David Sheppard’s Letter Of July 13, 1984.

This letter is discussed in   What Happened in July 1984: and the Aftermath: (OCR of Original)
Keywords: Political Economy & History;



                                  DEPARTMENT OF ECONOMICS
                                  13 June, 1984
The Rt. Hon. Sir Robert Muldoon
Minister of Finance,
Parliament Buildings,
Dear Sir Robert,
     Thank you for the acknowledgment of my last letter.
     I understand that you pay attention to comments that critics of the Government’s economic policy make on the media. Reluctantly – as I find my own academic work far more interesting – as a public exposure economist and as a critic, it is fitting that I elaborate on one of the comments I made on TV on Sunday night as it is important that you and your advisers understand It. Regrettably, Ian Fraser did not ask me why I saw no reason why Hew Zealand should adopt a ‘financial policy’ which directly conflicts with the conventional accepted orthodoxy of letting interest rates rise to crowd out inflationary trends. I understand why: he did not think, rightly, that most viewers would understand my explanation, and therefore did not wish to solicit my response that conventional orthodox economics is simply designed to explain how a ‘free market’ mechanism works in a world which does not exist. It – neoclassical macro economic theory –  is certainly beautiful; it has a well-ordered determinate structure. Regrettably, however, it is based on premises and postulates which are simply completely at variance w the world in which we live; their treatment of the concept of time is ridiculous; they assume there is some ‘God’, called a Walrasian auctioneer, who makes sure that prices are set so that markets clear, and they seem to have a fixation that we Jive in a one-commodity world, rather than in a multi-commodity world in which many prices are set by the hand of man, the corporate marketing division, and that the adjustment of them is a protracted and expensive business.
     This means that the concept of ‘price’ as expressed by a price index is, as you have recently pointed out in criticising P. Harris’s contentions, often not much better than a vacuous concept. As such, its movements have far more to do with a charge in the distribution of income, that is a change in the rewards paid to various producers of output and services (income relativities) than with serving to eliminate excess demand or excess supply in the marketplace. The only exception to this case is when the price index is relatively stable (not much more than say 2 to 3 percent per annum change. Only then does the national unit of account, the measure of value in exchange, proxy a useful measure of an invariant standard of value in the marketplace. Out of this context, when the so-called indices are bouncing along at rates of increase of say 10 percent or more per annum, our measuring rod of value is distorted, and opportunities exist which are taken up to make price changes rather then output charges a n of appropriating extra profits or extra wages, over and above the amount due for increases in our shares of the annual flow of goods and services produced.
     These contentions, mine, have distinct and different implications for successful economic management .In essence, in circumstances when the price indices are rising at an unacceptable rate, the State simply cannot afford to reject the consideration that incomes, prices, interest rates and exchange rates need to be managed in the collective interest. I point out that there is a new line In economic theory which supports these conjectures. It is called post-Keynesian economics and is advocated by sundry professional economists such as A. Okun, Paul Davidson, A. Eichner, A. Lerner, H. Kalecki, all of whom your neoclassical advisers would be hard-pressed to dismiss as nut cases, in as much as they take the time to consider the argument presented.
     Obviously, however, while these post-Keynesians do produce robust justifications to State-imposed, that is determined, price, income, exchange rate and interest rate settinq, they ado two important qualifications: a) the consequences of the setting must be made on a consistent basis – – arbitrary decisions, that is those which have been made without such an assessment, may well make matters worse; b) such State setting may be used malevolently, and in any event inevitably does create an expense in the form of the State’s appropriation of the right of the seller or buyer to determine the price which he is prepared to take or offer for goods/services available in the marketplace. Liberty, that is the freedom to choose, is also an item of value.
     I will not write more now except this. The key to your advisers’ difficulty in failing to understand why the State must have and at times exercise the right to determine prices in the marketplace is that they have overlooked the importance that Ricardo ascribed to trying to always make sure the national unit of account, the $NZ, is a vital element in the conduct of economic management. If they can be brought to considering this critical concept, then they too will gain some appreciation as to why there is a case to be answered as to why New Zealand should adopt, in certain circumstances, market imperfections to condition their laissez-faire fixation.
                             Yours sincerely,
                             D.K. Sheppard,
                             Professor  of Money and Finance