Listener 19 August, 2000

Keywords: History of Ideas, Methodology & Philosophy; Macroeconomics & Money;

Just before he was struck down by his final illness, 79-year-old Bryan Philpott completed the last of his many research papers. It reviewed the work he done at the Research Project on Economic Planning (RPEP) over its thirty years, first as McCarthy Professor of Economics at Victoria University of Wellington, and then in retirement. The paper reflects an impressive research achievement, but also includes and was intended to include, so he told me a powerful rebuke to the economic policy of the last 15 years. To explain how, requires some preliminaries.

The scientific core of the RPEP was largely concerned with a suite of ‘computable general equilibrium’ (CGE) models and the development of the massive data bank they require. (All largely done on the smell of an oily rag, for the government cut its funding many years ago apparently out of frustration that the models would not give the policy conclusions that the government desired.) I will not go into the detail working of a CGE model, but the reader needs to know they disaggregate the economy into a number of different industries, and thereby into a number of different commodities. In contrast, the standard economists’ workhorse, used by both the crude Keynesians (whom Bryan disliked, because he had been properly trained in England by a Keynesian) and monetarists (whom he loathed even more), models only a single commodity.

It is thus not very good at dealing with substantial shocks to the economy – such as dramatic changes in pastoral prices, oil price, or the exchange rate, or a technological innovation (like finding a big gas field). Such shocks involve changes in the relative balance of production and consumption of the different commodities where the convenient one commodity assumption is almost totally useless. At that point, economists start breaking their economic model into separate commodities and industries, their ad hoc actions clumsily mirroring what the CGE models do naturally. These shocks are some of the most important ones an economy experiences. Because they happen only occasionally the single commodity workhorse usually suffices. But when a shock does occur the CGE model turns up trumps.

The second point is that scientists thinking about the future have a particular approach involving a rigorous methodological framework. In contrast politicians, journalists and non-scientific economists (a genre with which we have been over-endowed) sling together a few anecdotes and tell you what they or their employers want (you or themselves) to believe, or what fits their ideology. The scientific methodology of prediction involves as formal a model as is possible (CGE models are very formal), and the setting out clearly the various assumptions that the model requires. In particular, by changing an assumption one can explore its implications. Retrospectively one can look at a scientific forecast and, without consulting the original forecasters (who are inclined to add ad hoc assumptions to defend their mistakes), identify what when wrong with the predictions.

As it happens, Bryan did not have to identify what went wrong with his 1985 forecasts, which he recalls ‘were regarded at the time as outrageously pessimistic’, especially the unemployment forecasts. In fact by 1990 it ‘was clear that they were all too realistic’. Thus Bryan can be said to have successfully forecast the failure of the Rogernomic economic policies at the time they were implemented, despite the promises of enormous improvement by the advocates.

Rogernomes usually come back and say the economic performance would have been worse if their policies had not been adopted, although these are but anecdotal claims with no scientific underpinnings (rather like their policy analyses, actually). Bryan can reply that in 1985 he also made forecasts based on an alternative economic policy package, and they projected a better economic performance. Whereas under the rogernomes the economy grew at 1.0 percent p.a., under Bryan’s package it would have grown 1.9 percent p.a.

Bryan reports a similar outcome in 1990 for the next decade. He forecast the growth rate reasonably accurate (1.8 percent p.a, when it was 2.0 percent p.a.), while his alternative policy projected 3.4 percent p.a. The implication is that had the sort of polices which Bryan had been advocating in 1985 been implemented, the economy would be over a fifth bigger than it is today. I leave you to work out the consequences of this prosperity, but I give you a hint. The tax policies of the rogernomes gave themselves an income boost roughly equivalent to what they would have received under Bryan’s polices. But the rest of New Zealand would have experienced a similar increase, rather than taking an income cut to pay for the rogernomes’ tax cuts.

The Rogernomes’ promises for better performance under their policies were wildly out of line with actuality and with the scientific forecasts that were made at the time. Which to a scientist, anyway, suggests that their policies were deeply flawed. Moreover there was an alternative policy, and the likelihood it would have given a substantially better economic performance.

Bryan wanted me to write this column. I am sorry he is not here to read it.

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From Listener 19 December, 1998.

Philpott’s Principles

At the 40th birthday of BERL (Business and Economic Research Ltd, New Zealand’s oldest economic consultancy firm), Professor Bryan Philpott, one of the three founders reflected on the economic principles which have dominated his (and BERL’s) thinking.

* The need for the analysis of all significant changes to include the effects at the economy wide level.
* support for low (but not necessarily zero) tariff protection and a role for efficient import substitution industries.
* Stress on the critical, and all pervading, importance of uncertainty as to the future, and of the need to relieve this (as far as possible) by good economic forecasting and economic planning as a substitute for, or a complement to, sole reliance on the market to solve problems related to the future.
* Concern at the destabilising of possibly malign speculation in, and movement of, mobile international capital.
* Tolerance (where necessary and when optimally designed) of government intervention, regulation and control, including the control exercised by the proper integration of monetary and fiscal policy.
Who said there was no alternative?