Some Nationbuilding Economists

Paper to The History of New Zealand Economics Session at the June 2005 conference of the New Zealand Economist’s Association.

Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History;

In the course of describing the evolution of the New Zealand political economy between 1932 and 1984, my book, The Nationbuilders, highlighted four economists: Bernard Ashwin, Bill Sutch, Bryan Philpott and Henry Lang. This paper looks at those economists from the earlier phase of the period, thereby leaving Philpott and Lang and others for a later assessment. By focussing on the period in which economics first became important in the New Zealand policy process, it adds to the first two a number of other economists: particularly Horace Belshaw, Dick Campbell, Douglas Copland, and James Hight.

Gordon Coates was key to this development. He was not an economist. Indeed he was not a university graduate, although he played a key role in establishing Massey University College, honouring his mentor Bill Massey. Yet he understood the importance of expert advice in the policy process. Because the economics profession was developing at that time, and because some of Coates’s toughest problems involved economics, he introduced economists into government, although of course it would have happened anyway, but later.

Joseph Gordon Coates (1877-1943) had entered parliament in 1912, representing Kaipara where he farmed. Following a distinguished war record, he became a cabinet minister in 1919, showed competence and energy, and became Massey’s choice as successor when he died in 1925. Coates won the 1925 election, although he was to lose the 1928 election (despite his party winning the most votes).

As Prime Minister Coates made two important innovations which promoted the development of the economics profession. The first began June 1926 he when appointed Dick Campbell as an advisor in the prime minister’s office.

Richard Mitchelson Campbell (1897-1974) studied at Victoria University College part-time while working in the Department of Education, graduating with an LLB in 1923 and a MA in economics in 1926. He left the Prime Minister’s office in August or September 1927, on a scholarship to LSE, obtaining a PhD for a thesis on imperial preference in 1929. There followed a couple of years in the United States at Cornell University, the Brookings Institute and travelling. He returned to Wellington in June 1931, initially on the secretariat of the abortive all-party Special Economic Committee. When Coates became deputy prime minister on the formation of the coalition government in September 1931, Campbell rejoined his office. Among Coates’s portfolios were works and unemployment. The Minister of Finance was lawyer Downie Stewart who earlier had been Minister of Finance in the Coates government.

Coates’s other innovation was the National Industrial Conference of early 1928, which is noteworthy for three reasons.

First, while tri-partite conferences of business and unions together with parliamentarians and officials are common enough today, the NIC seems the first of it kind in New Zealand.

Second, not only were five academic economists involved (Professors Horace Belshaw (Auckland), Alan Fisher (Otago), Barney Murphy (Victoria) and Bert Tocker (Canterbury), plus David Williams (a lecturer at Massey) but they dominated the conference by opening the discussion after the ceremonials, and providing half of the presented papers (by length), while the valedictory session was closed by Murphy, speaking on their behalf.

Third – even more astonishingly from today’s perspective – there were nine official heads of departments, including all the usual suspects, except there was no one from the Treasury. As Malcolm McKinnon reports, in those days the Treasury was essentially an accounting agency, its focus perhaps more gloriously described as ‘fiscal management’. It was certainly not involved in economic management. That would come later, and is a part of the Nationbuilders story.

Coates returned to office near the deepest point of the Great Depression. Within a few months the new government was contending over the direction of economic policy. On the one hand the agricultural sector, with Coates as their leader, wanted to share the burden from the fall in the terms of trade across the whole economy, and so promoted a devaluation, while the financial sector and Stewart wanted ‘sound’ money and opposed devaluation. (The alternative was a disinflation which presumably would have involved some extremely harsh measures.) Writing in 1936 John Beaglehole said that ‘Coates and his staff sped with eager elasticity from specific to specific. Mr Stewart saw with distinctiveness the disadvantages of everything.’

The political infighting is not well documented. Indeed the biographies of Coates as Minister of Finance are disappointing, perhaps because the writers are historians and do not follow the economic issues. A critical clue may be in a letter Campbell wrote forty years later recalling that on 22 January 1932, ‘Coates was writing to [prime minister George] Forbes to insist on a raised exchange-rate or (safe, then) let it find its own level. This, with a threat of “reconsidering my position …” A VITAL LETTER THIS WBS’ (letter to W.B. Sutch, 6 March 1973, original’s capitals) This is one of the few occasions in the correspondence where he offers a precise date. On at least two other occasions in his correspondence, he also refers to the letter, in one case inserting inside ‘Coates said’ ‘(Campbell at his elbow, Belshaw at Auckland not surprisingly – and indeed superfluously – duly encouraging)’. (6 March 1973) The implication is the event surrounding it were seared in his memory.

Campbell’s remarks have all the hallmarks of the discreet public servant signalling that he was a key player in the decision. Biographies of politicians often give the impression that their heroes came to their great conclusions all by themselves. Those familiar with contemporary policy making are acutely aware of how influential official advisers can be. As this instance shows, the practice is a long established one, if ignored by biographers. This not only gets history wrong, but overlooks that Coates was a superb leader of people, who may have been brighter than Coates but whose ideas he was able to articulate into policy. No wonder they worshipped him.

Twenty-one days later, on 12 February 1932, a Cabinet minute established a committee ‘to examine the economic and budgetary position of the Dominion’. The committee met the following day and ‘each successive day’, submitting its report on 24 February. Presumably it was set up a little earlier (given that four of the five members did not live in Wellington). The members were James Hight (chair), Belshaw, Douglas Copland, Alexander Park who was secretary of the Treasury, and Tocker.

Despite nary a reference to his economic achievements in the Dictionary of New Zealand Biography, James Hight (1870-1958) was one of New Zealand’s most important early economists, appointed to the chair in economics and history at Canterbury University College in 1909, having been a lecturer from 1901. In 1919 the chair was divided, John Condliffe becoming the professor of economics, with Hight remaining professor of history until 1948. It is this and his rectorship of the College from 1928 to 1941 which the DNZB, perhaps understandably, highlights. Yet in the couple of decades he was an economics teacher he brought on such extraordinary students as Condliffe, Copland and James McIlraith (best know for his Course of Prices 1852-1910). Condliffe dedicated his The Making of New Zealand to Hight, and both he and Copland write generously of his first teacher in Hight’s Festschrift, Liberty and Learning: Essays in Honour of Sir James Hight, particularly recalling his commitment to scholarship and research. In the public arena, Hight was a member of the 1912 Royal Commission on the Cost of Living (McIlraith was an expert witness), and the 1919 British Board of Trade Commission on the New Zealand coal industry.

One assumes that Hight was appointed to chair the 1932 Economic Committee because of his status (and perhaps because Forbes was a Cantabrian). Certainly the committee was independent, but the selection was done, one suspects, to rule out particular conclusions. Belshaw was already known to support devaluation, as was Copland (who must have been visiting New Zealand as he was Professor of Economics at the University of Melbourne from 1924 – earlier he had been professor at the University of Tasmania – going on to the vice-chancellorship at ANU in 1944). Copland had published articles advocating a devaluation in various New Zealand newspapers, which were brought together in a pamphlet as New Zealand Exchange and the Economic Crisis in 1931.

It is unlikely that Hight had any public position on the exchange rate question. But did Tocker? Tocker (1884-1964) famously wrote ‘The Monetary Standards of New Zealand and Australia.’ (Economic Journal 34 (December 1924): p.556-75) in which he applied Keynes’ analysis of the Indian monetary system based on sterling balances to New Zealand. He had graduated from Victoria University College in 1912 (but not in economics,which was not introduced until 1919), was an assistant lecturer at Canterbury under Condliffe from 1921-1925, became professor after Condliffe resigned, and held the chair unto 1950 (also following on from Hight as Rector from 1943 to 1948).

The obvious outlet for his opinions was The Canterbury Chamber of Commerce Economic Bulletin, which was published monthly from 1925, with the text usually attributed to ‘The Department of Economics of Canterbury College’. From 1927 to 1938 it consisted of Tocker and George Lawn (1882-197?). (Lawn was a director of the Reserve Bank of New Zealand from 1936-1952 and became its (first fulltime) Economic Adviser from 1937 to 1951. Colin Simkin was his CUC successor.) We do not know how the preparation of the Bulletins was shared between the two.

Whatever, there was surprisingly little discussion on exchange rate policy in contrast to Copland’s activities in 1931. There is nothing in 1931. The February 1932 issue, which was probably written before the Committee sat, does not offer an opinion of the level of the exchange rate, centring on the establishment of the Compulsory Exchange Pool in December 1931. In the year following the Committee’s report, when the exchange rate level was being vigorously debated nationally, the Bulletin only raises the exchange rate is in the context of ‘The Empire Currency Question’ in the August 1932 issue. There is no opinion on the appropriate level of the exchange rate.

Reading the Bulletin gives a sense that Tocker belonged to the finance wing of the economics profession of the time. Even so, he and Hight supported Belshaw and Copland with Park dissenting on the exchange rate change, although the rest of the report was unanimous.

Despite his leadership role at the 1928 conference, and despite being the local professor, Murphy was not on the committee. He belonged to the finance wing. In a 1973 letter Campbell dismisses his old teacher as ‘For me, Barney’s counsel ever was “Like the lovely Akatarawa tree, the economy of NZ just needs to be LEFT ALONE.”’ (1 July 1973, Original caps). These were interventionist days.

Park was not an economist, but an accountant, for this was the accountants’ era of the Treasury. However the report says that Bernie Ashwin was ‘constantly in attendance’. Ashwin was the Treasury’s first and lone economist, and would be so for another decade.

Bernard Carl Ashwin (1896-1975), a year older than Campbell, also studied at Victoria University College. He returned from overseas service to do his accounting qualifications and then, so he said, ‘accounting was becoming so popular … it was clearly advisable to go further’, to an M.Com in economics, possibly VUC’s first economics post graduate. Like Campbell he started in the Department of Education, but he transferred to the Treasury in 1922, and by 1931 was second assistant secretary, a position which seems specifically created for this promising young public servant. In 1930 he had given a paper to the local economic society, which was subsequently published as “Banking and Currency in New Zealand,” in The Economic Record (Nov 1930, p.188-204). A curious feature is that it cites Ashwin’s institution as Victoria University College. This may have been a laundering to separate it from a Treasury view – not the last time that this sort of thing occurred. But did Ashwin have some connection in 1930 other than being a graduate? Perhaps he was a part-time teacher. (His Masters thesis was on Public Finance. It probably no longer exists, but is unlikely to be connected with the Economic Record article.)

Campbell is as dismissive of Park as he is laudatory of Ashwin. ‘If Ashwin had been there, instead of subordinate to Park and [G.C.] Rodda [the Secretaries of the Treasury before Ashwin], at least there’d been an above-average intelligence at the top. There wasn’t.’ (16 August 1973)

No doubt too, Ashwin helped draft Park’s dissent against the devaluation. But what were his own views?

Campbell reports that Ashwin ‘reluctantly’ agreed to the devaluation. One is not surprised. His interests were more in finance than in agriculture (although he came from a rural background). It is reasonable to assume that he was more influenced by his teacher Murphy, particularly as unlike Belshaw, Campbell, and Copland he had no overseas university experience, even though he was as able as they. But his record shows he was a pragmatist rather than ideologue, and could be persuaded by analysis and evidence.

Coates, with Campbell as an adviser, and Stewart were away overseas for most of 1932, at the Ottawa conference. So the devaluation did not occur until January 1933, Stewart promptly resigned and Coates became Minister of Finance for the next three years.

He added to his advisory team Bill Sutch in August 1933 and Belshaw in December 1934 creating what was colloquially known as the ‘Brains Trust’, a not unreasonable description in that he was employing three of the four economists in the public service and they all had doctorates. Campbell said Coates would have liked to employ Ashwin too, but recognised the Treasury needed him more. It seems likely that the separation was not great. Both the Cabinet and the Treasury were in the same building and so the Brains Trust and Ashwin would have been bumping into one another and discussing issues informally (as still happens in Wellington today) even were there no formal meetings. The Public Service Commissioner, the older Paul Verschaffelt (he was 46 in 1933), was also a de facto member of the Brains Trust, which was wielding the economic management functions a decade before the Treasury did.

Because he presided over the depression and because his biographers have been weak on economics, the successes of Coates and his team during the era when he was Minister of Finance have tended to be overlooked. There was no Keynesian expansion (it would have been difficult without a central bank bedded in), but from the devaluation on there were numerous other measures the collective effect of which was to realign the prices, interest rates and debt in the economy to the post-terms-of-trade collapse reality. In doing so it made the fiscal expansion of the subsequent Labour government much more effective. Keynesianism in an open economy requires a coherent price structure.

Coates lost power in December 1935 when Labour was swept to office, although he became a valued member of the war cabinet, dying in office in May 1943.

Campbell left New Zealand to become economic advisor in the London High Commission in February 1935, and to marry his Scottish sweetheart, whom he met when he was doing his doctorate seven years earlier. Although he fades out of the New Zealand economists’ story, he returned to Chairmanship on the Public Service from 1946 to 1953, then went back to the High Commission and retired in Sussex ‘more English than Antipodean’ as he said of himself. Yet his contribution to New Zealand economic policy during the tumultuous depression years exceeded that of all other economists, with the possible exception of Ashwin.

Ashwin went on to be one of the youngest, longest serving, and most distinguished Secretaries of the Treasury from 1939, presiding over its shift from accountants to economists, for by the time he retired in 1955 there were numerous economists in the Treasury. Initially they learned their profession part-time while working as public servants in the Treasury or associated agencies such as the Economic Stabilisation Commission. Later, economic graduates were recruited.

William Ball Sutch (1907-1975) played only a minor role in the period this paper has focussed upon. Being at least a decade younger than the other economists mentioned he turns up later, although perhaps he caught up much of the decade, for he graduated from Victoria University College in 1928 (MA) and 1931 (B.Com). He obtained his PhD from Columbia in 1932 at the age of 25, only three years later than Campbell.

Sutch is seen as a controversial economist because he has written so much including about the 1930s and because his economist activities lasted into the 1970s, whereas those of the others considered here had ceased by 1960. Moreover, as for every other well functioning economist, his ideas develops with events and maturation. (One can, for instance, trace his changing views of industrialisation in the 1950s and 1960s while he was in the Department of Industries and Commerce reflecting his increasing understanding of the problem facing New Zealand.) To criticise him as an economist, as distinct from criticising one of his particular policy stances, requires an evaluation in terms of his times and its orthodoxy. (Other events in his life added to controversy, but here we are concerned with him qua economist.)

In fact, Sutch was an orthodox economist for his times. In the 1930s, the Columbia Department of Economics was the most important in the United States, teaching the dominant economic paradigm ‘institutionalism’, which Yuval Yonay characterises as ‘empirical research, suspicion towards deductive theory, emphasis on the changing nature of economic institutions, habits, and norms, special attention to the divergence of market values (prices) from social values, and the belief in the reality of informed concerted action to improve human welfare.’ Institutionalists trace their origin to Thorstein Veblin. Among the best-known are Gunnar Myrdal, John Kenneth Galbraith and Maurice Clarke, who led interwar Columbian economics, where Sutch was trained.

Younay is implicitly criticising the neoclassical synthesis (often abbreviated to ‘neoclassical’) – a combination of the macroeconomics that Keynes pioneered and the modern theory of markets (including a welfare economics which emphasises their beneficial outcomes), strongly laced with mathematical techniques – which only becomes important in economics after the Second World War. Even so, Paul Samuelson, the key neoclassical innovator and doyen of MIT economics which replaced Columbia’s supremacy after the war, said in 1999 ‘I do not come today to bury institutionalism nor to dispraise it. I believe it lives on as a lively element inside today’s mainstream economics, …’

Sutch could not have much neoclassical economics (other than that which derives directly from Alfred Marshall, who influenced both paradigms). To evaluate him according to the current neoclassical paradigm, would be anachronistic. Today he is criticised most because he is the most vocal and the most remembered, but he was part of the mainstream of his times.

Sutch of course was on the left, although Campbell may have been further to the left in the early 1930s. But neither Sutch nor Campbell were Marxists, both being strongly influenced by Fabian socialism which was anti-Marxist. Bill Sutch’s philosophical foundations may be like British Socialism’s, more influenced by Methodism than by Marx.

Ashwin was to their political right, but all the economists were together in the same paradigm. When orthodoxy moved, all may have been a little stranded. I have seen interventionist policies agreed to by Ashwin, which even today’s leftish economist would have doubts about. The interwar generations had much less faith in the market than today’s economists. We should not overlook their experience of the extraordinary failure of the Great Depression.

So while we may not agree with everything they did, the first economists to enter the public policy service, served New Zealand well. The foundations they constructed of an economy shocked by the Great Depression, were the basis of our best decade of economic performance ever. And they established a foundation for the profession upon which today’s New Zealand economists stand.

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