Foreigners, especially Americans, make this joke a lot, but they don't really think through what it means. Actually it provides some really good insights into the Australian character. IANACSP ( I am not a cultural studies professor ) but I was born and raised here, have lived here for the best part of forty years, and have travelled a fair bit overseas for comparison purposes :)
Firstly, stop thinking about criminals and start thinking about inmates.
caveat americanus When yankees think about prison, they probably think about race and drugs. Don't. There are serious issues with racism in Australia, but they have an entirely different character to in America. Instead, imagine a prison full of loyal Mafia dudes who have taken a fall for their Capos and are serving their time, and have no real grief with each other or how they got there.
What do these inmates do? They look out for each other, and try and get through a shitty situation with as much humour and enjoyment as they can. They don't think the guards or the wardens are any better than they are, and largely they just try to stay on their good side and otherwise ignore them. They break the rules (which they don't take very seriously) - smuggle stuff, pinch stuff, do what they aren't supposed to - as much as they can get away with, but if someone gets caught, that's just the breaks. They love their sport, and grow a little weed and brew some beer in a shed out the back while a 'decent bloke' guard looks the other way.
They don't try and rock the boat. If someone stands up and starts yelling about prisoner's rights, or the unfairness of the guards, they are more likely to make fun of them and give them a swift kick in the backside than to start a riot.
And they have an amazingly high tolerance for invasive government. That's just part of the deal. You expect the warden to make stupid rules (this week everyone must piss sitting down!) : you ignore them if you can, and make jokes about them if you can't. You cheer the guy who breaks them and gets away with it, and laugh at the guy who gets caught.
This is the real nature of the Australian laid-back approach to politics : fundamentally, Australians with this character (which is about half) don't see the rules governing their situation as subject to fundamental change. You can get better and worse wardens and guards, but you're still going to be in the nick. An inmate may feel real affection for his particular prison - and get very patriotic when there is inter-prison football games! - but they don't see it as something that belongs to them, something under their control.
Democracy didn't change this very much : it just means we get to elect the guards and the warden! But we will pick the guy who promises to be a good natured guard, not the guy who wants to tear the walls down. And when the warden asks us if we want to change something ( constitutional referendums in Australia are only initiated by the government ) we virtually always so NO, largely just to stick it to him.
But thats only half the story.
Secondly : whenever you have inmates, you have guards and plantation owners (we call them the 'squatocracy') whose wealth depends on the labour of the prisoners. And largely those are the ones who set the character of our government and our institutions.
This is the other half of the Australian character. These people think that all the rest are lazy, and stupid, and venal, and need to be controlled and governed as much as possible. Pick up any Australian newspaper, or listen to any talk radio, and you will see and hear dozens of articles and letters and callers ranting about the need to punish people more, and pass more laws. I don't think Australian parliaments even know how to revoke laws - they just ratchet them up with more and more details, more and more control, more and more punishment.
Law and order sells even better in Australia then in America, but it's not about race, and its not the American thing about property rights, independence, and the right to get and be wealthy. It's a real belief that most people are just bad, and the role of government is to keep them in line.
So there you have it
Half the population thinks that laws are just to be put up with, and the other half think that the first half need to be kept in line. The two halves of the Australian character exist in a symbiotic relationship that gives us daft laws like Conroy's internet nonsense (and speed cameras, red light cameras, rental property inspections, beach inspectors, prohibitions on public drinking, insane restrictions on liquor shops, bans on visiting rock stars, 'Northern Territory Interventions', the list is endless ).
There are other things you need to be aware of, like our profound dislike for intellectuals (the first half think that anyone who is educated reckons they are better then the rest, and the second half can't stand the way educated people keep telling them their laws and punishment aren't working and won't work), and 'tall poppy syndrome' - anyone who succeeds needs to be cut down a peg, except sportsmen, although there is nothing we like better than a disgraced sportsman! - but they pretty much follow from the basic idea.
I love my sunburnt country and its people, but we have one of the most dysfunctional democracies in the world. If we weren't so rich - twenty million people sitting on a fair slab of the world's minerals and arable land - this would be a really crappy place to live.