Australian outsider looking in, the DOGE effort is very much symptomatic of the kind of Lockean American political culture that doesn’t trust government and wants to place more strictures around it. Starving the beast, so to speak.

FUKUYAMA: Yeah. And as a result, they kind of get the opposite of what they intended. 

WALKER: Because the bureaucracy becomes so risk-averse, it breaks down the feedback loop between policy design and policy implementation.

FUKUYAMA: Exactly, yeah. And that’s what I teach my students here in this policy program that I run.

WALKER: Right. I’m not sure whether you’ve quantified this concept of delegation, but is there a correlation between bureaucracies that delegate more effectively and state capacity?

FUKUYAMA: Yes. I just won this award last year. It’s a kind of lifetime achievement award in public administration. So this is a field that Americans really don’t pay any attention to because they don’t like bureaucracies. But I think that one of the reasons I won the award was that I published an article back in 2013 that did exactly that. It said, what’s the appropriate amount of authority to delegate in a bureaucracy? And I said it’s determined by the capacity of the people to whom you’re delegating authority. So in the Federal Reserve, the staff of the Federal Reserve are all PhD economists, so you can safely delegate a lot of authority to them. Whereas the TSA, the Transportation Security Administration, are full of high school graduates, and you’re not going to delegate a lot of authority to them to make complex judgements about ‘Does this person look like a terrorist?’ or ‘Am I going to stop this person?’. You just give them simple rules to follow. And so, that’s how it plays out, the relationship between capacity and delegation.

Two excerpts from my podcast with Greg Kaplan and Michael Brennan

1. What can we learn from the excellent TFP growth in Australia's agricultural industry?

JOSEPH WALKER: The standout over the last three and a half decades [in terms of TFP growth] is “agriculture, forestry and fishing”. My understanding is the component that has done the best is agriculture. Do we know why that has gone gangbusters?

MICHAEL BRENNAN: I know a couple of reasons, some not to do with productivity per se. It depends a bit on weather conditions (now, that doesn’t explain the secular trend)—drought versus good rain conditions. Those are inputs that aren’t measured in the productivity stats, so obviously there’s something going on there.

WALKER: Just to dwell on that for a moment: drought is an unmeasured input that will depress output, so that’s going to deflate the numerator without deflating the denominator.

BRENNAN: That’s right, so it makes productivity look poor; and good conditions will make productivity look great.

GREG KAPLAN: Can I just add: if you stare at the figure—maybe our viewers can see it—it has grown the most. It’s also by far the most volatile.

WALKER: And I think that maps to periods of drought and good weather.

KAPLAN: I think that’s exactly right.

BRENNAN: But has agriculture done well? I reckon it has.

It’s hard to pin down causal factors, but I think there’s been a degree of rationalisation in the sector over this period. There’s a bit more scale in farming than there's been in the past. Farming is a much more professionalised sector.

Farm management—even where a farm passes down hereditarily through a family—younger generations coming into farming now typically have got much stronger management skills—they’ve studied it. The management of farm enterprises has changed, and I think is quite different to what it was in 1990.

The scale of farming, because there has been more rationalisation.

But it’s also the continuation of that trend, that we talked about, over the last 100 years: the application of scientific progress to this sector, and it’s been particularly amenable to it.

WALKER: Better fertilisers, better seed varieties. Things like that.

BRENNAN: Yeah, that’s right.

There are two things that are… And this goes to your point, Greg, that you can’t always copy-and-paste from one sector to another. But it might give you a clue as to what some other sectors might be missing; it doesn’t necessarily tell you what to do about it.

There are two things about agriculture. One: it’s internationally exposed. It’s a globally-exposed business with no pricing power for the most part—some vineyards and some other niche products might. But for the most part—wool, beef, wheat, cattle, etcetera—they’re selling into a global market. They're price-takers; you’ve got no alternative but to drive productivity on-farm. That’s how you make money. That’s how you make margin. You can’t do it through price or better marketing.

The other thing is: we’ve had a pretty effective innovation system in agriculture. It often rests on public R&D or R&D collectively funded by farmers paying a levy—funding, say, the Wool R&D corporation or CSIRO or whomever—and then a system of extension officers who go out and help encourage farmers to take things up and spread good ideas.

WALKER: Help diffuse those innovations.

BRENNAN: Help diffuse—that’s right.

I think part of what has aided that—this is pure conjecture—is that farmers generally are not competitors. They’re selling their product on a global market. But they’re not fighting for market share among themselves. That culture of sharing information, in Landcare groups or just around town, is established in that sector and that’s probably aided the diffusion of ideas.

That’s not—to your point Greg—to say, “Well everybody should do that.” They can’t all just do that. That’s probably a thing that’s distinctive about that industry. But it might be there a couple of these other sectors where that innovation system is less well-developed and—particularly the ones where government is involved—maybe government should foster a better innovation-diffusion system.

2. Should we break the Sydney-Melbourne duopoly?

WALKER: We can talk about the sensible and obvious ideas in a moment, but I’m curious: are there any particularly unusual or ambitious ideas for lifting Australian productivity growth that you’ve come across in your travels?

KAPLAN: For me, the ambitious one comes back to geography.

WALKER: Moving Australia up. [laughs]

KAPLAN: Not moving Australia—I think Australia is in a beautiful spot. [laughs]

It comes back to this bigger question that 40% of our population is sitting in two cities.

That locks up, for the reasons we’ve discussed, the difficulty of being in those cities for many people and the constraints in getting to them. 

If we could unleash other parts of the country to be engines of productivity growth—more broadly than,say,  just mining—there’s a bit of throwing darts, but the potential returns are high.

There’s a role for government because it requires a huge amount of coordination and investment in infrastructure. To me, that would be a long-term bet worth grappling with.

WALKER: So this is potentially the “major new cities” thing, but also densifying existing cities like Canberra?

KAPLAN: I’m not sure if the answer is that we need more cities of two million people, another five-million-person city, or the issue is that we’ve got a bunch of cities with 80,000 people that really should be half a million.

But right now, the set of options for where to live available to a young person, ambitious, wants to contribute to productivity growth in the country—they're pretty limited and constrained by some cost factors. 

Now, I might be wrong—you might blow a bunch of money trying to do this. But if you're asking what's ambitious and non-obvious—well, I don't know how non-obvious that is—but I think that's ambitious, and I think it's probably important if we want to have serious productivity growth over the longer run.

BRENNAN: Yeah, it's high stakes. I mean, part of the challenge is it’s the sort of thing that poorly done just results in a proliferation of grants and tax incentives and relocated government departments to small places. But yeah, I think it’s an interesting feature of Australia, and in fairness, we're comparing ourselves a bit to the US here and not to a lot of other countries, a lot of other geographies. 

But, yeah, where’s the Phoenix? Where’s the Austin, Texas? Where’s the emergent regional competitor, if you like, to the hegemony of the big CBDs? I think that's an interesting question. 

Greg and I were chewing the fat on this, saying, “Well, why isn’t Canberra a city of a million people?” I mean, you could densify that place, barely anyone would notice. It's a great city. It offers a great lifestyle, pretty proximate to both other cities and other features. I don't know. I don't know why.

KAPLAN: It’s got high skills. It’s got an anchor industry already.

BRENNAN: High skills, yeah.

WALKER: Say the federal government just decided to go all in on, okay, let's get Canberra to a million-plus people. What are the actual policy levers? Do you have visas and the condition for the visa is people have to settle in Canberra for two years, or how do you implement that?

BRENNAN: No, I think you’ve got to look at fundamentals. I think it probably is partly about land supply and the ability to densify in the ACT. I think that's a big part of it.

In fairness, that is both a Commonwealth and a territory issue because the Commonwealth agencies have some planning responsibility there. And yeah, it could be that the transport infrastructure plays a role. I’m not a high-speed rail fetishist, but, you know, maybe.

Two excerpts from my podcast with Barry Marshall

1. PCR testing on Charles Darwin's whiskers has revealed the probable cause of his lifelong stomach pain: H. pylori

JOSEPH WALKER: It’s well documented that poor old Charles Darwin struggled with dyspepsia most of his adult life. He had stomach pain, nausea, and if you read his letters or his diary he complains about this a lot. He and his doctor put it down to nervous dyspepsia, so it also ruined his social life and turned him into a recluse. 

How good is the evidence that it was actually H. pylori that was causing his problem?

BARRY MARSHALL: That is the subject of a rejected letter to Nature that a friend of mine submitted. I don’t know whether I was co-author, but I knew about it. The epidemiology is that in the 19th century the whole human race was infected with it, and there are many famous characters in the 19th century who died from stomach trouble or had it their whole life, which made them particularly cranky and intolerant.

Charles Darwin would have had it—most people had it—and he had this issue that whenever he was under stress or pressure, he would get these vomiting attacks. There were all kinds of theories about why he had “nervous dyspepsia”—the fact that he was in seminary school and later became an atheist, you see. He used to call himself the “devil’s chaplain” because he didn’t really believe it anymore. All the Freudians came up with reasons why he had stomach trouble and he was conflicted, et cetera.

But like anything that you don’t understand in medicine, and a lot of other areas, if we don’t know the cause of it, we say it’s caused by stress—because every person on earth has stress, so you can always blame it on the patients. Everyone said it was stress. In his biography, of course, even Alfred Nobel had the same diagnosis with stomach aches and so-called stress. 

But Charles Darwin is an interesting one because, if you look at the details, his vomiting attacks started before his boat left Southampton on the voyage of the Beagle. On the voyage he supposedly got “seasickness” all the time, but you used to have to go and sit on the boat for a few days while they were waiting for the right tide and loading it up. 

So he was in his cabin on the Beagle and had vomiting attacks then, even before he went on the voyage. So the story of it being seasickness is pretty much bogus. 

On the voyage of the Beagle he had episodes where he would be laid up for days, and everyone said, “Oh, that was Chagas disease in South America,” and some other things.

For his whole life, he was a member of the Royal Society, but he couldn’t really travel up to London except once every 10 years to give a speech, because he would decompensate. He was always vomiting, he was always taking health cures like icy cold water and things like that. He even was treated on one occasion with bismuth treatment, which probably put him into remission because it does kill the H. pylori. So they snagged a good treatment at one point.

He was always sitting there with this great beard, plucking whiskers out of his beard and mucking around, so on his desk there were whiskers. When he died—this is what I’m told third-hand, I don’t have any proof, it’s not published yet—the housemaid swept up his desk and put all his whiskers in an envelope, all these loose whiskers. And then a friend of mine, who shall remain nameless at the moment, got hold of some of these whiskers from the Darwin family and ran a PCR on them, and they’re labelled with Helicobacter pylori. 

So yes, he did have Helicobacter pylori, and that is certainly the most likely explanation for Charles Darwin’s lifelong guts aches.

WALKER: That’s amazing. This feels like a scoop, right?

MARSHALL: It is kind of a scoop.

WALKER: That’s incredible. Can you tell me a little bit about how that works with the PCR and the genetics?

MARSHALL: PCR is polymerase chain reaction. The coincidence is that Kary Mullis discovered that the same year that I and Robin Warren discovered the importance of Helicobacter pylori in 1983. It was a bit of a landmark as the new biotech started to come in. 

So let’s talk about PCR. With all bacteria, all life forms—and criminals, as you know—everybody’s got unique DNA, and bacteria have got a unique DNA.

So with, for example, [Darwins’] whiskers, you dissolve the DNA off them in a test tube and shake it up. Then you put it into a polymerase chain reaction set-up in a machine. If it finds the particular sequence of H. pylori sequence in there, you put a probe in and look for that, it will amplify that little piece of DNA a million times—or a thousand million times. Then you can take a bit of that fluid out of the test tube and put it on a gel, and you can see this little band of proteins appearing. That won’t happen unless you’ve got an exact match. 

That’s why PCR is an amazing thing. And, of course, Kary Mullis won the Nobel Prize for that in 1993, I think—ten years later. Sadly, he passed away about two years ago. In the last 100 years, a lot of important Nobels, but that would be one of the best.

2. The world's most cancer-causing pathogen could easily have been discovered 25 years earlier than it was

WALKER: The 1954 study by Palmer—this sort of titan of American gastroenterology—looked at over 1,100 sub-gastric samples and couldn’t find spiral bacteria in any of them. That solidified the consensus that the stomach was sterile and probably reduced enthusiasm for looking for bacteria in the stomach. How did he miss H. pylori with that many subjects?

MARSHALL: Someone in his lab was cheating. That’s the only thing you can think of.

WALKER: Oh, really?

MARSHALL: Palmer was a great pathologist. He used to run Walter Reed Hospital’s pathology department. You can imagine—World War II—there’s all kinds of body tissue turning up in different places, tropical diseases. They were the doyens of pathology in the United States. If they said something, you believed it. Palmer was great.

I met Stone Freedberg when I was in Boston years later—he was in his 90s, about 96, still seeing patients. He was a cardiologist and a general physician, but he published a paper in 1937 or so finding bacteria in the stomach of patients who’d had gastrectomy mostly for ulcers. I think he found it in 46% of his samples and presented it. Then it was World War II; diabetes had just been discovered, or insulin had just been discovered—there was all kinds of fancy stuff going on in medicine. He became a general physician and a cardiologist—so he did okay.

A few years after the war, Palmer and his friends decided to check the bacteria issue. He said to his registrar or research fellow, “Look, there are 1,100 samples in our biopsy collection—go down and have a look, see if any have these bacteria.” He gets a report back a few months later: “We looked at them—we couldn’t see any.” He signs off on the paper—he was the senior author. I don’t know who else was on it, because you just remember him—you remember when famous people make horrible mistakes.

Everybody believed it and never bothered to look. The only way you could miss these bacteria was by not doing proper research—not staining them properly—or just totally faking it. It was inexplicable, but he was deceased by the time I started asking this question.

WALKER: So either someone got lazy and said, look, if we say there's no bacteria that fits with the paradigm, it's a pretty safe thing to say. Or there was some sort of malicious…

MARSHALL: So Palmer might have said to him, look, this is rubbish. Bacteria can't live in the stomach. Go and look at these things and then publish a paper, and then we'll give you your PhD and off you go. So that was it. And I don't think he ever went and looked at them.

So that gets on to fraud in scientific research and how important it can be—not to do it. If he had seen the bacteria and started doing what we did, the literature was available—the tetracycline treatment study, bismuth—he could have done a lot of that. And maybe ulcers and Helicobacter could have been worked out before 1960.

Since 1960, you know, half a million people or a million people a year would have been dying around the world from ulcers. Millions of people were having their stomach removed and never enjoying their food ever again, losing weight and having a horrible life.

And that was because of that screw up in Palmer, in Walter Reed.

Despite infecting about half of humanity, Helicobacter pylori wasn't discovered until 1979 and shown to cause gastritis and peptic ulcer disease in the early 1980s. Why did it evade detection for so long—and what finally broke through the consensus?

I went to Perth, Australia—where H. pylori was first discovered—to chat with Barry Marshall, gastroenterologist and co-recipient (with Robin Warren) of the 2005 Nobel Prize in Physiology or Medicine for discovering H. pylori and proving that it causes gastritis and peptic ulcer disease. Marshall famously infected himself with the bacterium to demonstrate causality and later helped develop clinical diagnostics like the urea breath test, which we demo live in the episode.

We discuss:

• the rise and fall of stomach cancer in the West;
• whether Darwin’s dyspepsia and Napoleon's stomach cancer trace to H. pylori;
• the ulcer–cancer paradox;
• Correa’s cascade: what H. pylori eradication reverses—and what it doesn’t;
• the “H. pylori enigmas” (Africa, India, Costa Rica);
• eradication prospects and an oral vaccine timeline;
• how the field missed the discovery;
• how the primitive internet enabled the discovery;
• what the H. pylori discovery teaches us about how knowledge diffuses;
• lessons from manufacturing millions of tests in Perth;
• and much, much more.

Video

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Transcript

JOSEPH WALKER: Today it’s my great honour to be speaking with Barry Marshall. 

Barry is a gastroenterologist, professor emeritus of clinical microbiology, and along with Robin Warren he shared the 2005 Nobel Prize in Physiology or Medicine for their discovery of the bacterium Helicobacter pylori and its role in causing gastritis and peptic ulcer disease. 

Just to put the scale of that in context as a humanitarian achievement, about 50% of the world’s human population is infected with H. pylori. It doesn’t just cause gastritis and peptic ulcers; it also causes gastric cancer (or stomach cancer).

Stomach cancer is the fifth most common cancer in the world. In recent years, it’s been the fourth or fifth most common cause of cancer deaths, killing about 800,000 people per year. 

H. pylori is responsible for approximately 90% of non-cardia stomach cancer cases—that’s the more common form of stomach cancer. It can also cause some rare stomach cancers like MALT lymphoma.

That means H. pylori, this one bacterium, is responsible for about 5% of the total burden of all cancers globally—so one in 20 new cancers are caused by H. pylori. It’s the most cancer-causing pathogen that we know of, more so than even HPV or hepatitis B. 

And thanks to Barry’s work, we’re now able to prevent these cancer cases through a simple eradication treatment of H. pylori.

So, Barry, welcome to the podcast.

BARRY MARSHALL: Thanks very much, Joe. Good introduction, and thank you for doing, obviously, a lot of homework on that.

WALKER: Of course, my pleasure. I’ve maybe spent about a week reading up on H. pylori and your work, and I’m going to try to unload as many of my questions on you now. 

First question: it’s well documented that poor old Charles Darwin struggled with dyspepsia most of his adult life. He had stomach pain, nausea, and if you read his letters or his diary he complains about this a lot. He and his doctor put it down to nervous dyspepsia, so it also ruined his social life and turned him into a recluse. 

How good is the evidence that it was actually H. pylori that was causing his problem?

MARSHALL: That is the subject of a rejected letter to Nature that a friend of mine submitted. I don’t know whether I was co-author, but I knew about it. The epidemiology is that in the 19th century the whole human race was infected with it, and there are many famous characters in the 19th century who died from stomach trouble or had it their whole life, which made them particularly cranky and intolerant.

Charles Darwin would have had it—most people had it—and he had this issue that whenever he was under stress or pressure, he would get these vomiting attacks. There were all kinds of theories about why he had “nervous dyspepsia”—the fact that he was in seminary school and later became an atheist, you see. He used to call himself the “devil’s chaplain” because he didn’t really believe it anymore. All the Freudians came up with reasons why he had stomach trouble and he was conflicted, et cetera.

But like anything that you don’t understand in medicine, and a lot of other areas, if we don’t know the cause of it, we say it’s caused by stress—because every person on earth has stress, so you can always blame it on the patients. Everyone said it was stress. In his biography, of course, even Alfred Nobel had the same diagnosis with stomach aches and so-called stress. 

But Charles Darwin is an interesting one because, if you look at the details, his vomiting attacks started before his boat left Southampton on the voyage of the Beagle. On the voyage he supposedly got “seasickness” all the time, but you used to have to go and sit on the boat for a few days while they were waiting for the right tide and loading it up. 

So he was in his cabin on the Beagle and had vomiting attacks then, even before he went on the voyage. So the story of it being seasickness is pretty much bogus. 

On the voyage of the Beagle he had episodes where he would be laid up for days, and everyone said, “Oh, that was Chagas disease in South America,” and some other things.

For his whole life, he was a member of the Royal Society, but he couldn’t really travel up to London except once every 10 years to give a speech, because he would decompensate. He was always vomiting, he was always taking health cures like icy cold water and things like that. He even was treated on one occasion with bismuth treatment, which probably put him into remission because it does kill the H. pylori. So they snagged a good treatment at one point.

[Paragraph redacted as the paper Barry mentions is not yet published.]

So yes, he did have Helicobacter pylori, and that is certainly the most likely explanation for Charles Darwin’s lifelong guts aches.

WALKER: That’s amazing. This feels like a scoop, right?

MARSHALL: It is kind of a scoop.

WALKER: That’s incredible. Can you tell me a little bit about how that works with the PCR and the genetics?

MARSHALL: PCR is polymerase chain reaction. The coincidence is that Kary Mullis discovered that the same year that I and Robin Warren discovered the importance of Helicobacter pylori in 1983. It was a bit of a landmark as the new biotech started to come in. 

So let’s talk about PCR. With all bacteria, all life forms—and criminals, as you know—everybody’s got unique DNA, and bacteria have got a unique DNA.

So with, for example, [Darwins’] whiskers, you dissolve the DNA off them in a test tube and shake it up. Then you put it into a polymerase chain reaction set-up in a machine. If it finds the particular sequence of H. pylori sequence in there, you put a probe in and look for that, it will amplify that little piece of DNA a million times—or a thousand million times. Then you can take a bit of that fluid out of the test tube and put it on a gel, and you can see this little band of proteins appearing. That won’t happen unless you’ve got an exact match. 

That’s why PCR is an amazing thing. And, of course, Kary Mullis won the Nobel Prize for that in 1993, I think—ten years later. Sadly, he passed away about two years ago. In the last 100 years, a lot of important Nobels, but that would be one of the best.

WALKER: I was trying to find examples of historical figures who’d suffered from stomach cancer. One of the more famous ones was probably Napoleon. I was reading a good study of his autopsy results, and when they opened his stomach up—he died at the age of 51—it was just a cancerous mess. If stomach cancer was the cause of Napoleon’s death, then you could say there was probably a 90% chance he was infected with H. pylori as well, right?

MARSHALL: Yep, yep. When you finally get the stomach cancer, in the last few years as the cancer is developing, the Helicobacter may disappear, in fact. Once the cancer has started—well, you know it’s going to happen. 

The idea is, if you have Helicobacter all your life, when did you catch it? You caught it at two years of age or five years of age from your mother, probably. Then it causes irritation in your stomach, inflammation, all your life.

Fifty years later there’s so much damage in your stomach that you can’t make very much acid, so then the acid gradually declines. Eventually other bacteria start living in your stomach—bacteria from your mouth. The stomach becomes just like your colon; there’s stinky, putrid bacteria living there.

At that point, Helicobacter can’t handle it anymore and disappears. Most people with stomach cancer have got putrid gastric contents for years before the stomach cancer develops and gets them. So that’s the story. People with stomach cancer don’t necessarily get a peptic ulcer because that’s related to acid. Duodenal ulcers, and most peptic ulcers, are acidic, and that wouldn’t be much of a risk factor for stomach cancer. But the final thing when the acid is gone, now it’s ready to get stomach cancer.

WALKER: I have a question on the connection with duodenal ulcers, so I’ll come back to that in a moment. But imagine you could tally up deaths from all the different types of cancer through all of human history. Which one do you think would be responsible for the most deaths? Would it be gastric cancer?

MARSHALL: People didn’t live long enough to get gastric cancer, so it wasn’t really noticed till the 19th or 20th century, I suppose. If the average lifespan is 45, most people with gastric cancer would get it after that, so you wouldn’t notice.

In evolution, if gastric cancer killed you before you had any children, Helicobacter would have been unsuccessful—it would have just died out. But it’s very chronic, and you do pass it on to the next generations. Probably between 2% and 5% of people with Helicobacter would have got gastric cancer. But I’ll be conservative, I’ll say 2%—that would be like Japanese or Japanese Americans, would be good examples.

Years ago, when I was a kid, I remember my grandparents used to get the abbreviated books from Reader’s Digest and the history of the Mayo brothers who started the Mayo Clinic. When they were kids in about 1910, they used to operate on their dog. They would actually do surgery on the animals around the farm, and I know they operated on their pet dog at some point. But when they started the Mayo Clinic in the 1920s and 30s, stomach cancer was the number one cancer in America.

Mayo Clinic would have the data on that, they’d have the records of the patients even, and a lot of gastrointestinal stuff was first documented and studied at the Mayo Clinic. It was a clinic for surgery into GI problems, cancer, and oesophageal disease. You can find some originals and, behind you on the shelf, Proceedings of the Mayo Clinic, 1929–1939 or ’49, I think. I bought that in Pitt Street Bookshop in Melbourne many years ago.

WALKER: Oh, nice.

MARSHALL: If you look through them, you can find original descriptions of various diseases that have been in the medical books for as long as I can remember.

WALKER: That’s cool. It’s interesting that in the first half of the 20th century, in the US and Europe, the leading cause of deaths from cancer was stomach cancer.

MARSHALL: Probably, yep.

WALKER: I think the incidence of stomach cancer was probably more common in the West than it was in Japan at that stage.

MARSHALL: Hmm, yeah. Maybe.

WALKER: But then, since the second half of the 20th century, it’s declined in the US and Europe. What explains that fall?

MARSHALL: Several things. Even in the 1960s you can look at stored blood samples and see who had Helicobacter or not by antibodies in the blood. When they looked at the Kaiser Permanente collection in California, they could see that in 1966, 60% of Americans were infected with Helicobacter—50 or 60%. 

So there was still plenty of Helicobacter around the place, but after 1930 there was this decline in stomach cancer in the US. You might have said, “well, Helicobacter’s going away,” but in fact the decline couldn’t be explained by the disappearance of Helicobacter because there was still plenty of it. Going from number one down to number four cancer in that 30–40 year period—it wasn’t just Helicobacter. It might have been that it was refrigeration of food, more fresh vegetables. 

That’s really what happened. Everyone started drinking orange juice and got plenty of fresh vegetables. That was good. There are some studies that show that having vitamin C in your stomach inhibits carcinogens. So there’s Helicobacter, and we would say Helicobacter makes everything else worse. Anything you put in your mouth hits your stomach, and if you’ve got a carcinogen in the water supply or bad food or something, then if you’ve got Helicobacter there, that helps set you up to get stomach cancer.

So we say that better diet, fresh fruit and vegetables, refrigeration—that protected a lot of people from stomach cancer.

WALKER: I see, so the H. pylori amplifies other carcinogens because it eats into the mucus?

MARSHALL: That’s correct. If you don’t have H. pylori, you’ll always have stomach acid, and stomach acid destroys carcinogens. They just get consumed—they’re active molecules—so if you’ve got some acid there, they get eaten up or destroyed.

WALKER: I see. It’s also interesting that as there was this fall in the incidence of stomach cancer in the US and Europe, there was a commensurate rise in the incidence of duodenal ulcers.

MARSHALL: That’s right.

WALKER: I read this claim a couple of times when I was reading some papers, and it seemed mysterious to me, but duodenal ulcers and stomach cancer are virtually, though not totally, mutually exclusive.

MARSHALL: I was waiting for you to say that.

WALKER: So if both are fundamentally caused by H. pylori, I don’t understand how one protects against the other. Is it what you were alluding to earlier with stomach acid?

MARSHALL: It’s related to stomach acid, yeah. And you had asked me earlier about omeprazole and acid blockers and things—it’s all wrapped up. That’s why Helicobacter was never discovered, you see, because the main acute disease that young people, working people, would get would be duodenal ulcer. And let’s worry about the important things. Old people get stomach cancer, that’s just another cancer, so no one was focusing too much on that.

Everybody knew that if you had a duodenal ulcer, you never got stomach cancer. Or you never had stomach cancer and a duodenal ulcer at the same time because duodenal ulcer was a high-acid-level disease. Stomach cancer was a low-acid disease, so why would you expect them to be connected? 

However, this is Robin Warren’s insight. He’s like, “Barry, let’s not worry about ulcers. Let’s just focus on this inflammation in the stomach. It’s quite a puzzle, and you know I sometimes see it even in people with duodenal ulcer, so what’s going on? Are these bacteria related to it?” 

I said, “Okay, let’s study that. That sounds great.” 

We wanted to find how bacteria could live in the stomach. So this is our research. This is what you call curiosity-driven research. We’re not trying to find the cause of ulcers, because we could find these bacteria in plenty of people without ulcers. 

He said, “Barry, don’t take biopsies from the edge of ulcers—there’s too much healing and inflammation there anyway and it means nothing. Take your biopsy 5cm away from the ulcer,” which we did.

But of course, we counted the ulcers and everything else we could see in the stomach at the same time, but the biopsies were not of ulcer borders. When the data came out, the bacteria were an indicator of ulcer risk, if you like, and it was practically impossible to get a duodenal ulcer if you didn’t have the bacteria.

Obviously, if you ate enough aspirin, you could get an ulcer anywhere and some of them would be in the duodenum—that was another thing we found. And you could get a cancer. If you had cancer of the pancreas, sometimes it could bore a hole through the duodenum and you’d say, “Well, there’s a duodenal ulcer.” So we had the exceptions that proved the rule, if you like, but high 90s was pretty normal.

The other mysterious thing is that they’ve noticed toxin genes in Helicobacter, and if you’ve got the toxin genes in the Helicobacter, you’re more likely to get stomach cancer.

WALKER: Is that the cagA-positive?

MARSHALL: And you’re also more likely to get duodenal ulcer.

WALKER: So the cagA-positive strain, which is the most virulent H. pylori strain, that’s correlated with both duodenal ulcers and stomach cancer…

MARSHALL: Yes. It increases your risk of both, but they’re supposed to be mutually exclusive—so how do you work that out? The answer is that when you catch H. pylori, you’ve got a high acid level, you’re a young person, and ultimately you get a duodenal ulcer. But there’s acid in your stomach which destroys carcinogens and protects you from stomach cancer while you’ve got high acid level.

So the duodenal ulcer, if you like, is a marker for acid in the stomach, and high acid probably. If you eat plenty of protein, you’ll get a higher acid level. 

Even though the germ itself has still got the toxin, it’s causing a statistically stronger inflammation. The inflammation means the white cells are going there trying to kill the H. pylori. The H. pylori is not in your body, it’s on your body, if you like. It’s like dermatitis, but it’s dermatitis in the stomach—or it’s like dandruff of your stomach, if you can imagine that. It’ll be a bit annoying, not too bad, but over the years it gradually irritates the stomach.

Now, the white cells are trying to kill the H. pylori, but to get to it they have to separate the cells of the lining of the stomach. Those cells are protecting your body from the acid. If you’ve continually got this process where white cells are burrowing up through and between the cells of the stomach wall to get to the H. pylori and kill them, then it weakens the stomach wall, weakens the acid barrier, and then ultimately—if it’s bad enough—acid bores a hole in and you’ve got an ulcer. 

That is why the toxin-producing H. pylori is more dangerous and more likely to cause ulcers. But with acid in the stomach, the ulcers don’t necessarily lead to stomach cancer. Then, as the years go by and acid level falls, and you’ve got things happening in the stomach. At that point there’s not enough acid to create a duodenal ulcer, because that usually means you have to be towards the upper limit—top 25% of the population—to be getting a duodenal ulcer. 

So people with duodenal ulcer do have higher acids than other people, but it’s still within the normal range probably. Most of them don’t exceed the normal distribution. Being in the top 25% would be males, and anybody could be there. Eating meat puts you up there. If you have a low-protein diet and you’ve got malnutrition or something, you’ll never get an ulcer because you’re not far enough up the acid curve.

Okay, so then what happens after your “duodenal ulcer”, in quotes, burns itself out? As you get older, the damage, acid went down a bit. You say, “I used to have an ulcer when I was 20. I was in university, I was getting lots of study, pressure, pressure. By the time I got to 30, I didn’t have to worry about it anymore—it seemed to have got better.” You’re talking to a 60-year-old person and that person now hasn’t got enough acid to get significant ulcers but is becoming a cancer risk.

The inflammation’s there, the toxin is there. The inflammation and the toxin—various things damaging the stomach as you get older and leading to cancer. So that cancer is also associated with the toxin. It’s this concept of inflammation for many, many years, even if it’s not a malignant inflammation, can lead to cancer.

That’s been a big eye-opener, and Helicobacter has been the example that got everybody excited about this. It actually applies to three or four other very common human diseases.

WALKER: H. pylori is kind of the textbook example now of that link between inflammation and cancer, right?

MARSHALL: Yep, yep.

WALKER: So, in terms of resolving this paradox of the inverse correlation between duodenal ulcers and gastric cancer—it’s really about the interaction between the H. pylori and the host’s acid levels?

MARSHALL: Acid secretion, yes. It’s been known for years—see, people in China never used to get ulcers, but they would get stomach cancer. So you do have to have a reasonably nutritious diet. You think about it: not enough protein means people with H. pylori don’t make enough acid; they don’t make enough to get an ulcer.

If you study places I’ve been—China, Japan, South America, Brazil—people who studied acid secretion, when that was a pretty common test, would find that in these countries the amount of acid produced was about 50% normal. For you and me, we might produce 28 or 30 milliequivalents per hour if I stimulate your acid—that’s a maximum. Some people do 35, 40. That’s a healthy, Western male, if you like, diet.

In Japan, when they did that study on healthy young males, it was like 17 or 18—most Westerners would produce at least that. Then, 20 years later, when Helicobacter was on the wane in Japan, they repeated it. And in Japan they now had a more nutritious diet, a bit more protein, the acid secretion in Japanese males went up to about 25 or so.

WALKER: Right, interesting.

MARSHALL: That was the 20th-century “ulcer epidemic”, if you like, because duodenal ulcer started to get in the news. “Oh yeah, all those Wall Street guys, these business guys in Chicago, eating big meals and under a lot of stress—they were getting ulcers. So obviously psychosomatic.” 

But humans had never been so healthy as they were in the 20th century in the United States, and they were eating plenty of meat. That gives you a higher acid level, and you’ve got H. pylori, so you would get ulcers. There were a lot of people who didn’t have a good enough diet to get ulcers. 

The paradox is that when you get a duodenal ulcer it’s actually a sign of good health, because your immune system is very strong and hammering those Helicobacters, boring through the lining of the gut, and then you’ve got an ulcer. People used to say to me, “When you have an ulcer, obviously your immune system’s defective—the Helicobacter is going crazy and you’re losing the battle and you get an ulcer.” But it’s very likely that it’s the white cells fighting the H. pylori that are doing all the damage, releasing superoxide radicals and things they use to kill bacteria.

One of the first patients I ever tested when I was working with Dr Warren—probably 1981—we had some smears of the mucus in the stomach. It had white cells in it and you could see the engulfed bacteria inside the white cell. We had a lot of evidence like that got us a bit excited that, hey, these seem to be pathogenic, your body hates these germs.

WALKER: I just realised, for people wondering what the duodenum is, it’s the first part of the small intestine that connects to the stomach.

MARSHALL: Yes. The lesson for the stomach is that acid’s incredibly toxic. So it needs to be in the stomach and nowhere else. At the top of your stomach you’ve got your oesophageal sphincter—and if that’s working, that’s great. If it’s not, you’re going to get heartburn, acid reflux, and that’s another illness.

At the bottom end of your stomach you’ve got the pylorus, which is a Greek word meaning “gatekeeper.” The pylorus, I think he might have been the guard at the city gates—they shut the gate at night and, in the meantime, they’d be taxing people coming in and out. That’s why they changed the name to Helicobacter pylori, which is the Greek possessive part of pylorus, I think. Something like that.

So the bottom end is the pylorus. When you’re digesting your food, it’s supposed to stay in your stomach, it gets mixed up until all the food particles are less than about 3 millimetres, and then your stomach will squirt it into the duodenum. The duodenum is right after the stomach, so the pylorus keeps the acid in.

When the acid and food squirts into the duodenum, it’s a little bit toxic. At that point you release bile, which has bicarbonate in it, and the pH of bile is 8.5 or something. Before you allow that toxic acidic mixture to go down into your intestines, in the duodenum it’s mixed with bile and all kinds of juice goes onto it, and it gets the pH neutral.

The other reason you’ve got a stomach with acid in it is to kill bacteria. If you didn’t have something in your stomach to kill all the germs, when it goes into the duodenum and then starts percolating through your intestine over about six or eight hours, bacteria would already be there and be growing. They’d start digesting your sugar and half the nutrients in your food before you actually could digest them yourself. You’d be filling up with gas and feeding this bacterial flora rather than yourself.

Ideally, when the food comes out of your stomach, it then gets neutralised, but it’s pretty much sterile. Then it has four or five hours to get to your colon. By the time it gets to the colon, it’s supposed to have all the good stuff taken out. Then it goes into the colon—it’s a different process, and after that you’re digesting goodies produced by the bacteria. 

In gastroenterology, if you have bacterial overgrowth, that means you’ve got bacteria in your small intestine starting from the duodenum down. Then you won’t be able to eat sugar; you’ll be lactose intolerant as well, and all kinds of things can happen to you.

So we’d say you want acid in the right place—not leaking too much up or down when you don’t want it—and you want to have your bacteria in the right place as well, not in your small intestine.

In your small intestine, because you’ve got to absorb food and nutrients, you want that in intimate contact with the actual cells lining the gut. They’ll be taking up the fats and everything and absorbing them. Only when that barrier is broken down, that makes you susceptible to other diseases like cholera and what have you. 

So I’d say: don’t get rid of all your acid if you can help it—you know, it’s doing you good.

WALKER: Good life advice. So there’s this set of observations known as the H. pylori enigmas. As you know, the first of these was pointed out by Holcombe in the early 1990s looking at Africa. He observed a very high prevalence of H. pylori infection yet a very low incidence of gastric cancer. Since then, other investigators have pointed out so-called enigmas in other regions like Costa Rica, northern India, and other parts of Asia.

MARSHALL: Yep.

WALKER: What do you make of these enigmas? Are they actual enigmas, or are they illusions?

MARSHALL: It’s a combination of things. You’re right, it probably is correct that the African situation with Helicobacter is interesting—people don’t get as much stomach cancer. 

I’d have to say that the data coming out of Africa is not really comprehensive, as you can imagine, and there are plenty of things in Africa that can kill you that are worse than H. pylori. So we’re not too excited about it in Africa.

However, what I can say is that I know people who worked in missionaries and things like the Peace Corps in Africa—in Rwanda and different places. I think it was Rwanda—might have been Uganda—but they reckoned that one in three or one in four African men had a scar on their abdomen where they’d had ulcer surgery. They used to just open you up, do a few cuts in the stomach, and cut the nerves to the stomach so you couldn’t make much acid. That was an antrectomy and vagotomy—those kinds of things. You could end up a bit of a gastrointestinal cripple, not able to digest your food, but a lot of the time that would stop you from bleeding to death from ulcers and put you into remission.

Ulcer surgery was very common. In this hospital in Western Australia—Charles Gardner, where I was—we would do four or five a week, on one surgeon.

So they were very common in Africa, and Helicobacter is not totally harmless—it used to produce a lot of duodenal ulcers. 

The other situation: maybe, if people had access to meat—a high-protein diet—in some areas that would help. We didn’t collect much data, and a lot of people never lived long enough to get stomach cancer, because that mostly happens after age 50. 

I’m a bit vague as to the reason and people are still wondering about it.

One other answer is that the original Helicobacter did not have the toxin gene.

WALKER: Oh, the one that you and Robin found and cultured—it didn’t…

MARSHALL: No, it probably did. I’m not sure about that—we didn’t have genomics in those days.

WALKER: But is that what you mean by the original?

MARSHALL: No, no—humans have been infected with Helicobacter for 100,000 years.

WALKER: More than 100,000 years ago.

MARSHALL: Yeah—150,000 years ago.

WALKER: Yep, yep.

MARSHALL: And where did humans get it from? They probably came out of the trees, started walking around on the ground, and found a filthy, putrid animal lying there and ate it. It was probably a commensal organism of the ruminants—some kind of antelope that might now be extinct. You don’t know where it came from. 

But these bacteria that break down urea and make ammonia are common in the rumen of animals that eat grass. That’s one of the things that helps the digestion of the grass. 

Assuming that humans picked it up at that point, so then when you look at Helicobacter in Africa you find these African strains that seem to be ancestral and they don’t have the toxin gene. As you head out of Africa to Europe you get up to 60% with the toxin gene, and then you get to Asia—China is 95–99% or something. So then you look around at different racial groups and migrations, you find some people who seem to have been separated off many years ago and don’t have the toxin gene and potentially would have less inflammation and less disease from Helicobacter.

WALKER: It’s super interesting. This is how we can say Helicobacter has probably been travelling with our species for more than 100,000 years. They look at the genetic isolation of different human groups and map that over the H. pylori, and there’s a really good match.

MARSHALL: Yes. That’s right.

WALKER: There’s a well-known model called Correa’s cascade—after Pelayo Correa, with whom it’s most associated—that describes how gastritis progresses to gastric cancer.

MARSHALL: That’s correct.

WALKER: You start with normal mucosa in the stomach—that’s the stomach lining. An H. pylori infection can progress to gastritis. Then it can go in a few different directions, but if you’ve got the cagA-positive vacA s1 m1 strain of H. pylori, you can get multifocal atrophic gastritis, which then progresses to intestinal metaplasia, then dysplasia, then gastric cancer.

Question: to what extent is Correa’s cascade reversible? How likely is it that there’s a point of no return beyond which eradicating H. pylori won’t cause you to heal?

MARSHALL: So I think if you’re three-quarters of the way through Correa’s cascade and you stop the H. pylori and the inflammation, most of the time the progression will stop. You’re not going to get more of these islands of metaplasia in the stomach. That’s my opinion, but I couldn’t guarantee that there’s a lot of data from it. These are observations I’ve made over the years looking down the microscopes with Warren... 

The effect of Helicobacter pylori on the gastric mucosa is very local. You can see some Helicobacter sitting on some cells and they’re all toxic-looking and sick, and then two or three cell widths away the cells are normal.

If you have a patch of Helicobacter sitting there for a few years it could be damaging that area, and you could have normal cells nearby. One of the problems when you get atrophic gastritis is that Helicobacter damages everything—you get the inflammation—and I can tell you some stories about how inflammation causes cancer; there’s good data on that. 

Ultimately the cells that are being damaged turn into intestinal cells. That island is now Correa’s intestinal metaplasia, a little island of it. Once that happens, Helicobacter can’t live on it anymore because it doesn’t stick to intestinal cells. Teleologically, you could say the stomach says, “Oh, Helicobacter’s sticking on the gastric cells—okay, let’s replace them with intestinal cells,” and then Helicobacter is no more a problem. Focally, that is what happens—so it’s an evolutionary thing, I suppose. 

Once intestinal metaplasia has formed, although people have tried to show that it goes away when you get rid of the Helicobacter, I’m not sure it does. I don’t see the right experiments being done, because you’ve got 250 little islands of metaplasia around in your stomach. 

So when Pelayo Correa looks at a gastrectomy specimen and studies it carefully, he can find these islands of intestinal metaplasia around the stomach. He says, “Oh yes, there’s multifocal atrophic gastritis”—call it MAG, if you like. That’s a risk factor for cancer. 

But if you try to study it as a gastroenterologist in live patients, you’re going to go down, “I think it might be there.” You take a biopsy here, you take a biopsy there, and then you come back a year later and try to take another biopsy in the same place to see what’s happened. You might miss the metaplasia. It’s not always obvious which is metaplasia. 

You say, “Last year I biopsied here and there was metaplasia, and the biopsy this year doesn’t show any metaplasia. Isn’t that great? It’s gone away since we eradicated the H. pylori.” I’d say, “Well, it may have, but you haven’t proven to me that it’s gone away, because you haven’t taken out the whole stomach and counted it,” or something like he would do in a post-mortem sample. There are some proponents who reckon it gets better.

People say, “Take probiotics.” In China some will say, “Take TCM”—Chinese medicine. But I haven’t seen—well, it’s not proven, if you like. 

If I saw a medication on the market in the United States that the FDA had said “yes, gets rid of metaplasia,” I’d be tempted to believe it, because the FDA wants to see data. “Show us people who had 50 biopsies in 500 people, followed for four years,” that kind of thing—million-dollar study. That’s the kind of evidence that would convince people that metaplasia goes away. I don’t think it does.

WALKER: Okay. Yeah, interesting.

MARSHALL: Prove me wrong! [laughing]

WALKER: It’s a challenge to people listening. So, at the very least, around the multifocal atrophic gastritis stage you could reverse that.

MARSHALL: You can stop the gastritis, and it’s not going to progress as much, or at all perhaps. And the data is that you will prevent 50% of future cancers at that point. But you can’t get rid of the total risk of cancer once people have got gastritis and metaplasia. 

One thing—I’ll talk about metaplasia briefly—is that they did a study at Harvard about 20 years ago now. They took an animal model of stomach cancer with Helicobacter—cat helicobacters or mouse helicobacters in gerbils. They took female mice and gave them a bone-marrow transplant from a male mouse so they had Y chromosomes in their marrow, and then they gave them the bacteria. They developed stomach cancer, and six months later they could sample the stomach cancer and ask, “What can we find out about these cells that developed into stomach cancer?”

And guess what? They had Y chromosome in them. That means the stomach cancer comes because the inflammation triggers stem cells to migrate into your stomach. Stem cells divide and turn into metaplasia, presumably, and the metaplasia is now the genealogy—the metaplasia is from the stem cells—and that’s what becomes malignant, if you like, because these are dividing cells and they’re susceptible to carcinogens. 

You can apply that model to hepatitis B: you have it all your life, you’ve got inflammation—maybe stem cells or something—and you’ve got liver cancer developing. So that’s the cause of liver cancer. Cervical cancer: you’ve got papillomavirus sitting there many years, and maybe stem cells in the cervix lead on to different kinds of metaplasia and cervical cancer. Helicobacter is number one of those three. But it does show that getting rid of these chronic infections, if you live long enough, is going to save your life.

So that’s my understanding of it. There are all kinds of subtleties related to stomach cancer that we don’t understand yet. That’s one of the areas where we’d like to do fundamental research—related to cell biology and things like that.

WALKER: Interesting. At the end I’ll come back with some more questions on infectious diseases and chronic diseases, but can we do the urea breath test now?

MARSHALL: Yes.

WALKER: Okay. I just want to give you some context.

MARSHALL: Okay—yes, I’m wondering about the personal story here.

WALKER: I had never really heard of H. pylori until last year. I’m sure I’d read about it somewhere, and I was aware of your story and the self-experiment where you drank the H. pylori. But I was in the US recording some podcast interviews last year—I was in Berkeley. 

I went out for a run one night and just had no fuel in the tank, so I was running much more slowly than my usual pace. I got back, started feeling really nauseous, and then this developed into, I guess, some kind of gastrointestinal sickness over the next maybe five days. The main symptoms were: firstly, nausea; secondly, a feeling of bloatedness, which I’d never experienced before; thirdly, at night, a light fever.

MARSHALL: Interesting.

WALKER: And finally, kind of a strange— I’d describe it as a gnawing feeling in the stomach. It wasn’t pain [laughing], but especially when I hadn’t eaten—a gnawing feeling even after…

MARSHALL: Get up at midnight, open the fridge in the darkness, see the light, and drink the milk.

WALKER: [laughing] Exactly. So I checked into a medical clinic in Berkeley, and the doctor said, “I’m going to get you to do a breath test for H. pylori.” It’s an incredible test—sublimely non-invasive—we’ll demonstrate it in a moment. But anyway, it came back positive. I don’t know whether that was the cause of the symptoms or we just happened to catch it at the same time, but they put me on a quad therapy over there: bismuth subsalicylate, metronidazole, omeprazole, and tetracycline.

After about a week, I started noticing numbness and pins and needles in my fingers.

MARSHALL: Good—good blood level.

WALKER: [laughing] So I figured I was having some kind of side-effect reaction and I stopped taking the quad treatment after the first week. When I got back to Australia at the end of last year, I did two separate negative tests—because I wanted to be extra sure—a few weeks apart, and came back negative.

MARSHALL: Give me the name of that doctor. I’ll write him a letter. Obviously on the ball.

WALKER: Very, very good initiative by that doctor. But I loved doing the breath test because it was so easy, and it’s kind of genius how it works. 

MARSHALL: Thank you. [laughing]

WALKER: [laughing] I’ll ask you about it in a moment, but to save you having to explain it, obviously interrupt me if I get any of this wrong. H. pylori feeds on gastric urea. It uses urease to break down the urea into carbon dioxide and ammonia. If you feed the H. pylori, if you ingest urea, you can then measure the proportion of carbon dioxide in your breath to see whether you have H. pylori in your stomach—it’s breaking down that urea. 

To be extra accurate, the breath test labels the urea with an isotope—in the case of your PYtest it’s C-14; other tests use, for example, C-13—and that gets tracked through to the carbon dioxide in your breath. So you’re measuring the C-14, and that will tell you whether or not you’re carrying H. pylori. It’s a cool thing. Well, let’s do the test and then I’ll ask you a couple of questions.

MARSHALL: Okay. You have to be fasting—the stomach has to be empty, effectively—so we say fast overnight and miss your breakfast. I know you had a cup of coffee about two hours ago—probably okay. You’ve still got acid in your stomach and there’ll be no other bacteria.

[WALKER holding up test capsule]

The first thing you do is you have the capsule with sugar beads—like hundreds and thousands—and on the surface of those beads you’ve got a coating with a little bit of carbon-14 urea. It’s a beta emitter, so it’s 100% safe, and it’s such a tiny amount that you don’t have to worry about contamination or radiation or anything. You’re going to swallow that with a little drink of water—just enough to get it down.

[WALKER puts capsule in mouth] 

Get it down your throat into your stomach, and you start the timer at that point.

[WALKER takes sip of water, swallows capsule]

You want to try to swallow it all down so that—

WALKER: Why don’t you want too much water?

MARSHALL: If you have a lot of water you would dilute the urea. That’s all. Theoretically you might also send it straight down into the duodenum and miss the stomach—the capsule goes surfing down—and you get a low result. You want it to just get in to the stomach. Right now it’s probably sitting at the top of your stomach.

WALKER: Okay.

MARSHALL: And the gelatin capsule is slowly dissolving. Little sugar beads are coming out. Usually, when we looked in the stomach when we were starting this research, we’d find it on the outer aspect of the stomach, about halfway down the greater curve, a little collection of beads about 5 cm in diameter. 

Depending on what your stomach’s doing—if it’s just sitting there doing nothing—it won’t spread much. But if you’re feeling a bit hungry and you’re getting a little peristalsis in your stomach, that’s good because it rolls those beads around. 

They now have urea on them, which gets released and sits on top of the mucus layer in your stomach. People think the stomach’s like a football, but it’s not—it’s like a wet, empty paper bag. It’s only like a football when you have a big meal. Usually the two walls of the stomach are contracting and moving a little, rubbing together, and the bacteria, and the urea, and the capsule are all rubbing around together.

WALKER: Oh, so that’s why you want to be fasted.

MARSHALL: Yes. It’s getting mixed, and there’s no way that Helicobacter can live there and not be connected with the urea. 

[referring to the test] How many minutes have you got? 

WALKER: Nearly two minutes.

MARSHALL: Okay. So years ago I was on a plane talking to my boss, going from Brazil to the University of Virginia, saying, “It’s a damn puzzle—how do those bacteria survive in acid?” I had already invented the breath test by then, and I thought, “Oh, that’s why—it’s got urease; it’s making ammonia; it protects from acid.” We went back to the lab, did an experiment to prove this, and got it published in the United States. So it’s proven.

WALKER: Sorry—so the ammonia creates a little force field around the H. pylori. Because ammonia has a pH, it helps to neutralise the stomach acid.

MARSHALL: Yes. H. pylori likes a pH of 6. Or more—6 or 7. So, neutral almost. But the acid is 2—it’s like battery acid you normally have in your stomach. So H. pylori is cranking out this urease. Urea is in your saliva and in your whole body. It gets concentrated and excreted in your urine.

WALKER: In your blood [too].

MARSHALL: It’s at a level of about 2–2.5 millimoles per litre in your blood (per 100 mL). 

Helicobacter can survive as low as 1 millimole, and all the other bacteria will be killed in a few minutes—but Helicobacter is still there if there’s urea present. 

That’s the experiment we did. So now we know why it’s the only bacterium that lives in your stomach. It doesn’t have to have any competition from other bacteria. It just lives there. And it doesn’t need all these complicated enzymes and special mechanisms that E. coli has—because that lives in the colon and it’s really competitive there. There’s no competition to H. pylori. “So I’m just a dumb little bacteria—just make urease; pretty easy.”

WALKER: It’s got a monopoly on the stomach.

MARSHALL: Yeah. 

So it’s drinking time, isn’t it? [referring to the test]

WALKER: Three and a half minutes.

MARSHALL: You’re going to take your second drink of water now.

WALKER: Okay—why do I do this?

MARSHALL: If the capsule was stuck in the oesophagus for some reason—if you hadn’t swallowed it all the way into the stomach—by now the capsule would have fell to bits. This just makes doubly sure the capsule is in the stomach, or the urea has gone in.

WALKER: So the first ever urea breath test was Trimed’s PYtest, right?

MARSHALL: Yes—that was the work I did in the early ’90s at the University of Virginia.

WALKER: Can you tell me the story of coming up with that?

MARSHALL: It started off—I was thinking about Helicobacter as far back as 1984 and I developed a biopsy test based on urease and ammonia production—CLOtest. I was working with that and thought, “It’s a hell of a lot of work for me actually, to do endoscopies on everybody all the time; if only I had a non-invasive test.”

So—serology. We started doing antibody tests. That was great, but not specific enough. I thought, “If I gave you some urea, I wonder if the bacteria would produce enough ammonia to be detected in your breath—or not ammonia in your breath…” We did some studies and found that if you had Helicobacter, you did not have any urea in your gastric juice—it had all been used up. It comes in your saliva and it’s in all your fluids. 

But if you had Helicobacter and we sucked out some juice out of the stomach, there was no urea in it—just ammonia. 

I found some ancient literature in the chemistry books about how some people had urea in their gastric juice and some had ammonia—you didn’t have both. So I said, “Two and two makes four—obviously these people had urea.” You could look at old chemistry books and see who had H. pylori.

WALKER: It was a clue.

MARSHALL: I then got hold of some carbon-14 urea and I got a protocol at Royal Perth Hospital— so that was ’85. But I worked it out a few months before that. The doctors I worked with then—most are deceased—but Ivor Surveyor was a great guy; he was the head of Nuclear Medicine. His second in command was Professor Agatha van der Schaaf—she’s retired now, I met her recently.

They’re like, “Barry, we’ve looked at the books—it says urease is present in people’s stomachs; everybody has it—waste of time. But all right, we’ll try it out.” So we gave some isotope—carbon-14 urea—which I had by then.

I think the first person to do it was Professor Agatha van der Schaaf. One of those naughty things where we didn’t do an ethics committee, because the ethics committee would have come back and said, “Agatha, should we approve this?” She’d say, “Yes—it’s me; I’m the volunteer.”

WALKER: Self-experiment.

MARSHALL: Sort of a self-experiment. Anyway, she was negative. Then we did get approval. Dr Fox was head of Nuclear Isotopes then and he approved it. We did about 20 people—10 were positive and 10 negative—and it just worked like a dream.

Equating it to the doses we give now—we were giving ten times as much carbon-14 urea in those days, because that’s what they were used to using. Even that’s a tiny dose. Compared with what we do now, the negative people were giving a result of zero or five counts in the breath sample of radioactivity—that’s so close to background. If they took the pill, the C-14 urea was giving counts of about 2,000.

So many times in medicine it’s normal if it’s 3.6, abnormal if it’s 4.6—like a 20% difference; that’s the sort of thing we worry about. To have a diagnostic test where a negative is 10 counts or something and 3,000 counts if it's positive—everybody gets excited. Patients: “My God—3,000!” It was good for doctors and patients—it was pretty much black and white. If you were positive, it was through the roof. And the beautiful thing is, after you got rid of the Helicobacter and went back to normal, it came down to 10, or 0. It motivated the patients: “Those antibiotics are really worth it.”

In those days I used carbon-14 because we didn’t have any carbon-13 technology at Royal Perth—it’s a stable isotope and you had to put it through a mass spec. The technology moved on, and by the time we commercialised the breath tests both were on the market. Carbon-14 was the easiest—and still is the easiest and potentially least expensive.

So for developing countries—and many countries—they embraced carbon-14. Right now in China at least 20 million tests a year would be done using that. I don’t know what it is. Several people do it.

WALKER: [referring to the test] We’re at 9 minutes 30 here.

MARSHALL: Okay. So what’s been happening in your stomach is: the capsule’s spreading around little granules; the urea is reacting—or not. You told me your recent tests were negative, so we’ll probably get a result on you, like 15–20 counts. If we graph your carbon-14 excretion in your breath, it will peak at about 15 minutes. So I don’t care whether we did it at 10 minutes, 15 or 20—it’s going to give the same result.

We chose 10 minutes because that’s as good as the other numbers; if you’re positive, results are already sky-high at five minutes, but occasional outliers might take 10 minutes or so. Ten minutes is a good time—and that’s what we do routinely. If it were 15 minutes it would be the same. 

[referring to WALKER’s test] At this point you are going to give me a breath sample. If Helicobacter is there, some of that isotope urea has broken in half and released CO₂. It’s only a tiny bit of CO₂, but it means the isotope will be coming out in your breath. A tiny bit of the CO₂ you breathe out—like a millionth of it—will be an isotope one, and that will give us a positive result.

WALKER: I’ve noticed with other breath tests I’ve done—the ones at the end of last year—they took a baseline sample as well, but you don’t really need that?

MARSHALL: The baseline on carbon-14 is zero—it’s always zero. But the baseline on carbon-13 is 1%. It’s a naturally occurring isotope, and if you eat a lot of corn it might be 1.5%, say. That’s too much noise for the result, so you have to take a baseline. It’s not going to change in an hour from your baseline unless there’s Helicobacter, and it would go from 1.10% up to 1.12%. That tiny difference is what you measure with carbon-13.

WALKER: So that means all the tests I’ve done have been C-13 tests. So this is my first PYtest.

MARSHALL: Yes. With the C-13 test, you’d do at least 20 minutes. Now, move the straw in—there is a self-sealing balloon. Push it down; it’ll slip into the balloon. Push it down. Okay—now wait a minute, I’ll give you some instructions.

[WALKER attaching straw onto balloon]

We want lung air, not mouth air. Take two breaths in and out, then one big breath in—and hold it. Okay, this time breathe in and hold this breath. Hold it—don’t breathe—and we’ll count for 10 seconds. 

[MARSHALL counts down from ten to one] 

Now blow that breath straight into the balloon until it’s full. Pinch it off at the bottom with your finger and pull the straw out.

[WALKER following the directions]

A little bit leaked out, but that’s still fine. 

WALKER: Is that still enough?

MARSHALL: So what you’re going to do is tie that in a knot. A simple granny’s knot. It is self-sealing. 

We need a litre and we’ve probably got 1,500 mL there. 

When you hold your breath, you’re getting lung air, and we get a good concentration of CO₂—about 5% or so. If you were taking several breaths, a lot of what you breathe out is what you just breathed in and it’s in your trachea or mouth.

From that breath sample we want 1 millimole of CO₂. So we’ll take that breath, we’ll bubble it through an alkali solution—could be sodium hydroxide or similar—and that will suck up the CO₂ until we have 1 millimole.

If we had 2 millimoles in the balloon, the test would only collect one. Then we ask: in that 1 millimole of CO₂, how many counts do we get? At that point everybody’s equivalent—little person or big person. We collect 1 millimole of CO₂ and see how many counts we get per minute.

It’s hard to imagine how many atoms there are in a litre of anything—or a gram of something—it’s like 10²⁰, impossibly big numbers. One in a trillion atoms in your body is carbon-14—you have it naturally. When we give you some carbon-14, we’ve effectively doubled the amount of radioactivity in your body.

It passes out in your breath and urine in 24 hours. That’s why it’s safe. Carbon-14 lasts for 5,000 years, but it’s continually passing through your body. We’re only measuring the occasional ones that liberate an electron—that’s called beta emission. Not like gamma rays—it cannot penetrate your skin or paper. That’s why you need to collect a sample, and every single carbon-14 atom in that balloon is going to be detected by the breath.

So if we’re counting a thousand, that’s an incredibly small amount of carbon-14—because there are millions of them. The technique of counting carbon-14—you know what that was invented for, don’t you? Carbon dating.

If you dig up 10,000-year-old bones, you carbon-date them because they release a tiny bit of carbon-14. Tiny amounts. That’s how sensitive the carbon-14 technology is.

WALKER: Okay, so it’s amazing.

MARSHALL: That’s why, when we put it through the FDA, some people were a bit alarmed about radioactivity. But when you do the calculations, you get down to the fact that it’s background—you get a “breath test” every time you go on a plane. Every hour in a plane you get a breath-test equivalent, and no one worries about it. You get the same amount in a day of background.

The other funny thing is the radioactivity in your body is not only carbon-14—it’s potassium. Potassium in your body releases gamma rays. If you sleep in the same bed as your partner, you’re getting gamma rays from your partner your whole life—that’s about 15 breath tests a year. [laughing] You can’t avoid it.

The average person receives 300 (US units) millirems—that’s like a thousand breath tests a year equivalent, just from normal background. If you live in Denver it’s twice as much—it’s an altitude. So the radioactivity in the breath test is much less than a dental X-ray.

So don’t stress. We don’t worry about children or pregnant women. The FDA had a big meeting about it and signed off on it. There are people still paranoid. 

But you can do quite a few tests—you could test the whole family in half an hour; it’s only 10 minutes—you do them all at once. Completely safe, absolutely no side effects. You can send those balloons through the mail—everything.

WALKER: So if I give this to Alfred, will someone actually measure this for me?

MARSHALL: Yep, so Trimed—on your way home, stop in on the way to the airport if you like. They’ll suck the air out of it and run it through the machine, which only takes five minutes or so.

WALKER: We’ll organise that. But for people wondering what my results are, I’ll post them in the comments on the video on my YouTube channel.

MARSHALL: I’ll give a guess—I’ll say 15 counts. And anything less than 50 is negative.

WALKER: Be awkward if I’m positive. [laughing]

MARSHALL: If you’re positive, that’s a strange thing. Are you married? I’d have to find your partner and test the partner—because that’s the only way you could catch it.

WALKER: My girlfriend did a test after I did mine and she was negative.

MARSHALL: Okay, that’s good. 

The chance of spreading to your partner over a few years is 50%, as far as I can tell.

WALKER: Okay. So I can have my second coffee now?

MARSHALL: Yeah—let’s go for it. I’ll have coffee as well.

WALKER: Cheers. So, you mentioned the CLOtest, which was the earlier test you developed. “CLO” meaning Campylobacter-like organism—which was the original name for H. pylori until ’89. And the CLOtest was for testing urease in gastric biopsy samples.

I was reading that when Trimed USA eventually bought the manufacturing rights to the CLOtest, you wanted to try to keep the manufacturing in Perth to build up the industry here—but that effort ultimately foundered. I was curious what that experience taught you about either the difficulties of manufacturing generally, or the difficulties of trying to manufacture in Australia—or Perth specifically.

MARSHALL: It was great—we had good support in Western Australia. At that point Technology Park near Curtin University was starting up, and that was a biotech incubator, if you like. A company there—Delta West—mainly made transfusion water and things like that, plus a few creams, but they did have some good equipment and some smart chemists. They actually optimised this test.

It was a little test—a bit of gel. You take a biopsy sample at endoscopy and stick the biopsy in this gel, and if ammonia is produced—it’s like litmus, if you like—it goes from yellow to red. The beauty of that test was the gastroenterologist who believed in H. pylori—at that point nobody believed it, except a few aficionados—could make the diagnosis themselves.

If I was interested in it but my hospital microbiologist didn’t believe it, or my hospital pathologist didn’t believe it, they wouldn’t give me the diagnosis. But if I was a gastroenterologist with this little test, I could put it in my pocket after putting the biopsy in, and look at it 10 minutes later—and if it went red, I’d made the diagnosis very accurately.

The positive predictive value—if the test goes positive in, say, 20 minutes—it’s 100% certain you’ve got the germ. Patients like to see the nice red colour developing—“Oh my God, I’ve got a lot of Helicobacter there.” It helps motivation, and it really took off.

The beauty was you didn’t need a lab or any other people to diagnose and treat Helicobacter. But to see if you were cured I had to do another endoscopy on you—which is a lot of extra manpower. Of course, if I’m a private gastroenterologist, that’s money in the bank—so gastroenterologists thought it was good. But what was your question about… That was the first test, and it was made here…

WALKER: Yeah. So what did it teach you about manufacturing?

MARSHALL: Yeah. So the story about manufacturing and that. I remember I was excited about it and nobody else was, but I showed it to my good friend Rod, who’s been my business manager in Australia since the year dot. I said, “Rod, I reckon we could make this test for 5 cents and probably get 25 cents for it.” He looked at it and said, “Well, Barry, I think you’d probably get $2.50 for it.” [laughing]

Together we then connected with Delta West, and they did the patenting and did that hard work. 

After a few years, the issue with this product was it was a refrigerated product. When we shipped it to America, we had a refrigerated box, which effectively doubled the manufacturing price to fly, you know, 100 kilos of these tests. Maybe we’d do 50,000 tests in a box, but it had to be a refrigerated box. That would go out maybe once a month. 

If the flight was delayed it might end up in the summer in Chicago on the tarmac and the refrigerator failed or something—and 50,000 tests went up in smoke. They would deteriorate. We used to fly them to Chicago so they arrived at midnight, and they would straightaway get onto a truck. If you drove them down to St Louis—which was our distribution centre; it was Kansas City, I think, actually—you’d drive them down in the night; they’d arrive at 6 o’clock in the morning, it was still nice and cool, and then they’d go into the fridge. That’s how we solved it, but it was a bit of a hassle.

The people who were our distributors in the United States said, “Well, Barry, I’ve got a big company.” Ultimately it was Kimberly-Clark, who makes all the world’s tissues—Kleenex. 

The problem was that by then I had a little company that I was a shareholder in that was doing the distribution—doing pretty well. If Delta West sold it to somebody else, I would no longer be connected to the distribution, and so my mates—all that hard work they’d put into releasing it in the US would be lost. So we said we should buy it. My mates in America got some money and bought it and then ultimately resold it to Kimberly-Clark.

Straight away they had the PYtest and the CLOtest, and all the investors got their money back at that point. The West Australian investors got US$7 million for selling a machine that makes them—which is a manufacturing robot built in Perth by a guy, Peter Clark. He often works for the government now—pretty senior—but he’s a government adviser on technology. So, thank you, Peter. He built a good machine that could produce a million of them a month or something, and shipped that over to the United States, and then it was made in the US. That’s where most of the sales were at that point. So that was good.

At that point I actually returned with my family from the US with a bit of a bankroll, paid for my house and all that kind of stuff, and started working with NHMRC funding. 

So it got to the US—but it’s not like they snuck it away from us. They paid through the nose to Delta West to get that facility moved to the US. It wasn’t that we couldn’t produce it or create the technology, because they just bought the machine and shipped the machine out.

So whenever I see this story about “poor Aussies—they’ve been rorted again; the new discovery is now being made in tech in the US,” you need to delve a bit deeper and say, “Well, who owned it and what did they pay for it?” And “were Australians prepared to pay that for it?” They were not. To get US$7 million out of Perth investors would be pretty hard.

WALKER: Yeah, that’s not bad.

MARSHALL: I suppose you could have floated it on the stock market maybe—people did that—but there’s a lot of rorting that goes on with that kind of thing and over-hyping, and that also happened with CLOtest over the years—various ownerships and things in Australia. I felt there was a bit of rorting that went on, but I was not party to it. I used to read about how fabulous it was and I’d say, “Wow, did I do that? When did I do that?”

WALKER: [laughing] That’s funny. So it sounds like the main constraint on manufacturing in Perth was just the geographic isolation of Australia. Anytime you need to transport things it causes these huge difficulties.

MARSHALL: Yep.

WALKER: So, one of the many reasons I was very excited to talk with you is I think there are so many meta-scientific lessons from your and Robin’s story. One question I was asking myself was: why wasn’t H. pylori discovered earlier than 1979? I was reading through the book you edited, Helicobacter Pioneers, which is actually an excellent case study in how science works, because you have for about a century, in different places around the world, you have researchers feeling the elephant from different angles.

MARSHALL: Exactly right, exactly right.

WALKER: And you get that in this because each chapter is a different story in the larger story of the discovery.

MARSHALL: I kept meeting people all around the world who told me that their father had discovered H. pylori.

WALKER: It’s funny that the chapter titles are like, “H. pylori was discovered here,” “H. pylori was discovered here,” and you get all or most of the heavy hitters who are still alive to write chapters. I was using this book and trying to…

So there were four clues to the existence of H. pylori which, if you put them all together, you could have deduced the existence of the bug without laying eyes on it like Robin did. 

The first clue was endemic hypochlorhydria. 

Then there was the existence of gastric urease. 

Then there was this strange result that we could treat peptic ulcer disease with antibiotics. 

And the fourth clue was that there were spiral bacteria in the stomach—in different mammals, but then by about 1940, we’d seen—

MARSHALL: —we’d forgotten about them. [laughing]

WALKER: —we’d seen them in humans. But I was trying to work out: how big was the window in which all these clues were overlapping?

MARSHALL: Looking back on it, what I would say is that new technologies are continually being invented. They might be invented for problem A—a good example would be cell phones. You need to talk to people when you’re away from home—okay, cell phone. But of course, 90% of the use of a cell phone is for everything else: it’s an alarm, a body monitor, getting information on the Internet, watching movies—all that sort of stuff. When I got my first Motorola flip phone—1993 or something—I said, “This is great; I can make phone calls from my car.” That was about it. 

So now that also happened in gastroenterology. And also there are things that happen, like World I and World War II, and scientists are pushed hither and thither—kicked out of the US, for example—and now they’re somewhere else. All these things were happening.

If you look back on it—you talked about antibiotics—well, bismuth, which is one of my patents as well. I discovered that bismuth kills Helicobacter and a lot of other bacteria. That had been used as a component of antacid mixtures for 200 years. People in England were taking it in 1850 for stomach aches. We don’t know what caused the stomach aches.

WALKER: Including Charles Darwin.

MARSHALL: Right—okay—Charles Darwin sometimes was taking bismuth. But it wasn’t scientific; nobody knew that it was good for bacteria. But in fact, it used to be used to treat syphilis—it was painful; you’d get these bismuth injections with black stains on your buttocks. 

Bismuth was a recognised antibiotic. But why would you want to use it in the stomach? Why would it be important to the stomach? No—it’s an antacid as well. So that was that one. 

The next one was spiral bacteria in the stomachs of animals. That was published in different places—in German literature. If you’d told me that bacteria can’t live in the stomach, I’d say, “Well, acid there, obviously,” but I hadn’t read that German literature from 1890 showing pictures of all these bacteria in dogs’ stomachs.

WALKER: So that was Bizzozero.

MARSHALL: Yeah. The information didn’t flow very easily in those days. They were held up by the different languages. So we talked about the bacteria. 

The next one was the urease. Urease had a fabulous history in chemistry. It was the first enzyme that was purified, and it was shown to be a protein. Before that they didn’t know what enzymes were. It was found in the dog’s stomach also, and there was a guy called Murray Luck who did all kinds of urease experiments.

WALKER: Was this when it was discovered in 1925?

MARSHALL: Yeah—Luck and Seth—and they did a book about urease in the dog’s stomach. They said, “Oh, we think it makes ammonia, protects you from acid, because we find all the dogs have got this ammonia thing in their stomach.” 

Then Oliver and Fitzgerald wrote a thesis on urease in human stomachs.

WALKER: This is the Irish group.

MARSHALL: Yeah. They said, “Obviously it protects you from acid, and the urease is produced by your cells, and the ammonia protects you from acid.” They even developed an ulcer treatment where they were feeding people urea to generate ammonia and neutralise the acid—like an antacid: “We’ll take urea; you’ve got the urease enzyme.” But of course they would throw up—urea is like chewing tin foil; it’s horrible stuff. It sometimes healed people, but it was toxic to take. That was Oliver Fitzgerald. He ultimately became the president of the British Society of Gastroenterology. He was famous—but that was his thesis.

Then in America these guys—Leber and Lefebvre; actually they were Belgians, I think—studied urea and urease and ammonia in the stomach, and they showed that if you took tetracycline it went away.

WALKER: Which is an antibiotic.

MARSHALL: Yeah. So they said, “Oh, it’s probably caused by bacteria—end of story—blah, blah—let’s go on and do something else.” I actually met Dr Lever years ago—he’s since passed away—and had this discussion with him. A lot of Belgians used to do this: they would stick a tube down your throat and suck the acid out—how much are you making?—so they could do these kinds of experiments, but nobody picked up on this.

Then endoscopy started. The story is, wouldn’t it be great if we could look in the stomach—see if you’ve got an ulcer or something?

Everybody used to have barium meals—you’d swallow the chalky medicine and they’d tip you this way and that—and they’d see a very primitive, low-resolution, black-and-white negative image of your stomach. They could say, “The wall of the stomach looks like it’s got a hole in it—so that’s probably an ulcer, or a duodenal ulcer.” That was the diagnosis of ulcers in those days. If you had less than an ulcer—just gastritis—well, we couldn’t diagnose it very well.

To look in your stomach you used to have to use a straight tube—like a sword swallower. They’d poke this tube down—this is the technology from the ’30s onwards. We used to do that at Sir Charles Gairdner Hospital when I was a thoracics registrar. You’d look down this tube; you’d have a bit of a mirror on the end; you’d move it this way and that. It was pretty difficult to do—the patient would be struggling, people holding his face, holding him down. Anyway—that was that.

When you had flexible endoscopy, everyone says “Hooray!” Now we can just look in the stomach and you don’t have to have anaesthetic—just gag a couple of times—and we’ll look with this fibre-optic gadget and we can see if you’ve got an ulcer. These are technologies invented to find ulcers—but they didn’t realise there are a hundred other things you can do with that technology. Robin Warren’s there: “Why don’t you take a biopsy? We’ll have a look at the inflammation.” And—what do you know?—we found bacteria.

Warren and I were the only gastroenterologists in the world who were taking a biopsy off every single patient we saw. By the time we put the whole thing together, we had 1,000 patients, 2,000 patients, 3,000 patients in our repertoire to test it out. Everyone, when we started talking about it, said, “How can you be so certain? It’s just a new thing and you seem like you really know it. What’s been going on?” Well, we’d been doing it for three years on thousands of people—and treating them with antibiotics.

So we got pretty cocky about it at that point. What I’m saying is there’s a convergence of different technologies that made us realise it. Now, the fourth one that is really fabulous is that—I think it was 1979—Jimmy Carter and the National Library of Medicine put the Index Medicus—that’s all the medical journals every month—on the Internet. So they had Internet—primitive Internet—by 1980. At that point, Robin Warren and I were getting together—1980–81—the Royal Perth Hospital Medical Library got a telex machine, and we could query the international literature every month, looking for things about stomach and bacteria and gastritis and cancer. We’d send off a request, and a day later we’d get a printout with different publications. So we started to see what was going on in the world.

WALKER: So it was MEDLINE.

MARSHALL: MEDLINE—yep.

WALKER: And—sorry—so it would only give you the citation, and then you’d have to find the physical paper?

MARSHALL: We’d get the citation and send, “Give us the abstract.” And if we wanted to see the whole paper, the Australian National Library would have it.

WALKER: Oh, okay.

MARSHALL: They’d photocopy it and send copies. So we were doing Internet research remotely. The delay was two or three weeks before you got anything back. Overnight you might get brief abstracts or just the title. You’d say, “Oh—number 26—give me that,” and the Royal Perth Hospital Library would get it through their connections and send it back, sometimes by fax from America or Switzerland. We started doing proper research at that point.

Eventually—maybe it was Clinton—said, “It’s free.” Previously everyone had a subscription, getting these big telephone books every three months full of citations. You had to trawl through that. Eventually it was online, and then they said it’s free—you still pay your telephone bill—but you could download 100 references if you liked, and you could see text on your little screen by the ’80s. That really helped. 

Early on we were just doing it via telex—that’s how Robin Warren and I found all these things in the literature, for Helicobacter Pioneers. You’d say, “I wonder if dogs have it,” and you’d find the report in dogs. 

We found several doctors over the years who’d got excited briefly about Helicobacter but couldn’t get the traction to do further research. The surgical PhD in Oxford I spoke to—can’t remember his name—he applied for a research fellowship to study these bacteria they’d seen and was knocked back, so he went off and did something else.

By the time we found it, it was starting to rise from the ashes, if you like—you could see little seedlings of the discovery popping up around the world. If we hadn’t done it, maybe five years later it would’ve been exposed by somebody in England, probably.

WALKER: Yeah, you often see that in the history of science.

MARSHALL: It’s a convergence of these technologies and the Internet pulling all these other bits of information into one place.

WALKER: I see.

MARSHALL: And there are some fantastic examples of stuff that we dug up. One was a post-mortem study in Minnesota where this nerdy pathologist had done post-mortems on traffic accidents. In Minnesota, if you’re driving to your farm and have a traffic accident, you just freeze to death in your car, so when they do the post-mortem you’re frozen solid and then thaw out. It’s like doing a fresh post-mortem on a fresh specimen.

They actually saw all the inflammation and reported it. They reported that whenever they found a duodenal ulcer in a young person, they always found gastritis. They said, “We don’t understand this—the ulcer’s in the duodenum and the gastritis is in the stomach—what’s going on here?”

So when people came along to me and said, “Barry, people with duodenal ulcer don’t have gastritis—the lesion’s in the duodenum; the stomach is normal,” I’d say, “Well, I know something you don’t know: there’s this study from Minnesota, 1952, that people have forgotten about. One hundred per cent of people with duodenal ulcer have gastritis.” I got pretty cocky—and pretty annoying, I suppose, to everybody else.

WALKER: You had the data.

MARSHALL: Yeah. So that’s the answer—get more data. I often get the question: “Dr Marshall, what can I do to get this accepted, or get this drug through the FDA?” I say: just get more data. They’re only interested in data, those people—they’re not human beings at all. If you go broke and commit suicide because you failed, they don’t care.

WALKER: It’s such an interesting case study in how science works. Just to circle back to my earlier question—why didn’t we discover it earlier? Maybe of those four clues, the latest was the presence of gastric urease. Luck discovered it in ’25, but it’s not connected to ulcers until the late ’40s.

MARSHALL: Yeah—and bacteria in the stomach, they proved it in the ’50s.

WALKER: Yeah, exactly. So say from the late ’40s to ’79 is the window where all these clues are co-extensive—about three decades, give or take. What were the constraints operating in that period that prevented scientists from joining the dots? It sounds like—correct me if I’m wrong—the literatures were just so disconnected.

MARSHALL: You didn’t have a unifying hypothesis. You had four or five different, divergent bits of information. And the Librarian of Congress was this guy—his name wasn’t Joseph—his name was Boorstin. Daniel Boorstin, I think. He was the Librarian of the US Congress and wrote a lot of books. He said the delay in discovery—or the reason we don’t make these discoveries—is not ignorance; it’s the illusion of knowledge.

The overriding thing was: everybody knew ulcers were caused by stress. End of story. Take your tranquillisers. I say, in retrospect, if you get pain in the stomach every time you eat a meal—we rely on food to calm us down and make us feel better—if you don’t have that, you could feel pretty stressed. I know I would.

Once you have a unifying hypothesis, you can test it in 20 different ways by looking for information in the literature. By ’85–’86 we had pulled all this literature together to see how it fits. A lot of it was never online. We might have found it in a veterinary book. I found a lot about urease and urea in Ciba-Geigy Scientific Tables—a book of tables: how much sodium is in your blood, how much in your urine, in women and men and children.

One of the things they had was how much urea is in gastric juice.I could look at that andlooking at that data say, “Right, I’m going to make a breath test now, and it’s going to work,” because I could see this. It confirmed what we’d found—maybe I saw the Ciba-Geigy urea data first and then went out and tested patients.

Once you’ve got a unifying hypothesis, you can test it in the literature—just from information. There are quite a few Nobel laureates who’ve won the Nobel by reading other people’s scientific data. Like Kary Mullis—he made the discovery with a thought bubble when he was driving his girlfriend up to the ski resort on the weekend. He was the discoverer of PCR. He discovered it in his brain. And went and did, like, one afternoon of research to test it out. 

Warren and I were kind of like that. I said, “Dr Warren—why don’t we try treating this patient with tetracycline?” Okay—so that was our first patient. And then I said, “I’ve been looking at this literature—this guy in England shows that if you take bismuth for your ulcers, the recurrence rate is only about 50%, versus 90% if you’re taking acid blockers. It could be our bacteria there, and bismuth might be an antibiotic.”

So I got some bismuth and tested it—it was the best thing for killing Helicobacter pylori. It was like penicillin. And it was an ulcer treatment already on the market. That accelerated things. That was the eureka moment, in 1983 at Fremantle Hospital. 

We grew the Helicobacter. I got hold of some Pepto-Bismol—a pink stomach medicine that’s been on the supermarket shelves for 100 years in America. We made a disc of Pepto-Bismol, put it on this culture of Helicobacter, and put it in the incubator. Monday afternoon—about 4:30—I said, “Better check those culture plates.” There was a disc in the middle of the plate covered in Helicobacter, and the disc with the bismuth had a five-centimetre-diameter zone around it where all the Helicobacter had been killed.

I said, “Right—get me some of this—we’re going to test it on a few patients.” I probably called Robin Warren and spoke to the pathologist: “Look, I want to test this.” Extremely exciting. That was equally as exciting as the self-experiment result.

WALKER: Oh, interesting.

MARSHALL: That happened a few months before I did the self-experiment, but I got a bit cheeky and started publishing.

WALKER: I want to pick up one other interesting lesson in something you said—the new technology of endoscopes. Often in the history of science, technology becomes the platform for new scientific discoveries. Fibre-optic endoscopes didn’t become common until the 1970s, and it sounds like that was a big enabling factor for you and Warren.

MARSHALL: I was seeing endoscopies from ’75 onwards. It was tricky technology—it wasn’t very bright—we’d have a darkened room to look down, and of course we never used to wear gloves. These things would be splashing stomach juice on all the gastroenterologists—who caught Helicobacter. We did studies on gastroenterologists: they had twice as much Helicobacter as any other medical profession.

WALKER: Yeah, that makes sense. 

The 1954 study by Palmer—this sort of titan of American gastroenterology—looked at over 1,100 sub-gastric samples and couldn’t find spiral bacteria in any of them. That solidified the consensus that the stomach was sterile and probably reduced enthusiasm for looking for bacteria in the stomach. How did he miss H. pylori with that many subjects?

MARSHALL: Someone in his lab was cheating. That’s the only thing you can think of.

WALKER: Oh, really?

MARSHALL: Palmer was a great pathologist. He used to run Walter Reed Hospital’s pathology department. You can imagine—World War II—there’s all kinds of body tissue turning up in different places, tropical diseases. They were the doyens of pathology in the United States. If they said something, you believed it. Palmer was great.

I met Stone Freedberg when I was in Boston years later—he was in his 90s, about 96, still seeing patients. He was a cardiologist and a general physician, but he published a paper in 1937 or so finding bacteria in the stomach of patients who’d had gastrectomy mostly for ulcers. I think he found it in 46% of his samples and presented it. Then it was World War II; diabetes had just been discovered, or insulin had just been discovered—there was all kinds of fancy stuff going on in medicine. He became a general physician and a cardiologist—so he did okay.

A few years after the war, Palmer and his friends decided to check the bacteria issue. He said to his registrar or research fellow, “Look, there are 1,100 samples in our biopsy collection—go down and have a look, see if any have these bacteria.” He gets a report back a few months later: “We looked at them—we couldn’t see any.” He signs off on the paper—he was the senior author. I don’t know who else was on it, because you just remember him—you remember when famous people make horrible mistakes.

Everybody believed it and never bothered to look. The only way you could miss these bacteria was by not doing proper research—not staining them properly—or just totally faking it. It was inexplicable, but he was deceased by the time I started asking this question.

WALKER: So either someone got lazy and said, look, if we say there's no bacteria that fits with the paradigm, it's a pretty safe thing to say. Or there was some sort of malicious…

MARSHALL: So Palmer might have said to him, look, this is rubbish. Bacteria can't live in the stomach. Go and look at these things and then publish a paper, and then we'll give you your PhD and off you go. So that was it. And I don't think he ever went and looked at them.

So that gets on to fraud in scientific research and how important it can be—not to do it. If he had seen the bacteria and started doing what we did, the literature was available—the tetracycline treatment study, bismuth—he could have done a lot of that. And maybe ulcers and Helicobacter could have been worked out before 1960.

Since 1960, you know, half a million people or a million people a year would have been dying around the world from ulcers. Millions of people were having their stomach removed and never enjoying their food ever again, losing weight and having a horrible life.

And that was because of that screw up in Palmer, in Walter Reed.

WALKER: That's crazy. One of the other interesting lessons from your story is just this theme of how scientific knowledge diffuses. People might think that it's sort of like a light switch where you come up with a new discovery and everyone just instantly updates their knowledge. But it can take years for acceptance of the discovery to roll out.

You could take the NIH consensus conference in 1994 as the date at which H. pylori and its link to gastritis got the stamp of approval. So that's about 10 years after the definitive paper that you and Warren published. I was wondering, would there be some meaningful percentage of GPs and gastroenterologists who even today in 2025 still ascribe ulcers and gastritis to stress?

MARSHALL: Hardly any. 

WALKER: Yeah, okay.

MARSHALL: However, if you could walk the street and ask 10 people what causes ulcers, they all say stress.

So it's still in the media. You know, Tom Cruise — his poor E-type Jags are stuck in Rain Man. You know, the E-type Jags couldn't get brought into the country, they didn't have the documents or something. He's there drinking Pepto Bismol because he's got an ulcer. So you still see it.

WALKER: So maybe a few more decades until the punters get “diffused”.

MARSHALL: Yeah.

But the medical book on ulcers used to be 114 pages, and now it's like two pages. So saved all that wasted time. All the med students could go down the beach.

WALKER: So if you hadn't made the discovery until, say, 2015, do you think it still would have taken 10 years to gain acceptance?

MARSHALL: Yep. Well, I suppose with the Internet and me doing a podcast or two about it and everything… and then maybe it helps if you have a commercial product that someone's going to sponsor, that happens a lot faster these days.

But if I discovered something that was out of patent and was just generic, it's a bit harder, because who's going to spend the money? They're never going to get their money back on it. So what I discovered is that the US system, the capitalistic system, actually works very well if you can connect into the people who are going to spend $100 million and promulgate this new treatment.

So on the one hand, if you couldn't get the financing, nothing would happen. It would be very hard. So we had both of those.

In Australia there wasn’t anybody selling anything related to Helicobacter treatment or doing big clinical trials until I did one in Australia. So NHMRC had to fund it and it took a few years, and then it kind of leaked out and diffused out. And then we had to wait until there was a treatment before anybody really had conferences about it and approved it in other countries. So you have to do that work.

So all you can do as a scientist is focus on the data. You may get a patent or two, but I'd say don't let it ruin your life. Let the university do it because you'll get a percentage of it in the end, and the university's not going to give it away for free. They've got professionals to do that.

That was a mistake I made — I tried to do it all myself a little bit and I slowed it down a little bit. But the connection I made was with Procter & Gamble, who made Pepto Bismol, and they realised they had an ulcer product there. So then money started coming out for research to an extent.

And then finally AstraZeneca had omeprazole, which with amoxicillin was really going to cure a lot of it, and it was going to be easy to take and safe. They already had the product. So then in the ’90s they spread the word on it, and finally in 2005 the Nobel Committee didn’t have any scary doubts about it. It was totally proven.

WALKER: Okay. A couple of questions on the concept of self-experimentation, because your self-experiment in 1984, where you drank the H. pylori to try and prove the link between the infection and gastritis, is probably one of the most famous self-experiments in the history of science.

MARSHALL: I lived to tell the tale. [laughing]

WALKER: And I was curious, given your famous self-experiment, do many scientists confide in you about self-experiments of their own?

MARSHALL: Some. And so I think I set a good example in some way in that if somebody is in an early stage and they can plan a reasonable self-experiment, it's not going to be too dangerous. Ethics committees will approve it these days.

It’s likely that the ethics committee at Fremantle Hospital would have approved mine, but things were moving pretty fast for me at that time and I was just getting frustrated that I could not break this barrier: is it commensal or is it a pathogen?

So the pathology data was proof as far as I was concerned. But we didn’t have an animal model, so you couldn’t do that. And most gastroenterologists and normal people — you show them a pathology slide, they don’t actually see the importance of white cells and it doesn’t resonate with them, if you like.

So it was a stumbling block for me and I thought I needed to do it. Can I risk getting it knocked back? Well, no. And can I risk that it’s going to take months before they sign off on it and give me all kinds of hassles with it? So I decided, right, I need to find out, and maybe I’ll do it.

In fact, I had submitted an MD thesis a couple of years before and animal studies were part of it. And the last line was, if I can’t infect animals, I’ll get a human volunteer. So at that point nobody was shocked or anything. So it had kind of passed muster at that level.

WALKER: Yeah. So I read a paper saying that a lot of self-experimentation happens behind the scenes, but it's just not documented because of potential worries about ethics committees.

MARSHALL: I don’t know. If you had a dramatic experiment like mine, you would probably document it. But actually my paper was written in the third person, you know. So, “a volunteer” did this or that.

WALKER: And it wasn’t for a couple of years until you revealed who that was, right?

BARRY MARSHALL: People kind of knew. But these days, if you tried to get that paper published without an ethics committee, the journal wouldn't look at it. They’d be criticised too much. 

These days you have to cross the T’s, dot the I’s, as far as the ethics committee is concerned, because there’s a lot of stuff that’s been criticised over the years. There’s also a lot of important good stuff that came out before strict oversight was in place, but it’s a bit too risky for journals to publish now. If they can say, “Oh, there’s an ethics committee, they signed off on it,” then the responsibility is with the ethics committee. 

Recently there was a professor in Barcelona trying out new treatments for COVID. I know him peripherally—he was a great microbiologist. But they found out he had been using one ethics committee application for the last ten years across all kinds of research and just putting the same number on things. He was severely criticised. So you can’t do that these days. 

Actually, it’s good in some ways because quite often only studies that are successful can get published. So if you get a great result, everyone wants to publish it. If you tested something and it made no difference, it’s still science, but nobody wanted to publish it in a good journal. So over the last 20 years, all the positive results got published, while 10 times as many negative ones, you didn’t see them. So you thought, “Okay, this usually works.”

Take acupuncture, for example. It’s not easily testable. There are dozens or hundreds of papers showing it works, but the ones showing no effect weren’t really published. No one knew about them. 

Nowadays, before starting your research, you must show ethics approval and register it in the clinical trials database. Then, if you say treatment X works, reviewers can look in that database of studies and see, “Hang on, there are 30 other papers that have been started but never got published—so we can assume that they didn’t work. So therefore it’s just a lucky fluke with you.” And they won’t publish it.

So it’s better, safer, as it is, but it does delay things a little.

WALKER: One of the basic critiques of self-experiments is that there’s just an N of 1. Do you think that critique is overrated?

MARSHALL: No, I’d say N of 1 is a starting point. But you want some objective evidence that can’t be subjective.

If you said, “Barry, do you think Helicobacter causes bloating?” I’d say, “Oh yeah, I got bloating.” They’d say, “How do you know?” Well, I feel bloated. But what is that? Have you got a photograph? Is your stomach bigger? No—it looked the same. So I didn’t really have any evidence of what I said, what I felt..

That’s the trouble with N of 1. Say I had something that stopped me feeling nervous: echinacea. I’ll give you some kind of therapy which I think is probably bogus. And I said, “When I take this, I feel better.” That’s the N of 1, and it’s so subjective you wouldn’t believe it.

However, if I said I took echinacea, then had an MRI scan, and these funny little wiggly bits in my frontal lobe have all gone straight, just like normal. I’d say, “Well hang on a minute, that’s something interesting, that’s objective data.” With my experiment, Warren could look at the biopsy and say, “No white cells anymore.” Or, “They’ve come, and then gone.” The electron micrographs showed the cells were damaged exactly like in duodenal ulcer patients. Okay, let’s publish. So that’s the N of 1. But you can’t get away with it always. 

In retrospect, there was a lot of data I could have collected in that experiment that would have been other objective data, but I didn’t know it was happening until it was happening.

For example, when I was vomiting, why didn’t I catch a glassful and run it through the chemistry department? They would have found so much data in there. But at 6am, when you’re throwing your guts up in the toilet, you don’t really think about science. [laughing]

WALKER: Not thinking about the pH level of the vomitus. [laughing]

MARSHALL: That’s right. Another bit of serendipity was discovering that Helicobacter ruined your stomach acid. During acute infection, you don’t have any acid. So why would you think it causes ulcers? It was quite a paradox.

WALKER: There’s a phenomenon in the history of science: partnerships of two people seem unusually productive. Famous examples include Marie and Pierre Curie, Carl and Gerty Cori, and Watson and Crick, many, many others.

When I model what makes those partnerships effective, the starting point is complementarity. With you and Robin, he brought the pathology and you brought the clinical side. Some of these partnerships feel a lot like marriages.

For example, a couple of years ago I interviewed Daniel Kahneman a few years ago, who won the Nobel Prize in Economic Sciences in 2002 or 2003. He was the Israeli psychologist. He had a famous partnership with Amos Tversky. They pioneered our understanding of biases and heuristics in psychology, which fed into behavioural economics.

When you read about their partnership, it sounds a lot like a marriage. It was platonic but incredibly intense. Whereas reading about you and Warren, it seemed more complicated. Maybe not so much like a marriage. There were the individual letters in 1983, and the 1984 paper sounded like a difficult drafting process—eventually your wives even got involved one night at your house, and they wouldn’t let you leave the room until you’d settled on a final draft, which was then accepted without any changes—which is impressive. 

But I wanted to hear in your words how would you describe the character of your collaboration with Dr Warren?

MARSHALL: Well, Warren was pretty obsessional. People would say he was a bit pedantic on focusing on fine details of pathology. But I respected him because he actually taught me the pathology. And although it was a fine detail, I’d  say, “I believe it—those cells should not be like that. This one’s definitely abnormal.” This kind of detail.

People who are interested in pathology:, “Is it cancer? Is it not cancer? Move on, Dr Warren. What’s the next case?” That kind of thing. In a busy pathology department, that would be the usual kind of interaction with Dr Warren. “This meeting finishes in two minutes and we’ve got eight more cases, Dr Warren. Could you stop talking about that one; get on to the next three,” or something. That would happen with Robin.

But you could make the same complaint to him every week, it would make no difference to him. It was water off a duck’s back. That was Robin. He was in stone, as far as that was concerned.

So that was good for him as a pathologist, and actually in his life. A lot of people don’t know that he had epilepsy. He had these occasional epileptic attacks, so he needed to be pretty rigid in what he did, otherwise he could fall off the rails. (He did break his hip at one point, falling off his bike.) 

So I respected that.  

He used to smoke little cigars, and I used to sit down there with him—I was an ex-smoker—and I’d have a cigar with him. 

The interaction was that every week we would do a few hours together, looking down the microscope at these cases. 

WALKER: Was that side by side at the bench?

MARSHALL: Yes, both looking down the same microscope—we were looking at a two-headed microscope. 

You don’t realise what a pathologist does. In the middle of a session, someone would bring him a slide. He’d say, “Hang on, Barry,” look at it in the microscope, then five minutes later the phone would ring from the theatre.

The surgeon says, “What do you think, Robin? Is this cancer?”

He says, “Yes, definitely a sarcoma. Take the leg off.” Click.

So if you’re making decisions like that, you have to be exact and meticulous—if you like, pedantic or obsessional. So that was Robin.

But I’d be there like: “Robin, I’m going to go and treat somebody.” Or, “I’ve got this patient, he’s still waiting in the emergency, and I think we could use the patient, he might feel better.” Or, “Robin, I’ve got to get some samples from cats. Where can I get them?” I had 20 different research projects going on at once. 

But Robin was focused on the results of the pathology. I could say, “Right, let’s go and look at cats or dogs.” So I was all over the place, and it was good for him to pull me back and focus. He’d say, “You can’t publish all that.” Our wives said the same thing—“There are 10 papers here, just publish one and focus.”

I’d be writing a paper with 20 different ideas in it. He’d say, “There’s one idea here: germs cause gastritis, and that causes ulcers.” 

Eventually we became compatible. I knew what Robin was like and I accepted the deficiencies in my own personality—maybe vice versa. 

It was a good partnership.

I like talking to people and studying, so the fact that Robin would run overtime on a lot of these sessions didn’t really worry me too much. But of course, my wife would say: “How come you’re not home at 5:30, Barry?” I’d say, “I had a session with Robin.” So that used to go on.

But you’re right. We were different. I was looking at diverse sources of information, and Robin was focusing on the statistics and the biopsies and the inflammation. 

The great story is, in 1983, 1982, we could not do the statistics on gastritis and Helicobacter to show the association, because the p-value was always point zero, zero, zero, zero, zero… five digits. And we wanted to find out exactly.

So then the new Hewlett Packard 11C calculator came on the market, which could do factorial 64. Robin bought one, and we did it. And it was p = 0.00000000001. It was very satisfying.

WALKER: That’s one of the best p-values you’ll find.

MARSHALL: I’ve never seen anything like it.

WALKER: Was there ever a moment the collaboration seemed at risk?

MARSHALL: When we wanted to publish letters to The Lancet, Robin said, “Well, when you walked in the door, Barry, I already had the association with gastritis pretty much worked out. I had enough data and even some drawings of bacteria. I could have published that.”

I said fair enough. But, since I’d been working with him for 18 months at that stage, I said, “Now you want to publish in The Lancet instead of an obscure pathology journal. That is because you’ve got the next chapter, which is the clinical data. Although we are going to publish about gastritis—this is our letters to The Lancet—we’ve got the whole picture here now because we’ve got bacteria and we know that they cause ulcers, even though it’s not present in these letters, and it could cause cancer.” 

So we knew that this observation under the microscope of a bit of pathology really was translational into an important disease. So at that point, I put my foot down and said, “Since I came walked in the door of your office, your publication has to stop at that point, and we’ll be joint authors on the second half. But the reason it’ll go in The Lancet is not because it’s a bit of pathology; it’s because it’s an important clinical thing.”

So we then agreed to publish separate letters. If you read Robin’s letter, you can see it’s pathology. If you read my letter, it’s everything else at that point. But I was the one that worked out it was likely to cause stomach cancer, because I’d read the literature on gastritis and cancer. So the last sentence of our first two letters—you weren’t allowed to say it caused anything, because it was too preliminary, but we already knew at that point—we said, “this could also cause gastritis-associated diseases, for example peptic ulcer and gastric cancer.” 

That sentence won us the Nobel Prize.

WALKER: It was a little teaser.

MARSHALL: Robin said, “At that point, if we stopped doing research and became motor mechanics, we still would have won it.”

WALKER: [laughing] That’s cool. Earlier we mentioned that H. pylori has been with us for at least 100,000 years. If it has co-evolved with our species, there’s good reason to think there could be benefits to it. What do you think is most likely to be the most important benefit?

MARSHALL: The only one that’s been identified is that it seems to suppress the immune system a little bit, so you’re less likely to get allergies. Kids in countries where everyone’s got H. pylori tend not to get asthma—less of it.

In New York City, kids who had H. pylori had a 45% reduction in their need for allergy medicines—asthma, things like that. 

To stay in your body it has to do something to the immune system, suppress it a little bit. If you’re one of these people who’s a bit of a hyper-reactor, if you’ve got H. pylori, you might come down a bit. There’s conflicting data and we can argue about it, but… 

I’ve got a company called Ondek that’s doing research continuously on this idea of having on a probiotic related to killed Helicobacter, so that we could take the edge off your immune system and perhaps reduce any tendency to be allergic and get asthma or hay fever—eczema, we don’t know. It might be almost a probiotic, but it’d be killed Helicobacter.

WALKER: In terms of the benefits of infection, what do you make of the seeming inverse correlation between H. pylori infection and oesophageal cancer?

MARSHALL: If you have Helicobacter, in a lot of people, it keeps the acid lower ultimately, at a time when you’re starting to get oesophagitis and hiatus hernias as you get older. So if you have Helicobacter, you might not get the expression of those disorders as much.

It appears that chronic acid in the oesophagus is the risk factor for adenocarcinoma in the oesophagus. On that basis, I can see it could help protect you from acid-induced cancers because the acid is lower.

But the risk on the other side is that Helicobacter itself causing stomach cancer is, people have calculated, about four times the oesophageal benefit. So these days: don’t worry—treat the Helicobacter and take an acid-blocker and you’re sweet.

WALKER: So the net benefit still makes sense to eradicate.

MARSHALL: Yes.

WALKER: How plausible is it that we could eradicate H. pylori globally like we did with smallpox?

MARSHALL: Ninety per cent of it is going to be just hygiene and knowledge. It’s not all that easy to catch Helicobacter—you catch it off your mother—but these days people clean their teeth every morning and they don’t chew up the food and feed it to the babies like everybody used to do in the past century.

So it’s not super easy to catch it. You’ve got to be in pretty intimate contact with a family member usually, or have dirty water—faeces contamination of your water—that’d be the thing. 

As the standard of living rises and understanding of infectious disease spreads, Helicobacter is having a hard time keeping on.

Ultimately, I think there’ll be a vaccine. I’ve connected with groups around the world working on vaccines for Helicobacter.

It’s not easy enough yet and not certain enough to make it worthwhile, but there are vaccines—or at least one. It’d be a traveller’s vaccine: you could take it and it would cut down your risk of catching it if you were in Africa or South America or somewhere.

WALKER: What seems to you like the most promising delivery platform?

MARSHALL: I’d say it has to be oral.

WALKER: Oral recombinant?

MARSHALL: Yeah.

WALKER: Because then it would go into the stomach.

MARSHALL: That’s right. You need your immune system carrying out surveillance in your gut and making antibodies that stick to the proteins on H. pylori and stop it attaching to your stomach. That would be the thing.

WALKER: When you do predict we’ll have an H. pylori vaccine?

MARSHALL: To roll out everywhere, I’d say 15 or 20 years. We actually might have it now, but of course we have to test it in animals and thousands of people. And then, how long do you have to have it before your Helicobacter goes away or you get protected?

As soon as you have a trial, knowledge about Helicobacter goes up in the community and they stop catching it from general public health measures.

WALKER: Why haven’t Western countries tried to eradicate it already?

MARSHALL: With vaccine, or just eradicate it?

WALKER: Just eradicate it through the quad or triple therapy.

MARSHALL: It is a bit more difficult than normal infections. You have to do a preliminary test and then a follow-up test as well. With a urinary-tract infection I’d say, “Just dipstick your urine,” or something—we’re not quite there with H. pylori.

There was always an argument as to whether or not it’s good or bad. People who didn’t feel like treating it would say, “Oh, it’s probably good for you in some way.” In evolution, all humans had it, so you could say it has a benefit. What we think is that any benefit is in childhood, related to allergies—that’d be the thing. After that, you’ve lived too long—time for you to go—and Helicobacter will help you on your way. [laughing]

WALKER: Is Japan still the country to beat when it comes to screening and eradication programs?

MARSHALL: Probably. I think children in Japan are only about 2% infected, as far as I’ve seen. That means the next generation’s not going to have it. And if you’ve been to Japan, you know they are extremely clean. Anyone who eats raw fish all the time needs to make sure there are no germs around.

WALKER: Is there something they do really well in screening and eradication that Western countries like Australia could easily copy?

MARSHALL: No. They just test for it. They have numerous tests on the market and they screen. They’ve had a faeces test, urine test, breath tests, and endoscopy. They already had universal endoscopic cancer screening—and I think they still have it. From age 40 onwards you can have an endoscopy every two years and they’ll take some biopsies and look for it.

So they already had awareness of stomach cancer and protection, and half the population used to do endoscopy. They probably still do. Helicobacter got caught up in that—so half the people already had a way of finding it and treating it, so it happened pretty quickly. Once the government signed off on the treatment and started paying for it, everybody wanted it.

WALKER: Last question, Barry. One way of describing the paradigm shift you and Dr Warren initiated is that you blurred the long-held distinction between infectious diseases and chronic diseases—because we discovered what we thought was a chronic disease was actually caused by a pathogen.

Are there other chronic conditions—arthritis, Alzheimer’s, IBS, schizophrenia, diabetes, obesity—that you think we’ll eventually discover are actually caused by microbes?

MARSHALL: That’s a pretty good list. I’m interested in all of those. Since PCR came out, for any kind of chronic disease people have been looking for germs and viruses using molecular probes and things like that.

Recently, one of these probably bogus papers was finding genomes of bacteria and viruses in bits of brain and in bits of tumours—things like that. It’s a situation of early reports and positive results get reported and everyone’s excited and hyped up. That’s been going on a lot, but pretty lean pickings for most of it. I would say almost certainly some types of Alzheimer’s are probably a viral illness—whether it’s chronic, or damage was done years ago and something leads on.

For instance, polio. I was talking about this the other day: people who had polio as children are more likely to get motor neurone disease as adults than people who never had polio. Nevertheless, most motor neurone disease is polio, is not related to that. That’s the kind of evidence that’s exciting. A lot of autoimmune diseases—like Crohn’s disease and colitis—look like infections. If Warren had seen bacteria on colitis, he’d say those white cells are doing something—fighting the bacteria—but it’s not obvious at the moment. 

I say keep looking, but we have to look in early life. My thought is that from the day they’re born, we should be looking at children’s microbiomes and documenting: they had a cold, a runny nose, diarrhoea, vomiting—this, that. Each time something happens, collect a bit and put it in the fridge.

Twenty years later, someone discovers a virus, we get a probe for it, and we look at all those stored samples. That kind of data and biobanking is going to unlock a few of these. (I don’t know how many.)

There’s tantalising data out there. For example, nuns with Alzheimer’s—you could look at their application letter when they were 18 years old to get into the nunnery, in a study in Ireland. You could get a linguist to look at the language and say, “This person’s less intelligent than that one; this person’s not as good at writing letters as that one.” The ones who didn’t write a great letter got Alzheimer’s more.

The ability to look longitudinally at illnesses and at normal people—and notice aberrations or trends—is going to be important. That’ll give us clues. All this big-data stuff and the different kinds of data we’re collecting about ourselves—we’ll all have monitors on ourselves. All my labs—my haemoglobin and everything I’ve had taken for the last 20 years—I’ve got on my computer.

It might not be easy to hand-grab it all at the moment. The health record—privacy is something we should think about, maybe have a privacy ombudsman—but it’s not front and centre for most people; they don’t really care too much about it, mostly. That’s going to be an advantage. Five or ten years from now things will be coming out of it—and they already are. In San Francisco, for example, there’s biobanking: Kaiser Permanente serum since 1960 or so. Every 20 years—or every 10 years—they do a massive randomised study around the United States and collect blood and data from everybody, and it’s in a public database. That kind of thing is going to find a few causes of these diseases.

We’re getting new biologic therapies, working out what autoimmune disease is triggered by—hopefully. We can say something’s an autoimmune disease; we know you’re reacting, but at the moment we can’t tell what started it. This idea of finding the 3D structure of every antibody floating around in your blood and looking at everything else in the environment, we might be able to tell it’s really coming from dandelions or whatever.

I’m very optimistic. But it’s going to take skilled, smart PhDs looking at a lot of numbers and graphs on the screen. 

We’re really into the biologic century, if you like. All that information will eventually be obvious to us, just as some information became obvious to me once we could query online databases.

WALKER: Absolutely. Well, I’ve got through almost all of my questions. It’s been really fun talking with you. Thanks so much.

MARSHALL: Thank you for obviously spending a lot of time preparing the questions. It was fun answering because they were slightly different questions to what I usually get. 

WALKER: Great. Alright, thanks so much, Barry. Appreciate it.

MARSHALL: Thank you very much, Joe.

How much of the slowdown is homegrown? How much reflects the broader “great stagnation” plaguing the West?

How much is simply an artefact of the way “productivity” is measured?

And what would a credible new growth model for Australia—with its distinctive reliance on mining over manufacturing—actually look like?

To answer these questions and more, I’m joined by two of Australia’s smartest economists.

Greg Kaplan is the Alvin H. Baum Professor of Economics at the University of Chicago. He is also the cofounder and chairman of e61, a non-partisan economic economic research institute in Australia.

Michael Brennan is the CEO of e61. He was previously chair of Australia's Productivity Commission and a Deputy Secretary of the Australian Treasury.

We discuss:

• the forces behind falling construction productivity;
• how to think about “Australia’s most productive company”;
• where to find quality gains in the services sector;
• what we can learn from the stunning innovativeness of Australia’s agricultural industry;
• why we need new economic engines beyond the Sydney–Melbourne duopoly;
• and much, much more.

Video

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Transcript

JOSEPH WALKER: Today it is my great pleasure to be speaking with Greg Kaplan and Michael Brennan here at e61’s Sydney office. 

Greg is one of the smartest macroeconomists in the world. He’s the co-author of one of my favourite papers on the US housing bubble. He’s a professor at Chicago, but he spends part of his time back in Sydney where he’s a co-founder at e61. e61 is a non-partisan, independent economic research institute. 

I’m also joined by Michael Brennan. Michael is one of the most knowledgeable economists I’ve met. He’s the CEO at e61, and he has deep public policy experience. Prior to his role at e61, he was chair of Australia’s Productivity Commission, which is a very cool institution, essentially a think-tank for the Australian government that does deep economic research. Before that, Michael was a deputy secretary in the Federal Treasury. He’s also worked in the Victorian State Treasury and been a senior adviser to treasurers and finance ministers at both the state and federal levels. 

So, guys, welcome to the podcast.

GREG KAPLAN: Thanks for having us.

MICHAEL BRENNAN: Great to be here. Thanks, Joe.

WALKER: Basically, what’s going to happen is for the next couple of hours I’m going to pepper Greg and Michael with all of my untutored questions, and they’re going to teach me a few things about economic and productivity growth, and how to get more of them in Australia.

Obviously, we are three patriotic Australians, but this conversation I think will still have interest for an international audience, in two ways. Firstly, we’ll be talking about productivity more broadly as an economic object. Secondly, people might be interested to hear how a smaller country of about 27 million people, like Australia, thinks about how to get more productivity growth, because obviously this is a problem across the West.

I actually want to pick up where we left off a couple of weeks ago. The three of us were chatting and you two were riffing on construction productivity and why it has stagnated. It’s interesting that it’s stagnated not just in Australia but across the West. 

I’ll put these charts up on the video version of this episode for people watching on YouTube, Twitter and Substack: here we’ve got Australia’s housing construction productivity decline—this is labour productivity—from a report the Productivity Commission published several months ago.

And we also have a chart for advanced economies, so we can see clearly this is a problem around the [West].

When we were catching up, you sketched a theoretical argument tied to fixed inputs and the durable nature of housing. I don’t think I’d heard that argument before. Could you just recap that idea? And have you taken it any further since we last caught up?

BRENNAN: I’ll have a first shot. Thanks, Joe. This theory, maybe wild conjecture—listeners can be the judge. But the starting point was thinking about this paradox. Why are we so much better, and getting better over time, at building things in factories, but no better at building things out in a paddock or in a dense urban environment?

There may be a whole range of reasons for that. Obviously there’s been a lot of speculation about the ways we could make construction more like manufacturing—bringing elements of the process into the factory through modular housing, etc. 

But one of the things we were thinking about was: is construction fundamentally different in that, in every other industry, say manufacturing, the annual production each year gets repeated? The most efficient producers of any given good are producing again next year and the following year.

To the extent the product is growing, there’s an incremental bit that maybe is built by a factory that’s less conducive to high productivity, but those (what we economists describe as) infra-marginal units are getting repeated every year. 

Construction is fundamentally different: because in construction you’re not repeating those infra-marginal units. If you’ve already built housing in the most propitious, easy-to-build areas—those most conducive to a high-productivity build—you can’t reproduce that next year. That’s not going to be factored into the production statistics. You’re building, one would expect, in successively harder and harder places.

Now, that’s an empirical claim. It may or may not be true. It might be that, particularly with greenfields housing, it really doesn’t matter; you can just move further out in concentric circles from the city and it’s just as easy. Maybe that’s true. 

But it just struck us as something that might be a little bit distinct about construction: that sense that you don’t get to repeat the easy units each year, and therefore it could be just a little bit harder for measured productivity in the construction sector to continue to rise year on year the way we expect it might in other sectors.

WALKER: To make sure I understand: there’s this observation that you don’t have economies of scale in construction like in, say, car manufacturing where every model’s the same. In construction, most houses or units are bespoke in some sense. 

But you’re taking this further: the units quickly become different or more bespoke, which bakes in the productivity slowdown. Is that the idea?

BRENNAN: Yeah. Also, in cars, if the most efficient factory is in Detroit—or wherever—it’s producing those high-productivity amounts of output year after year. 

In construction, you might have used up the highest-productivity sites, if you think that sites might be conducive to a more efficient build. You’ve exhausted them.

The distinction with construction is that it’s an increment to the stock. That’s what you’re doing each year. You don’t get to revisit the stock and reproduce that each year, so the infra-marginal units don’t get repeated in the same way.

WALKER: Okay, I get it now.

KAPLAN: There are two features of housing construction which are a bit different from cars. One is the durability of the good: a building is extremely durable relative to a car. The other is the reproducibility of the key factor, which is land; which is extremely irreproducible.

But even with improved land, you have to think about critical infrastructure. It’s a continuum, and there is a role for government because part of what makes land “reproducible” is whether you invest in the infrastructure to make a new set of greenfield sites usable. But that difference means you don’t get to reproduce those infra-marginal builds as often, and when you do, you’re moving up a marginal cost curve—down a supply curve—as you do it.

WALKER: Do you have a hunch for how important this might be empirically?

BRENNAN: It’s hard to know. One of our researchers at e61, Matthew Maltman, has been working on a paper in relation to productivity growth in the construction sector in New Zealand, exploiting the natural experiment of when planning laws were substantially liberalised.

The result appears to be an uptick in measured construction productivity post a liberalisation like that, but it does fade again over time. 

This is not a robust empirical test, but that set of facts would be consistent with this theory: there’s an initial almost gold rush—“here’s a new opportunity”—the best, easiest and most economically viable builds will be done first, thereby you see a bit of a rise in construction productivity. But it will probably abate over tim as the best sites are done and you move on to the next lot. I’d have to check the percentage improvement in that instance, but it was a noticeable uptick.

WALKER: Here’s a thought experiment. Think of all the levers we have to get construction productivity growing again.

There are the classic planning regulations—the kind of things YIMBYs are concerned with, like what Matt was looking at. There are also regulations that apply to the labour side of the construction industry: union rules, enterprise bargaining agreements. [There are] building codes—all of those types of regulations. There are things like worker quality; the structure and fragmentation of the industry; how well it innovates; maybe tax incentives that cause it to be so fragmented, because it is a super-fragmented industry.

(I’m trying to remember the CEDA report that came out recently, but I think it said 98.5 per cent of Australian construction firms have 20 employees or fewer. It’s a very fragmented industry. And larger firms are more productive. Firms with 200 or more employees made 86 per cent more revenue per employee than firms with 5 to 19 people.)

So there are all these levers to get construction productivity moving. Now, as a thought experiment, hold planning regulations constant—you can’t advance the YIMBY agenda. You can only pull the other levers. If you could pull those other levers to get construction productivity moving, how much would that move the needle on housing supply? Or is supply basically stuck unless you first address planning regulations?

BRENNAN: I don’t have a neat answer about the relative proportions, but it is clearly a bit of both. Think of a basic supply-and-demand diagram.

If, at the margin, the supply curve is vertical—which is to say planning restrictions bind and you’re prohibited from building the extra unit—then theory suggests it really doesn’t matter how efficient the construction sector gets. All of that will just flow in additional rent to the supplier; it’s not going to increase quantity. It’s not going to increase volume.

I suspect that is the situation that confronts us in certain areas. Where there are restrictions on density in quite high-value areas, the supply curve is essentially close to vertical, so construction productivity is not going to be a thing that really moves the needle there. 

There are no doubt other areas—because you do hear feedback from the construction sector: “It’s just not economical for us to build in particular areas,” i.e., the price of the product we would be building just won’t sell. There’s not a market for it. 

That suggests—and maybe this is more in greenfields areas, or more in some dense-but-lower-value land areas—that the supply curve there is upward-sloping. There, you would expect that if you can shift the supply curve down or to the right—reduce cost—supply will increase. So it’s a bit of both.

The difference in quantum is that productivity in a sector like construction—or any sector—is going to tend to be pretty incremental year on year: 1.5 to 2 per cent, maybe it gets a bit more rapid if you get a big technological breakthrough, but generally hard grind and incremental. 

Relaxing supply constraints could operate more quickly, if you’re prepared to do it. In the near term, it’s likely the supply constraints probably would have a more appreciable effect, if you were prepared to relax them, than the various channels of productivity growth that you mentioned.

WALKER: Interesting. Imagine we get rid of all the planning regulations that, say, Peter Tulip wants to scrap. Imagine that we also get labour productivity in construction moving back to some kind of reasonable growth rate.

What would the new constraint on housing supply be? I feel like at that point, it becomes more of a political constraint. Because if prices fall too much, too quickly, people lose a lot of equity and you maybe even risk a balance-sheet recession. At that margin, is that the new constraint on more supply?

KAPLAN: I don’t know. Is the thought experiment that we got productivity growth more broadly up, or just in construction?

WALKER: Let’s say just in the construction sector, and it’s a YIMBY utopia, so we can build wherever we like. Supply can accumulate much more rapidly than it does today.

Is it then a political-economy problem where we don’t want to bring prices down by too much, too quickly?

KAPLAN: There would be vested interests for that, for sure. If the supply curve is vertical—as Michael conjectures, which I think is right in certain areas—that suggests there are rents to be had if you can expand supply. Those rents are going to accrue to the builders who are going to build there.

The people who are going to lose are those currently accruing the rents—the current owners. In that situation, the constraint is the vested interests of that group and their political ability to wield them. 

But that’s only one part of the country, when we think about those very high-density areas we’d like to make even denser. It would have less implication for smaller cities more generally.

BRENNAN: It is an interesting thought experiment. When you think about what currently drives opposition to density, the argument that it’s going to undermine property values doesn’t crop up a lot. It tends to be about amenity and neighbourhood character—shadowing, traffic—the sort of urban amenity issues.

That’s partly because we haven’t had a lot of success. So, in the world you imagine, it’s not impossible that you would start to get more explicit opposition. Sometimes the opposition maybe would be tacit and not reveal the true motive, but even honest opposition around, “This is going to kill our property values,” we don’t hear that a lot, but it’s not impossible you could hear that.

And it would— to Greg’s point—represent a transfer from incumbent property owners to would-be entrants, I guess, because part of making housing more affordable for entry is that the price comes down.

KAPLAN: I feel like there’s a long way to go in the sense that prices in the areas we’re talking about have gone up by a lot. And it’s not clear that we’re talking now about falls in prices—which is the sort of balance-sheet issue you’re concerned about. Maybe it’s slowing the growth in prices.

And there, there’s a lot of scope before you could make a compelling argument that there are stability concerns or macroprudential concerns from a big drop in housing prices.

WALKER: As a shorthand, let’s call the concerns about loss of home equity the “homevoter hypothesis.” The other stuff is, I guess, amenity concerns—that’s the “I don’t want noisy, ugly construction in my neighbourhood.”

Tell me if this is incorrect: the second set of concerns is currently what characterises most NIMBYs in reality; the first set is the mental model that federal politicians have of the average homeowner.

BRENNAN: That could be right. I think at the state and local level they’ve probably got the NIMBY mindset a little more in mind. It’s the controversy over densification and people’s cherished neighbourhood character changing.

But you could be right. There is, at the federal level, a bit of a tradition of—and former prime ministers and senior ministers have observed—“Nobody ever complains to me that their house is worth too much.”

WALKER: Yeah. The last two decades of Australian housing policy at the federal level have been bookended by leaders from both major parties making comments like that. There’s the famous Howard radio comment in 2004, and then last year there’s Clare O’Neil on Triple J.

Okay, to take this thought experiment one step further. (And this could be pretty difficult because we don’t have data and spreadsheets in front of us.) Say labour productivity growth over the past decade or decade and a half was, instead of the pretty lousy—what is it, 1% or whatever it’s been—closer to the 2% we had just after the reform era, at least in the market sector. So late ’90s, early 2000s.

How much more politically palatable would house price falls be if we’d had that stronger labour productivity growth? Presumably people would have higher incomes and be richer—does that make them more willing to accept losses in home equity?

KAPLAN: I’m pretty sceptical that it would change much.

WALKER: Why is that?

KAPLAN: Let me lay out a couple of things. One is: let’s go with your counterfactual—we had twice-as-fast productivity growth over the last 10 years. There’s no guarantee where that productivity growth is going to accrue.

Productivity growth is a very aggregate thing, and the distribution of how that plays out in the economy—there are many ways it could play out. It’s not obvious to me that the group you’re thinking of would be [the biggest beneficiary]. We need to think about what that productivity growth looks like and how it manifests in wage income and household income more broadly.

Second, if you look at the vested interests we were talking about earlier, for a large part that’s not a group of the population whose income sources are necessarily sensitive to the sort of labour productivity growth you’re talking about. There’s a lot of passive income, investment in second properties, and other wealth accumulation—superannuation and those sorts of assets—where it’s unclear that would shift the reliance away from home equity as a generator of wealth.

BRENNAN: I share that scepticism a bit. One observation is that although productivity growth has been pretty sluggish over the last 25 years, income growth has actually been pretty good by virtue of the terms of trade.

This is a totally unempirical claim, but here goes. When have Australians—when has the general mood or zeitgeist—suggested that Australians have felt most prosperous?

It’s an interesting thing to reflect on. We talk about the reform era of the ’80s and ’90s. My recollection living through it was that much of that time people didn’t feel particularly prosperous. Even the ’90s, with its rapid labour productivity and TFP growth, it’s not as though the headlines were telling a story of, “We’re really going well here.”

I think people did acknowledge a degree of prosperity around the middle part of the first decade of the 2000s, when the terms-of-trade boom really took off—that sense that the budget was in balance, there were tax cuts flowing, incomes seemed pretty high, the dollar was worth a lot. People are perhaps always a bit grudging, but there was more of a sense then that life felt pretty prosperous. And I don’t think it really translated into moving the needle on this sort of debate.

I think it’s tempting ex ante to say, “If we could get greater prosperity, maybe there’d be a greater acceptance of some of these hard choices.” I’m not sure in reality, or whether our expectations just adjust—I don’t know.

KAPLAN: It’s also not clear to me that faster wage growth wouldn’t translate into higher house prices…

WALKER: True.

BRENNAN: If there’s a scarcity constraint.

KAPLAN: …Yeah, given the constraints we’re talking about.

WALKER: Okay, so one final housing question. Do you both buy the standard YIMBY argument that densifying our major cities—particularly Sydney and Melbourne—would lead to big gains in productivity?

KAPLAN: I don’t. I can’t speak for Michael. There are cities that would benefit from densification, but I’m sceptical about the Sydney–Melbourne argument.

So, what’s the number—like 40%?

WALKER: About 40% of Australia’s population is in Sydney and Melbourne.

KAPLAN: Yeah. It’s hard for me to see where those productivity gains would come from. When I think about spatial productivity, I think about competing forces between agglomeration on one hand—which is what you’re getting at, what the YIMBY movement is getting at—versus congestion on the other hand.

WALKER: And what do you mean by congestion?

KAPLAN: Congestion, in economic terms, is sort of the negative of agglomeration, and the way economists would model this is they’d stick a minus sign in front of it. 

What’s agglomeration? It’s the idea that when you put more people in the same place, as a result of the number of people, each individual person is more productive, able to produce more.

Congestion is: more people makes it harder for any one individual person to produce.

WALKER: Before you move on, can we unpack the channels by which those gains of agglomeration work? There’s better matching in the labour market, but are we also including things like knowledge spillovers?

KAPLAN: Yeah.

WALKER: Okay. So the existence of cities like New York, London, and San Francisco—and the enormous knowledge spillovers there—doesn’t the existence of those cities automatically refute the claim that we’re not going to get net gains of agglomeration from densifying Sydney and Melbourne?

KAPLAN: I don’t think so. Firstly, it’s not obvious to me that the relative size of London, relative to the rest of the UK, is a net benefit for the UK. It might be good for London; I’m not sure it’s necessarily good for the UK. So even in this discussion, we should ask whether we’re trying to improve the welfare of Australians or the welfare of people living in Sydney and Melbourne.

Let’s put that aside. Second, Sydney has strong geographic constraints—which are real. Melbourne less so—Michael knows more about this than me. But it’s not obvious to me that it’s feasible in a practical way.

You mentioned two agglomeration channels—firms and workers can better match to each other, and new ideas and developments can spill over and be used by firms in the same sorts of industries. I think there’s another one at a more social level: where do people want to locate, set up their lives, and make plans for the future?

That requires things beyond just jobs. It requires infrastructure, healthcare systems, good schools, social networks, and a broad range of groups people can form community with and connections with. Those come from reaching a critical size. Those benefits from agglomeration are going to exist at different scales than some of the other benefits.

You could tell a story—and I’m going to make these numbers up—that there’s something very different between living in a city with 2,000 people and a city with 200,000 people along those dimensions, that are different from going from 200,000 to two million, or two million to 20 million.

So when I talk about the difference between potential gains from increasing supply in Sydney and Melbourne versus other parts of Australia, I’m thinking about the difference in the gain in going from a five-million-person city to a 10-million-person city, versus growing some Australian cities that are a couple of hundred thousand people to a couple of million people. 

Some of what I’m saying is about where those potential agglomeration gains will come from, and some is about the congestion force, which works in the opposite direction.

WALKER: So YIMBY-Greg would focus more on densifying places like Canberra?

KAPLAN: I think that’s a great idea.

WALKER: Is there anything more you want to say on the congestion?

KAPLAN: I think a lot of people forget about the congestion. You mentioned New York and London—these are really big cities—but there are some really difficult things about living in New York and London. I’ve lived in both of those cities. I’m very happy that I live in Chicago now and not in New York or London, in terms of where I am in my life with young kids and a family.

I also know there are other very big cities of similar size that are nowhere near as productive as New York and London. We can talk about very large cities in Asia where people will tell you it’s the congestion that makes it very difficult when you don’t have the right transport and other infrastructure to realise agglomeration gains. So it’s not obvious to me that we should just make Sydney and Melbourne bigger because they’re currently more productive—therefore put more resources there.

BRENNAN: I share a bit of the scepticism. Up front, it feels to me the productivity argument is secondary to the housing-affordability argument.

WALKER: Which is more of a welfare thing, right?

BRENNAN: I think that’s right. The strongest YIMBY argument for densification is that it will reduce the cost of housing—make housing more accessible and more affordable.

Is there a productivity gain there? Potentially. 

One interesting question—I’m pondering both New York and London now in my mind—I think Greg’s right that sometimes these agglomeration benefits may operate over slightly different scales. 

You’re right to separate them out, because conceptually they are distinct: the matching benefit—which is about, “If I can get a bunch of employers and employees together in the same location…”—and they spontaneously have pretty good incentives to do this, right—if a firm is located within, call it, a 40-minute commute for two million workers or five million workers or whatever, it allows them to pick a very specialised worker for a niche role, and vice versa for the worker. That’s the matching benefit.

The knowledge spillover is something more mysterious: it’s this idea that ideas transmit by virtue, often, of physical proximity and interaction.

My gut is that the matching benefit can operate over the scale of an urban area. The knowledge spillover feels like something that operates over a much smaller geographic scale. You know, it’s about a cluster of workers and firms within a smaller area. 

Most of these precincts that emerge spontaneously—or that government sometimes tries to create—are motivated by that much smaller-scale agglomeration. So I think it’s an interesting question: at what scale do you get these effects? 

You might be able to devise transport solutions and a degree of density such that you better link a whole lot of people to firms and jobs and get the matching benefit, even if we’re not, in all cases, dense enough to get some of those knowledge-spillover benefits.

WALKER: I’ve started this off by taking us all the way down the construction, housing, urban-economics rabbit hole. But I want to step back and talk about growth and productivity more broadly, starting with some measurement issues and the metrics we might want to be optimising for.

Greg, some of these questions might be more in your wheelhouse, but Michael, obviously feel free to jump in at any point. 

We’ll start with the metrics and measurement issues. Firstly, GDP: Greg, could you outline what you think are the most important limitations of GDP as a metric? There are many, but which ones give you the most pause?

KAPLAN: I’m going to give you the economist answer: it depends. And if you’ll let me take a step even further back, I naturally want to ask, “Metric for what?” Right? 

I think there’s a big question: what is it we’re trying to do, what is it we’re trying to measure, and why are we measuring GDP?

GDP was not invented as a metric to measure welfare. It was invented to measure how much stuff we produce. That turns out to be pretty well correlated with welfare—and there’s a reason we tend to look at it, which I’ll go into—but let me make two points from the outset.

One is that, ultimately if what we’re interested in is welfare, that is a distributional issue. There are lots of different people (there’s a “who”), and there are lots of different things those people are doing. There you and me, and then there’s stuff I consume, goods I buy, time I spend, my physical and mental health—there’s all sorts of aspects of me. So we need to aggregate across the things that contribute to my welfare, and then across people. 

Then there’s the “how”: how do we do that aggregation? There isn’t going to be one right answer from the outset.

Let me make the case for GDP, because before we talk about the limitations I think it’s important to be clear about what it does well. It does two things really well. First, it’s well-defined. And we can measure it. If we want a metric, those are two pretty good features. It’s easy to come up with hypothetical things you might want to do, but we want to be able to compare across countries, across time, in a consistent way, and to do that we need to be able to measure. So GDP ticks that box.

Second, it turns out that it’s very highly correlated—both across time and across countries—with all of the other things that go into our welfare. That’s a statement about correlation, not causation, but it is a way to see what’s going on. It’s hard to find examples—and of course we can cherry-pick some—where GDP doesn’t grow but welfare does, and vice versa, over long periods or across very different countries.

What are the limitations?

The biggest ones for thinking about welfare are these. First, what is GDP? It’s trying to measure how much stuff is produced in a particular place over a period of time. We produce a lot of stuff, and GDP counts things that may or may not be relevant for our welfare.

We’re trying to aggregate. And how do we do that? We aggregate using market prices—a dollar of this and a dollar of that, we add them up, and that’s two dollars of stuff. Whether that dollar is spent on weapons or on pastries is completely irrelevant from the point of view of GDP. So when looking at fluctuations in GDP or across countries, that’s a big issue.

Second is the distribution issue. Fundamentally, GDP is an aggregate and doesn’t necessarily tell you anything about the way in which those resources are distributed across people.

Finally, it only measures things you can attach a market price to, because we have to add different types of goods up. So it’s going to leave out things like health, mental health, the environment, and all the standard non-market items you read about in a textbook.

WALKER: Okay, great. Next: is there a “growth accounting in two minutes for economists”?

KAPLAN: I can try. 

WALKER: Okay, let’s try. Let’s see what happens.

KAPLAN: So here’s one way of thinking about how much stuff we produce (GDP).

We produce stuff by combining capital—things that are reproducible, like factories, maybe land to some extent, and labour (people). It’s a very, what I’d call, Victorian-England approach to production; industrial revolution. That’s also the limitation, but if you want to understand growth accounting, think about: we build a factory, we hire some workers, they come to work at the factory, and widgets pop out the other side.

We want to understand why, over time, we produce more widgets—people call that growth accounting—and why some places produce more widgets than other places—some call that development accounting.

There are only three reasons why one place could produce more than another. They either have more factories (capital), they have more people showing up at those factories (labour), or they’re able—for the same amount of people going to the same amount of factories for the same time—to produce more widgets. That last thing is productivity. Technically, productivity is how much you can produce with the inputs you put in, inputs being capital and labour.

Growth accounting tries to ask, over time, how much of the increase in output comes from more capital, more workers, and how much from getting better at using them. Starting in the late 1950s, with a paper by Bob Solow, people collected the data to do that. The classic finding has been that capital accumulation plays some role, but a surprisingly large amount of growth—over the 20th-century United States and across countries—has to do not with the amount of capital, but with how we use it: productivity.

WALKER: When we were chatting on the phone on Friday, you mentioned that what we think of as capital in the 21st century can blur the distinction between capital (K) in our production function and A, which is total factor productivity. Anything worth putting on the table there?

KAPLAN: It’s good to remember the world doesn’t look like that Victorian English factory, and there are a lot of other inputs to production today.

There are many other forms of capital than just factories. The classic one people figured out very soon after we started doing these calculations was that some capital is embodied in people—we call that human capital.

If you adjust some of those estimates for differences across countries not just in how many workers there are, but how much capital is embodied in them by virtue of education, it accounts for a big chunk of those differences.

Where that’s playing out today is in forms of intangible capital: institutional know-how, organisational capital, IT infrastructure and software—things that last over time but aren’t captured by the traditional factory approach to capital. Even things like data, models, or algorithms are a form of capital: we can reuse them and they help us to produce. These things are difficult to adjust for, because how do you measure them? They don’t have easily attached market prices, but people have tried.

If you look at the last 30 years of US growth (and probably something similar for Australia), and take conventional capital, roughly half of growth came from capital deepening—more capital—and half from using that capital more effectively—productivity.

Once you incorporate broader, intangible, more modern forms of capital, it’s more like two-thirds/one-third.

WALKER: Oh, so two-thirds capital deepening?

KAPLAN: Two-thirds capital deepening, one-third productivity.

At some level this is semantics, and as we’re having this conversation it’s worth keeping in mind. If a factory has better data in its machines and better software, and as a result it can produce more stuff—and that was more expensive to build that factory versus the old one—do we want to say that we produce more stuff because we put more inputs in or because we can use those inputs better?

They’re two sides of the same coin. A lot of what we call productivity is embodied in the capital we use. That calculation is picking up that some of the growth we’ve seen isn’t a magic mystery economists call “A” or “Z” sticking out the front of a production function; it’s embodied in the inputs we use. And in order to realise it, we have to invest in those productivity-embodied inputs—like intangible capital.

WALKER: Yeah. And just to inject my own commentary here (I’ve been brushing up on this over the past few days): I think it’s important to clarify that A, or total factor productivity, isn’t equivalent to technology, although people often talk as if it is. A good intuition pump, or something I found helpful for getting this point, is just to notice that across some industries or countries, TFP can have negative growth from time to time. 

If TFP was just technology, that would mean that those industries were suffering some kind of technical regress.

But that’s not plausible. As one economist—I can’t remember who—put it, we don’t forget blueprints. 

So there must be something else to TFP, which is efficiency, know-how, tacit knowledge.

KAPLAN: This is a fantastic point and indicative of a broader issue to keep in mind in these discussions. On the one hand, we’ve got measurement: we collect data, get numbers, and compute things—those are the numbers we compare.

Then economists use models—simplified versions of the world with clear, well-defined constructs—and we try to map our world onto that simple model. I’ve been going back and forth between the two in this discussion even.

The simplest model—the Victorian-England one—says output (Y) equals A (productivity or technology) multiplied by capital (K) and labour (L).

In that world, yeah, technology and productivity are the same thing because it’s a pretty simple world. But no one thinks that’s what the real world looks like.

In the real world we just go out and measure stuff, and that measurement process is going to take you quite far away from the object in the model.

So when we talk about productivity, are we seeing it through the lens of the model—is it a thing like technology—or do we mean “What you get if you count up a firm’s revenue and divide it by the number of employees”? Those are the two objects. The one we have in our mind is somewhere in between, but it’s not on the table. It’s either the thing you measure or the thing in the theory.

WALKER: A question for both of you. If you had to pick just one north-star metric that policymakers should be optimising for, what would it be?

Imagine you time-travel or you go into a coma, you wake up in 20 years’ time…Say Anthony Albanese time-travels 20 years into the future—what’s the first thing he’s asking for? Is it real GDP per capita, or what?

KAPLAN: Charlie Wheelan, in his Naked Economics books, does exactly that thought experiment. 

WALKER: Oh really? I haven’t read them. What was his answer?

KAPLAN: I think the title of the chapter is basically “When You Wake Up From a Coma, What Should You Ask?” and his answer is GDP.

WALKER: Just GDP?

KAPLAN: GDP per capita or something.

But I’m going to be annoying for a minute. 

WALKER: Go ahead.

KAPLAN: You ask the best questions, Joe, but I just don’t think that’s a question for policymakers to be answering. Because if you go back to where I started—which is “What is it that we’re trying to do?”—we’re trying to improve the welfare of some group of people—it might be Australians, people more broadly, this generation, future generations. Ultimately it’s an aggregation exercise and it’s a big thing.

The mistake we make is exactly to look for one metric and then debate whether it’s the right metric. Of course it’s the wrong metric. My advice to policymakers is: keep your eye on a bunch of different things. If you choose one north-star and focus on it, you’ll end up maximising that, and (remember) “that” is not a real thing—it’s just a measurement you took.

BRENNAN: All good points. Look, if you absolutely had to have one, and it’s ex post—looking backwards over the last 20 years—I’d prefer something that incorporates income, like real disposable income growth per capita, as your best proxy for welfare.

Ex ante, looking forward, in a stylised world where you can maximise one thing, you could do worse than GDP per capita. Of course that is stylised and not right. And it might be subject to the odd big thing—so it might be that, in the next twenty years, rational policymakers would say, “Well, the climate transition is something which has to be done, and that may or may not add to GDP per capita (partly because in reducing emissions we’re reducing a cost that has not traditionally been counted in GDP)”, and therefore a rise in GDP per capita is not the main game, because it’s subject to these other big things.

But in normal times, if we’re looking forward, I know how it comes across, but what else is there? There’s no other good broad-based measure that’s a reasonable approximation for how much better off we are in material terms.

KAPLAN: It’s strange to me because GDP is not a fundamental thing—it’s a measurement we came up with in the 1930s. We could measure whatever we want.

BRENNAN: Yeah. So what did policymakers do before then? What did Pitt the Younger regard as his fundamental object? Beating the French, I guess.

Communities and their leaders must have had other, perhaps intangible, indicators or objects in mind. It’s an interesting question, and it reflects something about how mechanistic we’ve become in the way we think about policy and the way we think about success.

WALKER: Yeah. Conditional on caring about productivity growth, should policymakers look more at labour productivity or TFP?

KAPLAN: These are two very different things, so let’s get them on the table. It depends, again, why you’re looking at productivity growth. If you want a proxy for something that resembles household welfare, labour productivity is much closer to that: how much stuff we produce divided by some measure of the effort or work we put into producing it. It’s close to GDP per capita—output on top, people on the bottom. So if you want a euphemism for GDP per capita or stuff per person, then labour productivity [is the appropriate metric].

But if what you really want is a measure of how effectively or efficiently we’re producing stuff—because we think having more stuff enables us to do more—then TFP is a much better measure of how effectively we’re producing. If what we’re trying to measure is productivity—efficiency—TFP captures that better.  But it’s not necessarily a good measure of welfare.

You were the Productivity Commissioner, [Michael,] what would you do?

BRENNAN: In theory, TFP is the purer measure because it distills how much labour productivity growth did we get from capital deepening. And capital is not costless. If you go back to the early Austrian economists, they observed there was a lot of labour effectively congealed in capital—it’s just a more roundabout mode of production.

But the measurement issues are just so great, which is part of why you observe the odd fall in measured TFP and why it looks very volatile. The challenge is measuring capital services; that’s what you’ve really got to measure—the capital input as distinct even from the capital stock. That’s difficult, stylised, and open to interpretation.

So as a basic heuristic, labour productivity—GDP per hour worked—isn’t perfect (it’s subject to its own measurement issues), but it’s probably a little less subject to the vagaries of really difficult measurement.

KAPLAN: Would you say that’s true even in a resource-producing economy like Australia? You have big movements in resource prices; we use our mines more; labour productivity looks like it moves around a lot, because the level of labour input doesn’t change too much.

BRENNAN: Yeah, it is complicated in very capital-intensive industries. TFP will bounce around a lot in those industries because of big capital investment cycles, and you can see troughs in TFP as a result.

KAPLAN: So you get movements in TFP because of the investment cycle. You get movements in labour productivity because of the prices moving around—utilisation.

BRENNAN: In theory, labour productivity should be fully deflated for the price of the relevant commodity. Ultimately it is a proxy for a physical measure—hours of labour and other physical inputs in, physical output out, and the change in those things—so in theory it abstracts from commodity prices. Not from second-round effects, though: high prices can draw resources into the sector and affect measured productivity.

This goes to my point about income versus GDP per capita. GDP is a production-based measure, whereas income is what we get for it. The experience of the last 25 years in Australia has really confirmed the importance of prices in the Australian story. If you think of the three Ps of the Intergenerational Report—population, participation, productivity—there’s kind of a fourth P: price. Prices have been incredibly important to our success.

Now, that makes it sound like it all just good fortune—and there is a bit of good fortune in this. We happened to be a mining producer at a time when China rose and had big demand for our resources. There is something to be said, though, for the speed and nimbleness with which Australia was able to respond to that with minimal overall economic disruption. But prices are guiding many of the allocative decisions within the Australian economy in a way that productivity actually isn’t. So understanding the role of prices both in allocation but also overall welfare is important.

WALKER: Any other measurement issues you want to put on the table before we move on?

KAPLAN: There’s one that we should mention. When we measure productivity, we often look at GDP per worker as a decent whole-economy proxy for how much stuff people produce.

But we often go further than that and apply something similar to the individual firm level. You often will hear discussions about “firm-level productivity”, with the idea being that if you want to understand how productivity works at the aggregate level, let’s look deeper into the individual firms in the economy.

There I think it becomes more challenging, because what we actually measure is something like the amount of revenue a firm produces divided by the number of employees—so revenue per worker. It feels similar to doing it at the aggregate, but it’s actually very different. There are many more reasons why a firm’s revenue per worker could differ from another’s, or grow over time, that get washed out in the aggregate. So while both are imperfect proxies, it’s a much less perfect proxy at the firm level. And maybe we can talk about the reasons why we should be careful about inferring too much from the data on so-called firm-level productivity for policy and thinking about the sources of overall aggregate productivity.

WALKER: Give me a couple of quick examples or reasons of why we should be careful there.

KAPLAN: Revenue per worker is ultimately how much revenue you produce per employee. If I’m a high-revenue-per-worker firm and you’re low, there are many reasons why.

It could be that we both produce exactly the same stuff and the same amount of stuff, but I’m more effective at producing it—so it really is a productivity gain. But it could also be that I have invested a different amount of capital in my firm than you have. It could be that we operate in different product markets with different prices. It could be that you’re able to charge a higher mark-up over costs relative to your competitors. It could be that your marginal cost of production—how much it would cost you to expand production—is different to mine.

Most of the time it’s that we’re producing different stuff. It’s only a very small subset of the economy where we can actually compare two firms and say they produce exactly the same good and therefore any difference in revenue per worker, we can have a clear interpretation of it. Most of the time we’re just looking at dollars of stuff. And they’re produced in very different ways, so it becomes much harder to know whether it is something about productivity or something about production or something about the market.

Can I give one example?

WALKER: Yeah.

KAPLAN: Take software. If you’re a software company, the marginal cost of production in terms of workers is pretty small, right? You sell an extra piece of software, it doesn’t require any more workers. 

So if you were able to expand that, what does that tell you about productivity? Nothing in terms of the technology interpretation we gave earlier, but it certainly is a measured productivity increase. It’s just capturing something very different from looking at a firm actually increasing its technology—using higher technology that allows it to produce more stuff for each employee.

WALKER: Great. Okay, so Michael, if you were Jim Chalmers listening to this conversation, and you bought all of Greg’s measurement critiques, is there anything you’d do differently tomorrow?

BRENNAN: Not really, no.

I’m sure he has a high respect for Greg, but I think the question is: does any of it change your fundamental strategy? Greg’s right: you take these headline aggregates with a grain of salt. They’re not the be-all and end-all.

They’re a pretty good heuristic, but they’re not everything. The question is whether you can replace something like GDP per capita or real incomes per capita or whatever with some other holistic, perfectly aggregated—but somehow more all-encompassing—measure. And the answer is you can’t. There is the Human Development Index and other things that attempt to bring in a measure for life expectancy, equality of income, and other things. I think you’re better off just having that aggregate and some other things you really care about.

Have a look at life expectancy. Have a look at whether it’s your Gini coefficient or some other measure of the equality of the distribution of income. Have a look at incarceration rates among disadvantaged communities—whatever it is that you want to highlight. But keep them fairly segmented as a dashboard of indicators rather than trying to heroically amalgamate these—do another version of GDP but with a broader measure of welfare.

I think where it really comes into sharp relief is more at the micro level. Obviously there are particular policy areas where prices don’t fully reflect the costs or benefits of the activity concerned. That’s where policymakers would want to move away from the price-equals-marginal-cost assumption. That’s obviously true for carbon emissions, road congestion, and a whole bunch of other things. So policy has to be open to where welfare or wellbeing departs from what’s measurable or observed. But I don’t think it’s fruitful to try to bring it all together into some kind of magical index.

WALKER: Okay. I just want to quickly level-set, and I think we can get through these next two topics in five minutes maximum. First, I want to characterise the Australian economy—especially for any international listeners. Second, I’ll give some quick statistics to provide a sort of health check on the Australian economy. 

This is another question for you, Michael. Could you share some stylised facts about the Australian economy? Say you had a friend who was an economist, but maybe they’re an American or someone overseas who doesn’t know anything about Australia—they call you up. What are the first three to five bullet points you’d share about Australia?

BRENNAN: I think it’s a great question because I think fundamentally Australia is quite a distinctive developed economy. It’s quite different to much of the rest of the developed world.

There are three industries where Australia is a big outlier in the sense that we are hugely overweight in those industries as a share of our overall economy. One is mining. Very few developed economies have a big mining industry. Most developed economies have traditionally had a big manufacturing industry. Australia has not. We had more of a manufacturing industry, but it was always small and it has diminished. But mining is a big deal in Australia relative to other developed economies—but it’s something we share in common with more emerging economies, right?

That means we have big exposure to commodity prices, which leads to a degree of volatility in our budget, for example. That’s a macroeconomic management and fiscal management issue that’s a little distinct for Australia. 

The second industry where we are overweight is financial services, because we have effectively a privatised pension system. We have this large superannuation system—compulsory contributions made by employers on behalf of their workers that get invested on their behalf. So we’ve now got a funds-management industry exceeding $4 trillion—well in excess of GDP and well in excess of the capitalisation of our stock exchange. This is significant, and it’s an outlier in terms of financial services as a share of GDP. 

The third is construction. Because we’re a high-immigration, we’re a high-population-growth country—it’s not often well understood, even in Australia, how much of an outlier we are in that respect—we’ve had population growth at times of 1.6, 1.7, 1.8%. Again, in the developed world, that is unusual. So construction is a larger share of our overall economy. 

Accompanying those latter two—superannuation and housing as really significant assets that characterise household balance sheets—I think that is particularly, if not unique, then at least distinct to Australia. 

The only other things I’d point to are a little more intangible but go to the policy and political culture of Australia. Two things I’d point out.

One is we traditionally have had—unlike a lot of the developed world, though maybe we share this a bit with the Nordics and East Asia—a culture of fiscal prudence, for want of a better term: a view that governments should balance the budget and debt should be low. In much of the developed world that’s not really a feature of the political culture at all. Maybe it has fragmented a bit in Australia, but traditionally this has been a key litmus test by which the success of governments has been measured—can you balance the budget?

WALKER: Do you know where that comes from?

BRENNAN: Maybe we’ve had a measure of success on that metric and it just became embedded. But it’s certainly noticeably different to, say, the United States, and even I’d say much of Western Europe, right?

And the third and final thing is that our social safety net looks a bit different. In one sense, we’ve got quite widespread, for example, labour-market regulation—we have a relatively high minimum wage as a share of the average wage compared to the rest of the world. In another sense, though, our welfare safety net is highly targeted—and that’s a little different again to much of the OECD, particularly where they have unemployment-insurance arrangements which are contributory and everyone’s paying in and can draw down in the event of job loss. Our social safety net is highly means-tested, and I think there is a very strong culture of means testing in Australia. Again, I think it’s fragmenting a bit, but traditionally the idea that social assistance should primarily go to low-income households—to people who really “need it”—has been a really important part of the political culture.

So, in the absence of unemployment insurance and perhaps given the great Aussie love of housing, there is a sense in which, for many purposes, Australia is a bit of a self-insurance economy. You ride out the volatilities of income or job loss often through the offset account—which is a distinctly Australian thing—the offset or the redraw on the house, drawing down on some of that accumulated wealth or whatever. Maybe this is part of the reason why there’s so much politics in it—it’s the buffer, it’s the cushion. 

I think there’s a whole research agenda around modes of self-insurance in the Australian economy, and it might be a little distinctive in Australia.

WALKER: Neat summary. That’s great. Okay—my job now is to provide a quick status update on the health of the Australian economy. This is maybe more for our international listeners, and again, to the extent I reference charts we’ll put these up in the video version of the episode.

For those who don’t know, Australia’s a country of about 27.5 million people. Last year our GDP was about US$1.75 trillion, or about A$2.6 trillion. 

In terms of GDP per capita, I think we rank about ninth in the OECD on a purchasing-power-parity basis.

Labour-productivity and TFP growth have been underwhelming, to say the least. Since the 2017–18 fiscal year, both labour-productivity and TFP growth have been only 0.2% per year.

Real GDP per capita growth has been declining, you could say, since the turn of the century. This is a chart looking at the five-year compound annual growth rate.

Labour productivity has also been stagnating—again, you could say since the turn of the century. 

And that is the RBA’s stuff—this table is probably an easier way to draw the comparison against the earlier period.

For the market sector, in the two decades to the 2017–18 fiscal year, labour-productivity growth was 1.6% per year. But since 2017–18, it’s been only 0.6%.

Anything else you would add to that?

BRENNAN: I guess just to return to the recurring theme in relation to GDP—average real GDP per capita growth—which was high around the early 2000s and then steadily declined. There was a part of that period where income growth, nonetheless, was pretty strong.

WALKER: Yeah, because of the terms of trade.

BRENNAN: Because of the terms of trade.

In level terms, whilst it has fluctuated, the terms of trade are materially higher than they were in the 1990s, and that has, in effect, been the underpinnings of prosperity largely, given the poor contribution from productivity growth.

WALKER: Yep. Okay, so let’s talk about goals and growth regimes. I have a couple of quick questions on what we could be aiming for and then what the downside might look like. I’ve another chart, which I’ll, again, put up in the video.

This is Australia’s global rank measured by purchasing-power-parity-adjusted GDP per capita over the last two centuries. As economic historians know, Australia, for a time, was the richest country on Earth in the late 19th century.

Maybe this is a silly question, but as a thought experiment I wanted to ask: what would it take to reclaim that top rank?

BRENNAN: Well, it's interesting how it came about. I mean, a couple of big causal factors were growth of the pastoral industry—land was the big thing that became pretty plentiful, obviously at the cost of dispossession of an indigenous population. But that input was able to be expanded significantly, and substantial income growth came on the back of the wool industry and then gold from the 1850s onwards.

When I reflect on Ian McLean's book Why Australia Prospered, he makes a point that the gold rush resulted in much more sustained prosperity than one might think. It is consistent with a gold rush. So I think a couple of big industries really provided some tailwinds. 

I think it was a period of global growth and openness, and we were linked to a massively expanding market in the United Kingdom, which was going through a period of substantial income growth and industrialisation.

But yeah, it is an interesting thing to ponder, just the economic success of the 19th century, particularly given that the big income growth that occurred in Western Europe really didn’t start until the early 1800s. So, it wasn’t as though those who came in the 1780s had necessarily already experienced that big surge in income growth that then characterised Western Europe and later the United States.

I think also there were some good institutional choices that were made early on. There was a big debate about whether to in effect convert the pastoral leases that had been issued to squatters in western New South Wales into freehold title. There was a lot of resistance to that, rightly, and I think it in many ways prevented the creation of a sort of oligarchic pastoral class. I think that’s part of the story of the success over that period: a kind of a sense of democracy, a sense of maintaining institutions that were fairly egalitarian. In economic terms, that also paid dividends.

Could we achieve it again?

I mean, that logic partly reflects... When did we slide down the rankings? We slid down the rankings partly because some other countries developed. And that’s a great thing. Singapore, Taiwan, Japan, Germany—although neither of those, I think, outrank us at the moment in the per capita stakes. But it was important in that post-war period that much of the world recovered.

When you look at our relative performance, it’s sort of hard to escape the conclusion that the 19th century was largely characterised by agriculture, a bit of mining. Much of the 20th century by manufacturing, and Australia didn’t really catch the manufacturing wave in the same way that other economies did. For whatever reason, it just wasn’t our thing in the way that agriculture and mining were. 

When agriculture was the biggest industry in the world, we were number one. When manufacturing was the biggest industry in the world, we were further down.

KAPLAN: But we were still number ten.

BRENNAN: Yeah, that’s true.

KAPLAN: I think it's easy to look at 150 years ago and say, "We were number one. Wow, it’s a failure since then." I think we also need to look at some of the other countries' performance over that period.

Argentina is the one that comes to mind, but there are others that have taken another path from the same position.

WALKER: Right. Do we know what the highest growth regimes are that have been sustained by other frontier economies in recent decades?

KAPLAN: Well, I think the key word there is frontier, right?

WALKER: Yeah.

KAPLAN: Yeah. So, the 2% number seems, over long periods of time, like a pretty hard number to get around.

WALKER: 2% real GDP growth.

KAPLAN: That’s the long-term number for the US.

WALKER: The US, right.

KAPLAN: You would think about that as being the frontier. Now, I may be less optimistic than others that that’s sustainable over long periods of time. If you put it in a much broader context, it’s a pretty special period. 

But yeah, numbers like 5% seem difficult.

WALKER: Okay. So, what do you think is the most ambitious growth regime that Australia could plausibly aim for?

KAPLAN: Should we be aiming for growth regimes? I mean, it feels to me a little bit like a five-year plan.

These numbers are outputs, not inputs, right? What we should aim for is: let’s remove all the impediments that we place on people producing in the most productive way.

Let’s foster whatever policies we can where government has a role to play, and see where we land up.

That seems to be a much more productive approach than to start putting targets in terms of these outcomes.

WALKER: Okay, let me reframe the question. Say we make Michael Brennan and Greg Kaplan benevolent social planners—omnipotent social planners.

BRENNAN: Disaster.

KAPLAN: That’s gonna be a negative number. [laughs]

WALKER: And you implement the full suite of your agenda and remove all the impediments you’re worried about. What kind of ballpark or range do you think we could get to in terms of our real GDP growth?

BRENNAN: I will come at a number just to humour you, Joe, because I’m a pleaser, but there’s a lot of truth in what Greg says and there’s a lot of contingency in it. When you look over the broad sweep of history at what’s driven productivity growth, a lot of it is technology broadly conceived—the pace of technological change. Of course, that includes everything from high-end, complex technologies right through to the “invention” of the shipping container—which is not really an invention at all but it’s an economic innovation, it was a coordination issue, but it’s led to huge efficiency and trade, which has been a huge source of productivity growth for countries like Australia. It’s the pace of those sorts of things that come along, and then it’s an economy’s ability to adapt to that and adopt it.

You think of Robert Gordon’s thesis. It might just be that the pace of technological change has slowed and that’s going to place a limit on how fast productivity growth can be, irrespective of the policy and institutional settings that a country’s got.

But logically you would think, if you were after a number you would go back to the sorts of numbers we achieved during the second half of the 1990s as being ballpark. You feel if you’ve got your policy settings right, your broad institutions of openness and adaptability, and you’ve got a technology that’s there for the taking in the way ICT perhaps was in the ‘90s (and potentially AI today and maybe other things)—that feels like the sort of growth rate that’s not unreasonable for an economy to aspire.

WALKER: What the the growth rate?

BRENNAN: Labour productivity growth of these orders of magnitude.

WALKER: 1-2% [per year].

BRENNAN: Yeah, 1-2%.

WALKER: Got it. Okay, again this question might be better answered by a spreadsheet than a podcast, but say we continue with our disappointing productivity growth of 0.2% per year, do you know how much GDP we’ll miss out on roughly in a decade’s time, relative to a counterfactual of more like 1-2%?

KAPLAN: So you’re asking what the compound difference to the power of labour share?

WALKER: Greg can you just quickly work that out in your head? [laughs]

KAPLAN: I don’t know the number but it’s substantial.

WALKER: Over ten years?

KAPLAN: Yeah.

WALKER: It might be like 30, 40, 50%, something like that.

KAPLAN: Yeah. Back of the envelope: what are we talking—1.5% per year? Over 10 years, that’s 20% or so.

WALKER: So it’s significant.

KAPLAN: Yeah.

WALKER: Okay, so let’s talk about what’s causing the productivity crisis, and then some different ideas to fix it. Just as a starting point, tell me what’s wrong with this view: the punchline is that the crisis is—if not non-existent—at least greatly overstated, and the argument relies on three points. Dietrich Vollrath, the American economist, is most famous for making this argument in the American context. I’m just stealing it and applying it to the Australian context.

The first step in the argument is: services industries tend to be lower-productivity than goods industries because of this intrinsic quality whereby services tend to involve labour. And eking out productivity gains from labour is difficult; it has diminishing returns because you’re constrained by the scope of people’s time and attention. The classic example is listening to a string quartet: if they’re playing a 30-minute piece of music, you don’t want to hear it in 12 minutes. That 30 minutes is going to be pretty fixed across the centuries or the decades.

Second, the price of services, as a result of that first point, will tend to rise relative to goods—also known as Baumol’s cost disease.

Third, more economic activity will shift into services, because our demand for services is income-elastic, whereas our demand for goods is income-inelastic.

We see this in the data. If you look at the size of Australia’s services sector as a value-added share of GDP, it’s grown rapidly in the last several decades. At the moment it’s about 80% of GDP. This chart is from the Productivity Commission in 2021—Michael, this was when you were chair, I think. So I’m giving you your own research. Look at this research I’ve done! [laughs]

In this view, the productivity slowdown just reflects a shift in consumption from goods—which we’ve got really good at producing—to services, which are lower productivity. And that slowdown is just an artefact of how productivity is measured. We wouldn’t be better off if we reversed it, so everyone just needs to calm down and carry on. There’s no productivity crisis; there’s no need for huge roundtables. This is just what happens to a mature economy. 

So, what’s wrong with that view?

KAPLAN: I think it’s a perfectly reasonable hypothesis and every premise there makes sense. But it’s an empirical question at the end of the day. I’d get Michael’s view, but my understanding is it’s just not borne out in the data. It’s clearly part of it—we’re shifting towards low-productivity sectors, and some of those sectors are also outside of the market, which has contributed—but my understanding is that if we look within sectors, there have been big productivity slowdowns even within those sectors, within services sectors.

You could do a within–between decomposition of changes in productivity. My understanding is that most of the change is within sectors, not across sectors. So yes—but it just doesn’t account, empirically, for a huge fraction. I know we’ve done some work at e61 on this, and I know the RBA has done some as well.

BRENNAN: Yeah we’ve done a bit on the rise of the care economy. It does two things. The shift in the composition of the workforce towards sectors with low levels of productivity obviously has a compositional effect—it reduces overall productivity growth. But there’s also a question about the ongoing productivity growth in these sectors as well. I think the cost-disease story is pretty compelling as a set of stylised facts as a starting point, but I wouldn’t read into it that therefore there’s “no problem”.

It helps qualify it a bit, but to me it characterises the nature of the challenge. The string quartet is interesting because it goes to whether services can be automated—can we achieve productivity growth in these services? The string quartet is instructive because the original intent of that metaphor was: you can’t just automate the cellist. It’s not like manufacturing where you strip out labour and replace it with capital. You still need four people in a string quartet.

What is interesting is we’ve had technological advancements that mean people can hear that string quartet—a billion people could hear that string quartet, rather than a hundred sitting in an auditorium.

KAPLAN: That’s exactly my issue.

WALKER: So it’s a failure of imagination to say that services really do depend on labour as much as they historically have?

KAPLAN: Well, no—it’s about how you measure output. Baumol’s idea was brilliant. He’s saying the measure of output there is the 30 seconds of producing the music out to the world.

An alternative potential measure of output would be the receipt of that music by a set of ears.

And so now how much you produce depends on the size of the auditorium. In which case one would say that maybe that sector actually has had more productivity growth than almost any other sector you can think of.

WALKER: Okay. But you can pick other examples where there are constraints. Teachers and doctors…

BRENNAN: Yeah, absolutely.

KAPLAN: Of course. But the point is to say that innovation in services is not impossible.

And if the one thing we've learned from the AI changes that we're seeing is that, yeah, that's going to happen. Hard to predict where and how much, but it’s not a God-given truth that services can’t be produced more effectively.

BRENNAN: I don't know how far this gets us, but just bear with me for a moment. The string quartet—good example. Think of a lot of household chores… 

It's interesting to reflect: in one sense, the service economy was probably bigger in the 19th century than it is today, right? The share of time spent on people doing stuff. It was a service-dominated economy that, as this blue line reflects here, services got replaced by goods, in a way, via manufacturing. So a lot of the service of, you know, having four people play a string quartet for you in the auditorium, that got replaced by a record and a record player. So, the ability of manufacturing to step in and create a substitute for the service or, in the case of household chores, a dishwasher and a washing machine…The manufacturing industry came in and manufacturing these things got cheaper and cheaper over time because we were able to automate that process.

Part of what's gone on in more recent times—I think of the music example—is we've actually gone back towards a service in a sense. You no longer buy CDs, records, that sort of thing. We now have phones and it’s a streaming service. The point being maybe you can't forever manufacture away what is fundamentally a service. I don’t know. That’s an unproven thesis, right? But interesting to think about. 

The thing that I think is relevant to the services sector, and this is, again, a forward-looking thought experiment, but I look at agriculture here. It’s extraordinary to think in the 19th century that was 60% of the economy—the measured economy, at least. 

At the turn of the century, 1900, okay, so it's down to about 25%, but it was about 25% of the workforce as well. 

It's now about, what, 4 or 5% of the workforce? The output is hugely increased. So we are producing vastly more wheat and fiber and food than we were in the 1900s. But we're doing it with many fewer people, and that’s part of the “cost disease” story—that's the labor that was freed up by those highly efficient, highly productive industries to flow into other things that we decided we wanted, many of which are services.

So it is interesting, I guess, to reflect now. You think of our biggest employing industries, like health and social assistance, education, some of these, and think, "Okay, so would we plausibly expect over the next 100 years that they're going to have a big productivity surge that's going to translate into shedding labor at the same rate, where it's gonna go into other sectors?"

And it might, but at this point in time, it's hard to envisage. But maybe that's always true. Maybe it's always hard to envisage how labor could be massively liberated. 

I think this is partly your point about elasticity. If health improves a lot in quality, we're just still going to want more because it's just a natural thing. Why wouldn’t you? More life, more quality life. Whereas some of these goods are more inelastic. Maybe once they get cheaper, you want something different. So I think it is an interesting question. Are we going to see the same pattern in some of our modern service sectors that we observed in, say, agricultural and manufacturing?

KAPLAN: Let me just add one observation. Underlying this (there's a blue line here [in the graph], the services line), the two biggest sectors there are health services and financial services, maybe education services as well. 

Health and financial services are two sectors where the productivity measurement issues are probably most pronounced. Michael focused on the denominator, the labor coming in and out. I think the bigger challenge is the numerator: output. How do you define output in the financial services sector? It's very, very difficult. 

It's some form of revenue. It is producing some value, by maybe more efficiently allocating capital, allowing people to insure over time. Those are very abstract concepts that are very hard to measure. The same thing goes with healthcare. Ultimately, what we're measuring there is going to be something with dollars on the top. But if we're getting better health outcomes, that's something that's very hard to get into the productivity statistics. Would you agree with that?

BRENNAN: Absolutely, yeah. See, I kind of agree with the basic premise that you're putting, Joe, but it’s unclear how big the problem is.

But at least I would say this: if productivity growth looks different in the future to what it looked like in the past—including that more of it is quality, hard to observe, the demand for these services pretty elastic, etcetera—then I think it does have implications for some of the things that we have asked of productivity growth. Like, for example, productivity growth has been the way that our fiscal arithmetic has added up, right? It’s allowed governments to expand service delivery at a rate that exceeds population growth and inflation and still have the revenue to cover it because revenues will grow roughly in line with the economy. So, if there's productivity growth, it sort of gives you a bit of fiscal wherewithal.

The story you're telling, if it’s right and it’s not clear that we're going to get big, real cost reductions in these services, these things aren’t going to become radically cheaper over time, then some of that fiscal arithmetic becomes challenging. So even if it’s not a problem in terms of overall well-being and that sort of thing, it just changes the nature of what dividend we're going to get from productivity growth. I think that’s still a challenge.

WALKER: Just quickly so I'm super clear, the services / Baumol's cost disease story is true, but the effect just isn't large enough to explain all or most of Australia's productivity slowdown?

BRENNAN: Yeah, I think it's part of the story.

WALKER: Part of the story, but not the dominant explanation.

BRENNAN: Yeah, I think that's probably right.

WALKER: Okay. Just while we're on the topic of services, what do you see as the lowest-hanging fruit for getting productivity or quality improvements in services?

BRENNAN: If I think about that conceptually—and this is me playing in my benign dictatorship or whatever, so now I've got complete, not just control over government, but I'm actually running the economy 1940s-Soviet-era-style—when I think about emerging technologies, it's got its political challenges, got its implementation challenges, but it's really not impossible to envisage use cases in health and education for AI that are pretty obviously productivity enhancing, potentially labour saving, quality enhancing.

It's much harder in disability maybe and in aged care and in childcare. There are still services where it's gonna be difficult, I think, to achieve the sort of productivity growth that we observed in agriculture and mining. There would be political and stakeholder difficulties, but I would've thought there is very substantial scope for technological adoption in those sectors.

WALKER: I mean, not to be too crass, but if you think about what a GP does, which is essentially like pattern matching and then giving a fairly pro forma prescription—a lot of that you can see being at least assisted by, if not substituted for, by things like LLMs.

BRENNAN: Yeah, I think you could see a world in which a GP could achieve very similar health outcomes in less time for a larger group of patients.

WALKER: Yeah.

KAPLAN: I want to ask a question about this, and maybe I misunderstood the question.

So that's really an answer that's really about how I'd love the economy to look as opposed to what maybe we should do as governments. I'm not sure if that's what you're trying to get at, but thinking about that sort of harder question of, okay, so how do we enable that? What is the role of government in getting us to that? 

Would you say, Michael, that one might be moving some of these service sectors in Australia done outside of the market back to the market, so that we could get some of the competitive pressures that would be needed to adopt these technologies?

WALKER: Feels like a leading question. [laughs]

KAPLAN: Yeah. I don't know. The answer might be “no”

WALKER: [laughs] Oh, you don't know the answer?

BRENNAN: I think it's a qualified “yes”. So there are instances where you can imagine these use cases and then you think that the incentives aren't really there.

And you're quite right: it’s not for me to determine what GPs or teachers or education czars should be doing. 

But there are instances where the incentives just don't align with that. So some of the incentives are about whether something is operating in a market or not. Sometimes it's about the design of that market. I mean, the reality with GPs is they are remunerated on the basis of the time they spend with the patients. It's a consultation of specified length. So that is a barrier to wanting to, as I put it, treat more patients at higher quality in less time. 

In other instances, if you've got a school system, for example, and you want to inject more technology, you've got to sort of drive that through the system. But I wouldn't be surprised if we see a fair bit of disruption from the private sector in tutoring. It's not impossible that other countries adopt technology rapidly because they don't feel they've got a high-quality teaching workforce and they achieve better educational outcomes as a result. 

There are parts of disruption, but there are barriers to it as well.

KAPLAN: So maybe let me pare back the question a little bit. These are sectors in which government plays a big role, at least in Australia and in most countries: healthcare and education. We think there's good reasons why they don't operate in a pure market-based economy. Instead, we set up some form of quasi-market where we set rules and create how that quasi-market is gonna operate. 

Is the point here that if we want to enable the types of technology adoption that we think are gonna drive productivity going forward, the role for government is to step back and rethink about how we organise those markets given that the answer is not going to be “Let's get out of them completely”? There's very good reasons for why we intervene in those markets that are not gonna be cured by AI, so it's not going to be that we don't need any government intervention in healthcare or in education. But it's just that the type of intervention we need is different and the trade-offs are different. You gave a perfect example there, Michael, with the idea of time maybe not being the way that we remunerate GPs. There's no reason why that has to be the case. It's not a market outcome, it's a rule.

BRENNAN: It's a funding model.

KAPLAN: Yeah, it's a funding model. But is that maybe where government should be focusing their attention in terms of productivity gains in the service industry?

BRENNAN: Yeah. I think it's the age-old admonition to government of just “think about what are the barriers”. And is there a rule, or a regulation, or a funding model, or just a rigidity that might stand in the way of the operation of a different business model or a technologically-enabled alternative?

WALKER: Okay. One more question and then I’ll move to a different kind of segment.

I’m curious: to what extent do you think the causes of Australia’s productivity slowdown are for Australia-specific reasons versus frontier-wide reasons that are plaguing other frontier economies?

BRENNAN: It’s got to be a bit of both, right? Productivity growth has slowed the world over, so it’s hard to say this is a unique Australian phenomenon.

I think we can lose sight of that in Australia because we had a period of what we now regard as an important and distinct period of economic reform—in the ‘80s and ‘90s, perhaps early 2000s—that yielded productivity growth, and we feel we don’t have that anymore. So we tend to tell an Australian-only story, ignoring that this is a global phenomenon and it could be about common causes within individual economies or a universal cause like a slowdown in technology. 

I’d be interested in Greg’s views—he’s spent a lot of time in the US. This is just a personal reflection borne of many years in this game: around the mid-to-late 1990s there was still a lot of commentary that maybe Europe had developed an economic model ultimately superior to that of the United States—maybe they would achieve similar levels of prosperity but with greater equality but with less of the sharp edges.

And I look at it now and think that case is getting harder and harder to make. 

WALKER: Absolutely.

KAPLAN: Yeah.

BRENNAN: There is something—it’s harder and harder to ignore this divergence we’ve seen. We used to believe in convergence as an explanatory factor in development economics: the poor countries will catch up; it was hard for the richest countries to grow fast.

But the gap that exists now—even in recent times—between the US and Europe, even the US and Canada, the US and Australia, I feel that it’s getting hard to ignore. That does imply that there’s something many of us need to reflect on what about might be missing in our approach or our economic model. I don’t know what you think, Greg?

KAPLAN: I think that’s right. There are what I’d call horizontal differences in choices that countries have made that are becoming starker.

Some of the differences you’re pointing out between Europe on the one hand and the US on the other are partly compensated by other choices those countries have made that I think come back to those initial questions we were talking about: what are we actually maximising for here?

It’s hard to critique those trade-offs—those are choices. Now, does that mean one can’t achieve US levels of productivity with European levels of equality and our unique Australian culture? I don’t see why not, but it’s very different to aspire to that than to point to the actual role for government and policies.

Getting out of the way where you’re unnecessarily in the way seems to me the easiest one that the US for a while was doing very well at. I’m not sure that’s as clear now, and we’ll see what happens in the next few years. But yeah, it’s a good observation.

WALKER: I was wondering if you could humour me again: what do you think is the relative importance of the Australia-specific causes for the slowdown versus the frontier-wide causes?

BRENNAN: I’m going to say it’s at least half frontier-wide.

KAPLAN: I was going to say 50/50 minimum.

WALKER: Okay, cool—at a first approximation.

BRENNAN: Yep.

WALKER: So, the next thing I want to talk about is what we can learn from firms, industries, and countries currently performing really well in terms of productivity growth.

This is me using common sense and winging it a bit. Maybe it comes across as too obvious or too simplistic to you guys—especially given your deep public-policy experience, Michael.

But if I were a policymaker trying to get productivity growth going again in Australia, one of the first places I might look is: which industries have been doing well, which have been doing poorly; which firms have been doing well; which countries have been doing well. Then I’d see if there are any ideas I could borrow to apply to the laggards. 

As a starting point, does this approach sound reasonable?

BRENNAN: I’m with you so far. I think it potentially has its limitations, but there are some lessons to be drawn.

WALKER: Okay.

BRENNAN: What do you think, Greg—or am I being too benign?

KAPLAN: Maybe. Obviously those are things to look at. 

Maybe it’s the Chicago in me—I just have something against the idea that we can will ourselves into higher productivity and better outcomes. That idea of looking at the outputs and saying, “They’re doing well over there; they’re not doing well over there; so let’s copy them—let’s try to get the guys doing that to do that”—that’s just not how I think about how an economy works.

Those are outputs. What policymakers can control are the settings by which private actors make input choices. My starting point would be to look at the barriers that are preventing people from doing what they want to do and that make it hard to either adopt technologies or have best-practice outputs, and then go from the input side.

WALKER: That makes sense. If I were a policymaker, I’d maybe look from both directions: top-down and bottom-up.

KAPLAN: I’m not saying you shouldn’t look. It’s good to know. You have to avoid falling into the trap of looking at outcomes and then saying, “We need all firms to be more like that firm over there.”

WALKER: Right. Just humour me—and we can come back to the bottom-up approach after this. 

To start with industries: which have been doing well and which poorly in Australia? Just to sense-check with you both: if I were a policymaker, I’d be more interested in growth rather than levels. Does that sound reasonable?

BRENNAN: Yeah, it does to me.

WALKER: Greg—any objections?

KAPLAN: No objections. [laughs]

WALKER: Over the weekend, Kevin Fox, the economist at UNSW, shared his latest charts with me, which are based on the ABS multifactor productivity data—so shout-out to Kevin and to the ABS.

BRENNAN: And shout-out to the University of New South Wales, with whom we have a partnership at e61.

WALKER: Absolutely; that partnership launched a few months ago.

We’ll look through this again on the video—I’ll put this chart up. We’ve got 12 core industries in the Australian market sector, and this chart shows their total-factor-productivity growth indexed to 1990. 

The best performers are: (1) agriculture, forestry and fishing; (2) information, media and telecommunications; and (3) financial and insurance services. 

The three worst performers are: (1) electricity, gas, water and waste services; (2) mining; and (3) construction.

First question: the standout over the last three and a half decades is “agriculture, forestry and fishing”. My understanding is the component that has done the best is agriculture. Do we know why that has gone gangbusters?

BRENNAN: I know a couple of reasons, some not to do with productivity per se. It depends a bit on weather conditions (now, that doesn’t explain the secular trend)—drought versus good rain conditions. Those are inputs that aren’t measured in the productivity stats, so obviously there’s something going on there.

WALKER: Just to dwell on that for a moment: drought is an unmeasured input that will depress output, so that’s going to deflate the numerator without deflating the denominator.

BRENNAN: That’s right, so it makes productivity look poor; and good conditions will make productivity look great.

KAPLAN: Can I just add: if you stare at the figure—maybe our viewers can see it—it has grown the most. It’s also by far the most volatile.

WALKER: And I think that maps to periods of drought and good weather.

KAPLAN: I think that’s exactly right.

BRENNAN: But has agriculture done well? I reckon it has.

It’s hard to pin down causal factors, but I think there’s been a degree of rationalisation in the sector over this period. There’s a bit more scale in farming than there's been in the past. Farming is a much more professionalised sector.

Farm management—even where a farm passes down hereditarily through a family—younger generations coming into farming now typically have got much stronger management skills—they’ve studied it. The management of farm enterprises has changed, and I think is quite different to what it was in 1990.

The scale of farming, because there has been more rationalisation.

But it’s also the continuation of that trend, that we talked about, over the last 100 years: the application of scientific progress to this sector, and it’s been particularly amenable to it.

WALKER: Better fertilisers, better seed varieties. Things like that.

BRENNAN: Yeah, that’s right.

There are two things that are… And this goes to your point, Greg, that you can’t always copy-and-paste from one sector to another. But it might give you a clue as to what some other sectors might be missing; it doesn’t necessarily tell you what to do about it.

There are two things about agriculture. One: it’s internationally exposed. It’s a globally-exposed business with no pricing power for the most part—some vineyards and some other niche products might. But for the most part—wool, beef, wheat, cattle, etcetera—they’re selling into a global market. They're price-takers; you’ve got no alternative but to drive productivity on-farm. That’s how you make money. That’s how you make margin. You can’t do it through price or better marketing.

The other thing is: we’ve had a pretty effective innovation system in agriculture. It often rests on public R&D or R&D collectively funded by farmers paying a levy—funding, say, the Wool R&D corporation or CSIRO or whomever—and then a system of extension officers who go out and help encourage farmers to take things up and spread good ideas.

WALKER: Help diffuse those innovations.

BRENNAN: Help diffuse—that’s right.

I think part of what has aided that—this is pure conjecture—is that farmers generally are not competitors. They’re selling their product on a global market. But they’re not fighting for market share among themselves. That culture of sharing information, in Landcare groups or just around town, is established in that sector and that’s probably aided the diffusion of ideas.

That’s not—to your point Greg—to say, “Well everybody should do that.” They can’t all just do that. That’s probably a thing that’s distinctive about that industry. But it might be there a couple of these other sectors where that innovation system is less well-developed and—particularly the ones where government is involved—maybe government should foster a better innovation-diffusion system.

KAPLAN: Would it be right to look at this chart and say the bottom one—“electricity, gas, water and waste services”—isn’t exposed to international competition and is more highly regulated?

BRENNAN: Yeah. Highly regulated pricing, and this is an area where the economic regulator plays a big role in determining what investment can take place, because you take an investment proposition to the pricing regulator to have it allowed in your regulated asset base.

In a couple of those areas we’ve gone a little harder on capital investment over part of the last 20–25 years—in electricity, say, because we were interested in reliability more than cost in a couple of instances; big transmission upgrades, etcetera. That feeds into the MFP (or TFP) figures a bit, because more capital has gone in.

WALKER: I see. What about mining?

KAPLAN: That was going to be my question. What about mining? It’s kind of shockingly surprising to me. They’ve got international competition, but according to this [chart] we’re less effective at producing than we were 25 years ago. Doesn’t that fail the smell test?

WALKER: It’s capital-intensive; it’s something Australia prides itself on. Why has TFP growth been so…?

KAPLAN: But before we get into that—does it pass the smell test? I’m not going to doubt ABS or Kevin’s numbers, but are we capturing the thing we’re trying to capture? This is a well-defined measurement with rules about how to measure it.

Then there’s the object in our model—you gave the example of forgetting blueprints. Let’s be careful about interpreting this as forgetting blueprints, because it suggests we’re 20% worse at producing mining output than we were 25 years ago. How could that be?

BRENNAN: Well, I think the clue is the period over which it declines: basically from the early 2000s—when prices really went up. That tells the story, remembering this measure abstracts from prices; it deflates away a price increase, because it’s trying to get at physical output.

It’s quite plausible that the measured productivity is down because we’ve put more capital and more labour into mining for some increase in output, but maybe the increase hasn’t been commensurate, but it’s still highly profitable because prices are so good.

So you wouldn’t not want to do it; the investment of labour and capital is good from a macro perspective is good—the nation is richer for it—but the measured productivity comes down. 

This is an instance where it’s important information, but it’s not necessarily the whole story.

KAPLAN: So maybe policymakers don’t look at mining productivity measures and try to draw too much from them. [laughs]

WALKER: [laughs] Yes. Okay, a quick check for completeness: we’ve spoken about maybe learning some things from agriculture around how it diffuses ideas. Are there other things we could learn from the best performers to apply to poorer-performing industries?

BRENNAN: It’s hard to say. For financial and insurance services, which is up there, a big problem is measuring output. What is the value-add in the financial sector? Is it the net interest margin a bank makes? The insurance premium an insurer charges? Superannuation fees a fund charges? Those are the proxies we’re reduced to in order to get a handle on output, and that’s the challenge.

There has been productivity in finance—we bank on our phones now; we don’t go into branches now or spend time at ATMs—there’s considerable productivity growth. But it’s really hard to measure it, and I worry that part of what’s driving the measured growth is just the growth of the industry itself. Indirectly. But who knows.

WALKER: Alright. Here’s Kevin’s second chart.

WALKER: The red bars are 2003–04 to 2023–24—the last couple of decades. The blue bars are the 15 years prior, 1989–90 to 2003–04. 

You see a TFP-growth slowdown in 11 of the 12 market sectors since 2004.

The exception is “arts and recreation services”, although the magnitudes there are not so large that I think you’d want to place too much weight on or interest in that. 

The fact we’ve had this TFP growth slowdown across almost all sectors over the last couple of decades suggests there must be some common causes.

KAPLAN: Is this figure just measuring the slope of the line over the first half compared with the slope over the second?

WALKER: It’s the average per-cent growth per year.

KAPLAN: Yeah, I think that’s what it is.

Again, to me this is one of those examples where it’s great to take summary statistics and use them, but you look at what’s underneath that and it’s just a mess of lines.

When I look across these sectors, I’m really sceptical about the measurement—it’s got nothing to do with how well we try to do it. There are maybe three or four sectors where you can even start to conceptualise what you’re trying to measure before asking if you can measure it.

In the others it’s not even clear what it is you’re trying to measure—Michael gave the example—in financial services, or arts and recreation. Why are we comparing them? And we’re not weighting these by importance. When you weight them, the stuff that matters for the overall economy is what we shouldn’t be paying much attention to in charts like this.

BRENNAN: But there’s something in Joe’s observation, isn’t there? If it tells you nothing else, it tells you whatever’s going on might be broadly based.

If some were going up and some down—your point about whether cost disease is the big story here—your observation, Greg, was that it feels like a productivity reduction within sectors. This looks like some vindication of that view.

KAPLAN: Maybe. But the second half includes 2020, and 2020 across all of them dips down. That’s got to count for something. It’s also got 2008 in all of them, where it also dips down. I don’t know. Maybe.

Or maybe this is just one time series and that’s what it looks like—let’s not over-read it. I don’t know.

BRENNAN: Fair enough.

WALKER: If you started from the assumption that there’s some common cause—or set of causes—slowing TFP growth across these industries, what’s the most obvious candidate explanation?

BRENNAN: It’s hard. It’s hard to find the thing that changed around that time, or has been in continuous change. Are we a more regulated economy or?

KAPLAN: Yeah, but it's not going to be in every one of these sectors. By virtue of looking for something that's across every sector, you rule out a lot of stuff. 

WALKER: Okay. Here's one idea. You take a general-purpose technology, which by definition is pervasive. Something like the ICT revolution. And then you say that it helped lift productivity growth—because it's pervasive—across all these sectors, but then the effects of that had petered out by the turn of the century. 

KAPLAN: Yeah, I think that's a plausible explanation.

It’s probably the only one, because it almost by definition has to be something pervasive, has to be something general. What are you left with? 

WALKER: I don’t know. You can’t really tell a regulatory story. 

KAPLAN: Not really.

You could say, “We’ve become way worse at getting in the way of firms,” but how could that be true in every sector? 

WALKER: You could tell a deeper “ideas are getting harder to find” story, but I don’t think that’s plausible.

KAPLAN: And it’s not that deeply different from the [general purpose technology] story.

WALKER: Right. But also, empirically, I don’t think the “ideas getting harder to find” story checks out. Because you would need to show that the effort we’re putting into research had also dropped, and I’m not sure it has. 

KAPLAN: We’ve got a great test of this hypothesis coming up over the next 20 years—a GPT has just been developed. So either this story’s right or it’s not. We’ll see what happens. 

WALKER: A literal GPT in this case.

Okay, let’s look at the firm level now. This feels like a silly question—it actually feels like a doubly silly question because, Greg, you’ve just taught us about the measurement issues with looking at revenue per employee. But do we know what Australia’s single most productive company is—or companies? 

KAPLAN: Single-highest revenue per worker?

WALKER: I guess.

BRENNAN: Well, it exists, but I don’t know. [laughs]

KAPLAN: It’s probably a shell company somewhere [laughs] with zero workers. Who knows? I mean, by definition a maximum exists.

BRENNAN: Hard to know. But it would be interesting to hypothesise what it would be. It could be a very small firm built around some exceptional individuals—in, say, software licensing or something.

WALKER: Something with low marginal costs.

BRENNAN: But potentially very high revenue.

It could be a firm with high revenue per employee because it operates with a kind of regulatory moat—like it’s a casino and it’s got a casino licence or something. 

Or it could be a large company that sells goods to people and just does it very efficiently. 

That’s part of the challenge in interrogating the data, right?

WALKER: Is you want to know “why?”

BRENNAN: Yeah.

KAPLAN: If you really want to dig down into some of the underlying issues facing Australia, the technically correct answer is an investment shell company invested in property that has a revenue per worker of infinity because it has zero employees, and it generates a huge amount of revenue. And there’s a lot of them.

I’m being a bit condescending here. [laughs]

BRENNAN: So cynical.

KAPLAN: Cynical. But I think it kind of gets to some of the deeper productivity issues.

WALKER: Okay. Do we know which Australian industries have the biggest productivity gaps between the frontier and the laggard companies within that same industry?

BRENNAN: e61 has certainly never put anything out on that, but in principle you could assess that.

It’s something we’ve looked at in the aggregate. In theory you could do it by sector.

Again, there’s an interesting question about: what does it tell you? There would be some sectors where there’s not much of a gap between frontier and laggard—greater compression, smaller standard deviation around the mean. That could be consistent with a story that says there’s really good diffusion. It could also be consistent with a story that says there’s not much innovation.

Equally, where you observe a big gap, it’s the converse: it could be a story where there’s really poor diffusion—or it could be where there’s rampant innovation and firms are shooting ahead, and so at any point in time there’s some real superstars. 

You could look at it over time, I guess, and see whether it’s changing. 

I’m reminded of Arnold Harberger in his presidential address to the American Economic Association. His metaphor was: does productivity growth look like yeast or mushrooms? Yeast is everything rising steadily by the same amount year on year; mushrooms are fits and spurts, weird things sprouting up. His conclusion was that, when you look at the data, it’s much more mushroom-like than yeast-like.

KAPLAN: I think that’s right. I’m going to give a cynical view again, but I think this is really important. There’s a lot of work we can do now looking at these measures across firms. The thing you measure is revenue per worker—that’s what we mean by productivity—and there’s a huge amount of variation across firms within industries.

If you look at longer-run averages and extract a persistent component, there’s still huge variation across firms. What I find interesting about this conversation we’re having is the underlying sense that a high-revenue-per-worker firm is a “good” firm and a low-revenue-per-worker firm is a “bad” firm—high productivity, low productivity.

Some listeners may find it surprising that the way that that data has been interpreted over the last 10 years or so is exactly the opposite. It’s played a role in policy discussions in Australia and policy changes in Australia, and has been really important all over the world: that’s to interpret those differences as mark-ups—as differences in an ability to extract revenue from your customers for the same amount of inputs.

WALKER: Market power.

KAPLAN: Market power. So, here’s what we can all agree on, because this is just data. If you take the distribution of firms in the US or Australia, there’s a huge amount of variation. The mean revenue per worker has gone up a lot over time. That increase has been driven by the firms at the top getting bigger—firms that generate high revenue per worker growing faster than firms in the same industry that generate lower revenue per worker.

But there are two interpretations of that. One is benign—even optimistic—that there are differences in the ability to produce and we’re allocating resources to more productive firms. The other is a nefarious interpretation: aggregate mark-ups or market power have gone up, holding back productivity growth because firms are generating rents and exploiting market power. 

That distinction fundamentally epitomises why we have to be careful about looking at cross-firm data and trying to take away something we can use for policy purposes.

BRENNAN: Do you reckon there’s a sectoral difference in that? As we observed before, in agriculture, you basically have price takers, so if you observe a difference between laggard and frontier in agriculture, maybe it’s more likely to be a productivity story. But a lot of services operate in a kind of monopolistic-competition world—downward-sloping demand curve, some pricing power but not complete—and the bigger question is almost, “What market am I in?”

KAPLAN: Not just your product market; it’s also the input market. So the example you gave—which I think is a great one—take a sector where we think the product market’s competitive and there’s no issue with that—

BRENNAN: Factor markets may not be as—

KAPLAN: But factor markets are not [as competitive], particularly in these industries. Farming is a great example: spatially very concentrated, with low labour inputs, and then you get distortion on the input margin. Ideally, if you really wanted differences in productivity, you’d need a sector which is competitive on both the output margin and the input margin.

The problem is that most of the economy doesn’t look like that, and then you’re confounding productivity and market power. They show up together mathematically as two numbers multiplied together that you can’t tell apart in the data, so it becomes more of a political story about how you want to interpret the same data.

WALKER: Interesting. Okay. I’m going to segue from firms that have been doing well to countries that have been doing well. Inevitably the country I’m going to focus on is really just the United States, because they have genuinely been doing exceptionally well and they’re the country I know most about.

Do you think the median US firm is more productive than an Australian counterpart, or is it just that the US average is dominated by extremely productive outliers like the Metas and the Alphabets?

BRENNAN: It’s a great question.

KAPLAN: Great question.

BRENNAN: I’ve grappled with it a bit—I don’t know why I’ve grappled with it as much as I have, because in principle it’s empirically answerable. We looked at a little bit of data recently that lends weight to the outlier story rather than the difference-in-the-median story.

If you abstract—and that’s always dangerous, taking sectors out—if you abstract from ICT (information and communications technology) and from manufacturing—because in Australia that’s a low-productivity-level sector—then a lot of the gap seems to disappear. It appears there are many sectors where productivity growth from a given base year is more consistent. I’m thinking aloud. That’s probably not answering the question about levels; it’s answering a question about growth over time rather than levels, so it could still be consistent with a story about divergence in median productivity.

So the realtor in Duluth, Minnesota, compared to Wollongong or wherever—are they more productive? I’ve always found that a fascinating question.

KAPLAN: At least coming back to revenue per worker—which is the thing we measure—that’s very much answerable, and it’s something we could look at here.I’m sure someone out there is saying, “I’ve done that and had a look at it.”  I don’t know the answer. 

WALKER: If anyone’s looked at that, email me.

Okay, so Nick Bloom has some cross-country evidence showing that American firms are fantastically well-managed, and in international comparisons Australia is sort of middling on management practices. 

What I want to know is, concretely, how different Australian management practices would look if we converged on US practices. It’s not obvious to me what they do that we don’t do at the moment. Any ideas?

BRENNAN: [to Kaplan] What do you think?

KAPLAN: The survey you referenced is one in which Nick and co-authors asked a bunch of firms in countries around the world a set of questions about their management practices. We should preface it by saying it’s a relatively small survey—about 350 firms in Australia and about 650 in the US—so I wouldn’t want Australian firms thinking this is indicative of how they run their business. Keep that in mind.

If you look across the measures that contribute to the Australian average being lower than the US average, the biggest difference is in incentive structures—the way employees are rewarded.

WALKER: Performance bonuses, etcetera. 

KAPLAN: Exactly. Now, for completeness, there are differences in all categories, but that’s the biggest.

Is that plausible? It feels plausible to me, having spent time in both Australia and the US. But how much that would concretely change output, I don’t know—that’s not something this study gets into.

WALKER: So then it’s not obvious to me why practices like this haven’t fully diffused to Australia. Plenty of Australians go and work in American companies or multinationals. People talk and share information. These seem like simple technologies. Why don’t we have these to the same extent?

KAPLAN: It’s not obvious there’s strong evidence associating that change with firms performing better. That’s another step one would have to take, so I’m a bit hesitant to jump and say that.

WALKER: Okay, so what you’re saying is maybe we don’t do these things for good reason.

KAPLAN: Maybe. Maybe our tax settings are not conducive to it. Maybe our cultural settings among employees are a little different.

BRENNAN: That would be plausible, wouldn’t it? Though I shouldn’t just speculate in the absence of evidence. 

A lot of American managerial practices would rely on a degree of receptivity. If you’ve got a contrary workforce culture, that’s going to be a problem. Maybe that’s an issue—hard to know.

WALKER: So, the US is nearly the only rich country to have had a positive productivity growth experience in the last five or so years. Do we know what it is that they’re doing so well?

KAPLAN: [to Michael] You said it was mostly in the ICT industry—did I hear that correctly?

BRENNAN: Statistically, relative to Australia, ICT seems to be a big part of it.

WALKER: And what do you mean by that?

BRENNAN: A combination of ICT manufacturing, but also software development.

WALKER: Okay. So is this just the AI boom, essentially?

KAPLAN: Could be.

BRENNAN: It could be part of it. Along with chip manufacturing; a bit of Moore’s Law. 

I don’t know how much to make of the COVID response and the immediate aftermath.

One thing about the US response that was distinct was that they didn’t have furlough or job-retention schemes on the same scale we did, and Europe did to an extent. We had the JobKeeper scheme—probably a highly effective scheme for the first few months, but beyond a point it outlived its usefulness in terms of maintaining job matches, which should at some point have been liberated.

The US didn’t really go down that path and did experience a faster productivity-growth rebound coming out of COVID. That’s casual empiricism—it’s not causal—but still.

WALKER: Interesting. So for that reason they might have had better matching.

BRENNAN: Potentially, or greater dynamism across the economy as a consequence. But you’d expect that to recede over time. By now it would be a stretch to blame JobKeeper for sluggishness in the labour market or poor match quality.

WALKER: One more question on the US. When I did my second interview with Ken Henry at the live event this year, he mentioned that in the 1990s Treasury looked at what level of US TFP Australia could aspire to and reasoned it was about 95%. The 5% gap was imposed essentially by geography, if we think about our isolation from major markets.

I don’t know this for a fact, but I think it’s roughly right: say we’re at about 80% of the US level of TFP at the moment—so maybe we’ve got 15% to play with, because we can’t change our geography. What I want to know is: how much of that 15% is “culture”, and how much is stuff policymakers could more proximally influence?

KAPLAN: Some of it is going to be sector or mix as well. I’m not great at numbers, but some of it is that our economy does different things, and there are different levels of productivity.

WALKER: And some sectors are more productive than others. If an especially productive sector has a larger share of value-added, that changes the overall average.

KAPLAN: Correct. And the cultural number—I’d say it’s bigger than zero. [laughs]

I live in the US and spend a lot of time in Australia; there are different cultures. What that translates to in aggregate numbers, I don’t know. Michael’s happy to be fair game and throw a number, but my number is positive. [laughs]

WALKER: Can you give an over–under or something? [laughs]

KAPLAN: It needn’t be positive. It could have been negative. So I’m giving you something—it’s a positive number.

BRENNAN: And as I said before, it’s a gap that’s widened relative to the rest of the world. Now, you might query if cultural differences have widened, but it doesn’t have to explain all of the movement. But I think there’s something fundamentally different about the United States—it’s a fundamentally entrepreneurial in a way other developed economies approximate but don’t fully achieve.

WALKER: You can see where I’m going—I’m trying a process of elimination to work out the fixed factors. 

BRENNAN: Yeah. What’s left? 

WALKER: How much can we play with? And to me, you can influence culture on some margins, but it’s a pretty deep and persistent thing.

KAPLAN: I agree to some extent, and it depends on the time horizon. Over the next two years, sure, culture may not be something we can change. But culture evolves and adapts, and it responds to economic outcomes—sometimes even temporary ones.

We know from people who’ve lived through hyperinflations that 70–80 years later they still have very different approaches to investing and how they perceive economic choices. Economic outcomes and the incentives that things like the tax system give us do affect culture.

If the game is to raise productivity over a longer period, there are policy settings that affect our collective approach to human-capital investment, entrepreneurial activity, and incentive structures within firms, as we were talking about earlier.

BRENNAN: It’s an interesting reflection—and again, this is not an empirical claim. I feel like I’m saying that a lot. [laughs] 

But to back up Greg’s point, what you’d think of as the canonical Australian economic cultural trope of, say, 1978 compared to 2003—over a 25-year period—I would say it changed pretty fundamentally.

The reputation Australians had overseas—if you went to London in that era, in the early 2000s—the reputation Australians had was hardworking and go-getter-type young people. I don’t think that was the caricature of Australia 25 years before.

KAPLAN: I’m too young, but I believe it. [laughs]

BRENNAN: It’s a high-level impression, but that is partly a function of policy change. Obviously culture affects policy and vice versa. But I agree with Greg. 

People probably make the same point about Britain—there was a different culture in the mid-1970s compared to 2000.

KAPLAN: Let me point something out about the US as well on the same token. We talk a lot about the performance of the US in terms of productivity, but the US is a big place.

There’s huge geographical variation in all economic outcomes, including productivity—inclduing within the same industry, even within very narrowly defined industries. 

It’s very different across parts of the US for lots of reasons: different state legislation, different cultures, different levels of government intervention, and different geographic barriers, in the same way as Australia, though not to the same extent.

To answer your question, that would be something one could look at to understand what these maximums are. It’s not something I’ve done, but it would be super interesting to better understand.

WALKER: Great. Let’s switch from my top-down approach of looking at which industries, firms, and countries are performing well, to Greg’s bottom-up approach of what silly policies or obstacles we could remove. This doesn’t need to be an exhaustive catalogue; let’s talk about a couple of the more important or interesting ones.

First, another thought experiment: what’s the smallest set of reforms we could implement to get back to 1–2% labour-productivity growth per year?

BRENNAN: I think it’s not that small, is the truth. My instinct is there are a couple of high-profile, bigger levers, but generally success in this area relies on mobilising on a lot of fronts.

In successful periods of reform, it tends to work that way. Once you’ve moved on a couple of key areas, momentum builds in others. Broad-based tends to be the way to go—it’s more likely to be a lot of little things than two or three big things. That’s my instinct.

WALKER: Sort of the nature of being a frontier economy?

BRENNAN: Partly, yes. If you think about what characterised the Australian economy in, say, 1983—if you date a substantial reform chapter from that point—we had significant resource-allocation issues because of high protective tariffs on trade. We had an inefficient manufacturing sector in certain industries. There were big government business enterprises that were a bit bloated. We had areas without much competition—including banking and aviation.

In that world, there were big things you could do to improve the efficient allocation of labour and resources. We had some obvious misallocations. Today, you might make that observation about, say, the Chinese economy: there would be some obvious areas of excessive allocation of resources in certain sectors.

It’s a harder case to make today. You might say we overweight investment in residential property, and there are a couple of other sectors with some favouritism, but it’s not on the same scale. 

For that reason it’s more likely that what we’re facing is: how each sector needs to innovate to get closer to the frontier, as distinct from a big improvement in resource allocation across the whole economy.

That’s a bit stylised, but it’s part of why I think it’s less likely to be one or two big levers.

WALKER: So it’s government as bottleneck detective, just going around and tinkering with obstacles.

BRENNAN: I think there’s a bit of that.

WALKER: We can talk about the sensible and obvious ideas in a moment, but I’m curious: are there any particularly unusual or ambitious ideas for lifting Australian productivity growth that you’ve come across in your travels?

KAPLAN: For me, the ambitious one comes back to geography.

WALKER: Moving Australia up. [laughs]

KAPLAN: Not moving Australia—I think Australia is in a beautiful spot. [laughs]

It comes back to this bigger question that 40% of our population is sitting in two cities.

That locks up, for the reasons we’ve discussed, the difficulty of being in those cities for many people and the constraints in getting to them. 

If we could unleash other parts of the country to be engines of productivity growth—more broadly than,say,  just mining—there’s a bit of throwing darts, but the potential returns are high.

There’s a role for government because it requires a huge amount of coordination and investment in infrastructure. To me, that would be a long-term bet worth grappling with.

WALKER: So this is potentially the “major new cities” thing, but also densifying existing cities like Canberra?

KAPLAN: I’m not sure if the answer is that we need more cities of two million people, another five-million-person city, or the issue is that we’ve got a bunch of cities with 80,000 people that really should be half a million.

But right now, the set of options for where to live available to a young person, ambitious, wants to contribute to productivity growth in the country—they're pretty limited and constrained by some cost factors. 

Now, I might be wrong—you might blow a bunch of money trying to do this. But if you're asking what's ambitious and non-obvious—well, I don't know how non-obvious that is—but I think that's ambitious, and I think it's probably important if we want to have serious productivity growth over the longer run.

BRENNAN: Yeah, it's high stakes. I mean, part of the challenge is it’s the sort of thing that poorly done just results in a proliferation of grants and tax incentives and relocated government departments to small places. But yeah, I think it’s an interesting feature of Australia, and in fairness, we're comparing ourselves a bit to the US here and not to a lot of other countries, a lot of other geographies. 

But, yeah, where’s the Phoenix? Where’s the Austin, Texas? Where’s the emergent regional competitor, if you like, to the hegemony of the big CBDs? I think that's an interesting question. 

Greg and I were chewing the fat on this, saying, “Well, why isn’t Canberra a city of a million people?” I mean, you could densify that place, barely anyone would notice. It's a great city. It offers a great lifestyle, pretty proximate to both other cities and other features. I don't know. I don't know why.

KAPLAN: It’s got high skills. It’s got an anchor industry already.

BRENNAN: High skills, yeah.

WALKER: Say the federal government just decided to go all in on, okay, let's get Canberra to a million-plus people. What are the actual policy levers? Do you have visas and the condition for the visa is people have to settle in Canberra for two years, or how do you implement that?

BRENNAN: No, I think you’ve got to look at fundamentals. I think it probably is partly about land supply and the ability to densify in the ACT. I think that's a big part of it.

In fairness, that is both a Commonwealth and a territory issue because the Commonwealth agencies have some planning responsibility there. And yeah, it could be that the transport infrastructure plays a role. I’m not a high-speed rail fetishist, but, you know, maybe.

So yeah, you asked for some of the more unusual left field things—they're worth grappling with.

WALKER: Okay. So again, we can come to the more sensible things in a moment, but I did have a question on AI. Say you were Albo and you were bullish on AI. You were fully bought into the AI scaling laws for large language models [laughs], what would you do? What’s the obvious thing to do? Is it to cover the Northern Territory in solar farms and data centres? Or where does Australia's comparative advantage sit in the AI value chain?

KAPLAN: Great question.

BRENNAN: So I think that's yet to emerge. I think it's yet to emerge. I don't think we yet know what the synergies between the infrastructure piece and the AI development and AI usage piece are. Remember, in the year 2000 or around that time, we had a big debate in Australia about whether we wanted to be headlong in ICT—like chip manufacture—and there was a bit of a view that you had to be in that world in order to be an advanced economy. 

I think in retrospect, that was wrong, and Australia was right not to go down that path. 

But it's really hard to know. Are there big spinoffs from being big in the infrastructure like the data centres? I think this is potentially an area where there’s going to be a slightly fuzzy boundary between being a developer of the technology and being an adopter of the technology,. 

We often think of Australia as being a fast adopter of technology developed overseas. But it may be with AI that you can do that up to a point, but you need some domestic capability in order to adapt it and use it well. And I just don’t think we know that yet. 

One of the questions for us is just what regulatory stance we’re going to take, and I think we could do a lot worse than start with a mindset of not trying to invent or speculate about what the harms of AI might be, not to do the kind of dystopian exercise, but just to look at our existing suite of regulatory frameworks that are really aimed at protecting against existing harms and work out how resilient they are to the use of AI and do we need to keep them fit for purpose? I think that's a better place to start than any other, and then I think we will learn as we go.

WALKER: Another random question, I was wondering this the other week, but does anyone know how important the CSIRO is to Australia's total factor productivity? If the CSIRO vanished tomorrow, what does Australia's average TFP growth rate over the next decade or two look like?

BRENNAN: The answer could be zero, but it could be zero partly because of materiality or it could be zero because it's not doing the right things. I suspect it's more a materiality issue.

A lot of the work of the CSIRO, I'm not intimately close to it, but I suspect a lot of it is good work, fits where we would generally say there’s potential market failure around the doing of basic research. So it’s not that it's contrary to TFP or wasteful or anything like that. It’s probably just not of itself necessarily a big driver of it, but I’m sure it’s had substantial benefits, you know, in agriculture, Wi-Fi, there are a range of things that, as a kind of an instrument or an avenue for advancing science in Australia, probably been pretty beneficial.

KAPLAN: Yeah. I'll make a plug for the importance of institutions like the CSIRO beyond what their direct impacts on productivity are. We want to be a productive economy. Someone in this country should know how basic science works. [laughs]

WALKER: [laughs] Okay, so I promised we would leave a little bit of space for the more sensible or obvious ideas. Is there anything that you really want to put on the table in terms of reforms that need to happen to raise productivity growth? Stuff we haven’t talked about? Tax reform is an obvious one. I’m sort of just leaving a few minutes open if there's anything you really want to register.

KAPLAN: I can mention tax.

WALKER: Yeah, go for it.

KAPLAN: Look, obviously, tax is not going to be the route to becoming the most productive economy in the world, but the wrong tax settings can be a barrier to doing that. And I think there are things about the tax system in Australia that are acting as a barrier.

So much of future productivity growth happens within the corporate sector, particularly within large firms where there's smart, talented employees working together on improving and implementing technologies. We don’t have a tax setting in Australia that is conducive to encouraging smart people to want to go and work for large firms as employees. Right now, you get taxed a lot more if you work as an employee than if you run a mom-and-pop business that has very, very low productivity growth, because of the way we tax capital gains, because of other incentives around the way that we tax financial investments.

The level of our labour income taxes— you know, we think of that as just being divorced from productivity, but I actually think it plays a role in that.

WALKER: How big is the magnitude? I agree with everything you’re saying, but I’m wondering what the potential effect is on productivity.

KAPLAN: The difference between doing the same work as an employee versus as the owner of a small business might be as much as 23% of your income. That’s substantial. Accumulated annually over a life, it’s a big chunk more money paid in tax. You might generate revenue, but if we think there’s externalities that come from grouping and agglomerating smart people together under the same roof, not everyone can be a boss. Someone has to work for someone else. 

I’m not saying this is the thing that’s going to change the issues we’ve discussed, but it certainly doesn’t help.

WALKER: It’s on the shortlist of sensible, obvious things to do.

KAPLAN: Yeah. Also, we typically don’t think about tax through the lens of productivity because we don’t think of human capital as something we invest in that’s affected by tax rates. Maybe a mindset shift is needed to start thinking about tax through the lens of human-capital investment and productivity.

WALKER: Great. Anything else?

BRENNAN: Two emergent issues—not the be-all and end-all, but they’d help—are first, the climate transition is important, and we should do it as efficiently as possible. It is a shame we walked away from what was a pretty sensible approach to this, which is pricing carbon emissions. I understand the politics of it, but think back to the Goods and Services Tax: it went through a number of false starts—Paul Keating’s Option C in the mid-1980s; then the Fightback! package, which was knocked on the head electorally—yet within five years it re-emerged as an idea whose time had come.

It’s now 12 years since the carbon price died a death and it’s still showing no signs of re-emergence. It’s not the be-all and end-all—there are many other things needed in energy markets—but it’s an important part of ensuring the most efficient forms of carbon abatement. It should make a comeback at some point.

The second is more frontier, and it’s hard but necessary partly because of the climate transition: road-user charging. By necessity, we’ve got to find some replacement for the revenue lost through the fuel excise. But it is an opportunity to impose a 21st-century pricing model. The fuel excise is a 20th-century pricing approach—it’s crude, across-the-board, it’s industrial-scale. 

We now have the ability to charge for the true cost of road use—congestion, at least in urban areas—on particular routes at particular times of day. It has its political challenges, but it would have a pretty substantial productivity benefit in terms of this shared asset, which is the road network. We could do worse than focus on that.

WALKER: Great. To finish, some questions on the reform era and the process of reform—given your background, these are probably more questions for you, Michael, but Greg, obviously feel free to jump in at any moment. 

Maybe my biggest update in the last 12 months is just realising the ’80s reforms are potentially a bit overrated. I wanted to get your view on this.

Australia credits the high TFP and labour productivity growth we had in the 1990s to the microeconomic reforms of the ’80s. But other frontier economies had high productivity growth in the ’90s as well, and they attribute it to the computer revolution diffusing through the economy and finally winding up in the statistics. 

Why isn’t that the most parsimonious explanation for us as well?

BRENNAN: It’s got something in it. Not every economy experienced that TFP growth in the 1990s, so there’s something to be said for Australia, the US, and a few others’ exceptionalism. I think there was some dividend from the reforms of the ’80s and ’90s.

But remember some of those reforms happened only in the ’90s—even in the late ’90s—national competition policy, for example, so they’re almost too late to explain the TFP surge. 

Does that mean they’re overrated? Not necessarily. In terms of the difficulty of bringing about those reforms, it required pretty substantial effort of intellect and advocacy, but I think also—and it’s a consistent theme that Greg has pushed throughout this discussion—there were reasons for many of these things that weren’t necessarily just about TFP. Bringing competition to domestic banking or reducing tariff barriers on imported cars and textiles were things that were partly about expanding choice and opportunities for Australians.

I don’t think the reform effort had an explicit productivity motivation at the time. There was a general sense we were falling behind in economic performance and needed to do something about that and be more open and energetic and not shield ourselves behind protective barriers. There were broad benefits associated with that.

KAPLAN: Can I add to that?

WALKER: Sure.

KAPLAN: So, I think three things. One, obviously counterfactuals are hard.

But you would think on the face of it that those reforms would have more like a level effect on productivity rather than leading to some sort of sustained period of growth.

But I also think that it's plausible to think that there's an interaction that is potentially more important. If you're going to get some big change in technology and that needs to diffuse around the economy, you need the right settings and market structure to enable that to take place. And I think you could make a case that it was the interaction of the two that contributed to it. And that the counterfactual might not have been, in the absence of those reforms, it would have been much more difficult to reap the benefits, going through the '90s and early 2000s.

To what do you attribute the gains? Well, it's sort of an interaction between them.

WALKER: Yeah, it's interesting. When we caught up a couple of weeks ago, Michael, I think you said that your understanding of the rationale for the '80s reforms was that policymakers were thinking and speaking much more in terms of the level effects, not the growth rate. 

Obviously, the holy grail would be some kind of transformation to the underlying growth rate, right? If you could find policies that lift the growth rate.

BRENNAN: Mm-hmm.

WALKER: And this distinction between levels and rates is not a clean distinction always, but it's not obvious to me that policymakers today, or in the last few decades, but let's just say today, it's not really obvious that we have levers onto the growth rate.

And so, it raises the question of what the role of government is. And we've spoken about this sort of bottleneck detective role, and you've also written about government as sort of a final guarantor or insurer.

BRENNAN: Yeah.

WALKER: Do you have any sort of riffs or takes on this question of: does government actually have the ability to influence the growth rate or is the best we can hope that, you know, every new generation, every decade or so, government has to search around for the next set of reforms to raise the level, and then it's an eternal process of raising the level.

BRENNAN: Yeah. I think there are two questions embedded in it. One is, what is the role of government or the role government can play in driving productivity improvement? The other question is, does productivity improvement happen in level terms or growth rates? And I'm kind of reminded of Thomas Philipon and the work around what looks like a growth rate is really just a series of level shifts—and that's part of the reason why we see plateauing: because we've seen a level shift, we've approximated the new level, we're at a steady state. And that seems to fit the data reasonably well, actually, as an approximation.

When you think about the underlying economics, most of our explanations tend to be a little bit more about levels than growth rates. The exceptions, I guess, are education as an input, human capital, knowledge as a key factor in endogenous growth models, and that sort of thing. I suppose they go more to the growth rate as something that can be influenced.

But I'm alive to the idea that it's very difficult for government... I mean, when I talked earlier about those resource misallocations, that's fundamentally a level story, right? And you can do this in a general equilibrium model, right? You can say, "Here's the resource allocation today. Here's the resource allocation if we remove these various distortionary barriers. We'll get a better equilibrium, and it has this level effect."

The things that go to growth rates, I suppose there's a question about, are we exposed to the frontier? Are we open enough to both trade and investment flows such that we're going to be quick adopters of whatever comes along? Do we have a market that really rewards success and punishes failure? Because if you do, I guess then the best ideas are going to be spread pretty quickly, and that will go to growth rate in the aggregate.

But I agree, it's difficult for government, I think, to have a lever that they’re going to pull and say, you know, "That's going to lift growth by 0.25% or something."

KAPLAN: Yeah, I think adoption's really important. And for adoption, you need price signals to be able to dictate to firms what to adopt and when. And there, I think, governments have a role to play on both sides. Firstly, not distorting those price signals too much, and secondly, making sure that you have the right institutional environment that firms can operate in and see those price signals.

Again, I'm still in the world of there's more that governments can do to mess it up than to actually generate benefits that wouldn't otherwise be there.

WALKER: Okay, so as an example of that sort of institutional setup, maybe something like floating the dollar did have a growth rate effect.

KAPLAN: Yeah, absolutely.

WALKER: Yeah. So if there are opportunities like that in the choice set, we should obviously jump at those. But once you're Australia in 2025, it’s harder to find them…

KAPLAN: Yeah, like if some sector that's ripe for innovation that's unnecessarily regulated so that it doesn't operate like a market, even a market that's with maybe significant amounts of government oversight and intervention, yeah, you could say that there's issues there. 

I mean, one of the sectors we were looking at before was the financial services sector as being a sector that had some of the fastest productivity growth over the last 20 years. That wouldn't have happened without the deregulation reforms because there would've been no signals or incentives in order to innovate in that sector.

WALKER: Okay, two final reflections on the reform era to finish with. So, there's this worry—and I'm guilty of this too because I've spoken about this in podcast interviews—but there's this worry that Australia's economic reform era has ended.