Energy (Index)

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General
In Stormy Seas: The Post-War New Zealand Economy Chapter 11: Industry and Energy (1997)
Capital and Technological Change: Some International Comparisons From In Stormy Seas Chapter 14 (1997)

Electricity
The Maori Geothermal Claim: A Pakeha Economist’s Perspective (September 1993)
Future Shocks (November 1996)
Risking Dialogue: Electricity Outages Show How Consumers are Powerless (August 1998)
Electric Rhetoric: Sneering Instead of Thinking (July 1999)
Air Force: An Answer to Our Power Needs May Be Blowing in the Wind (March 2003)
Power Games: The Electricity Crisis is the Result of Bad Economics (May 2003)

Oil
Postcard from Arabia (April 2000)
Rhetoric and Iraq: Arab Brothers and Oil Sisters (October 2002)
New World Disorder (April 2003)
A Note on Iraq, Oil and the US Dollar (April 2003)

Economics Of Socialism (Index)

This entry was posted in Index on by .

Keywords: History of Ideas, Methodology & Philosophy;

The Left and Economics: Are They Today’s Conservatives? (May 2002)
What Might A Left Wing Economic Policy Begin to Like? Some Notes (April 2002)
New Zealand in a Globalised World (September 2001)

The Third Way
Road to Damascus: What is the Third Way? And What Were the First Two? (December 1999)
At the Crossroads: Three Essays by Jane Kelsey (June 2002)

Bruce Jesson
His Purpose is Clear: Reflecting a Life of Thought and Experience (February 1999)
Global Warning: What would have Bruce Jesson have said about APEC (September 1999)
Nationbuilding and the Textured Society (Bruce Jesson Memorial Lecture, October 2001)
The Nationbuilders Envoy (November 2001)

Karl Marx
Marks of Change (May 1990)
A Pantheon of Seven …. (March 2000)

What Might a Left Wing Economic Policy Begin to Like? Some Notes

This entry was posted in History of Ideas, Methodology, Philosophy on by .

Keywords: History of Ideas, Methodology & Philosophy;

It is best to think of this as a draft – and very preliminary. Comments welcome. Further of my writings on the left will be found at Economics of Socialism (Index).

The Listener column, ‘The Left and Economics (3 May 2003) elicited a number of the readers of the draft version asking me what a modernised economics of the left might look like. My response was ‘Who me? I’m only an economic columnist’. In any case few would put me among the Left, other than those who are so far to the right they object to the road rules.

However, there may be some obligation to say something more about future directions than I could in the column, for I am not unaware of some of the traditions of the Left and economics. But these are only notes, the sketching of a program.

Let me begin by avoiding the error of starting with policy conclusions. One of the failures of the Left (and indeed New Zealand analysts generally) is to begin at the policy end, which traps them to the analyses which prescribed those policies, so that cannot get to the fundamentals. I am also not going to refer particularly to the New Zealand scene, even though it may be one with which I have a little expertise.

Instead, I begin with the roots of the left-wing economic thinking. As the column says it was a response to nineteenth century industrialisation, as was one way and another, almost all the intellectual developments of the times. The responses might be divided into three major strands. There were the nostalgic such as Proudhon who thought the solution was to return to the past. I shall little more about them, except that perhaps much of today’s Left belongs here.

Then there were the incrementalists, of which the Fabians would be the best know British movement. The incrementalists worked so closely with the dominant economic paradigm that it is sometimes difficult to untangle them from it (or at least to do so is another very large article). Their essence was to work within the existing established institutions to transform the economy in a series of steps to a one dominated by the (national and local) government including social (and cooperative) ownership and direct economic controls and intervention.

The third group of radicals included such different bedfellows as Marx and the anarchists (when they were not nostalgic). Marx saw himself building on the economic paradigm, elaborating it both in a technical analysis and encompassing it in a wider social science. Their essence was a rapid transformation of society by working outside the elite institutions of the existing society. Their ultimate goal was similar to the incrementalists, although there was much divergence within them as to the degree of central government control versus local (typically worker) control.

The core issue was seen to be industrialisation and the destruction it appeared to wreck upon human society as it was then cherished. I dont recall the incrementalists actually saying so, but they probably recognised the benefits of the economic transformation, wanting to change the institutions of economic regulation for better ends. Marx also saw the potential benefits of the industrialisation – for him it was an historically progressive movement. His analysis proposed how eventually the benefits would be reaped by workers in the ‘communist’ state, although he was vague as what this state would be. (We had to wait for Lenin to be more programmatic.)

Both groups saw the industrialisation driven by capitalism, so much so they equated the two, which led to their policy conclusion of – in the famous fourth clause of the British Labour Party constitution – the social ownership of the means of production, distribution and exchange. Marx added to the framework his theory of class conflict. It was helpful to analyse nineteenth century industrial society into capitalists and workers, and Marx enhance this division by extending the class analysis to earlier social arrangements.

From today’s perspective, we may greatly respect the analysis of those times, but things change, and it has less relevance to the twenty-first century. There are three major changes to the picture in this brief thumbnail.

First, industrial society is not nearly so destructive today as it was 150 years ago – not in affluent societies anyway. I shall have more to say about its current destructiveness, but the point is the Left cannot meaningfully use the rhetoric of Engel’s The Conditions of the Working Class in England as if it applies to the vast majority of today’s population. Of course there are pockets of poverty, and larger groups under various economic stresses. But to claim that things are still like they were in the nineteenth century is to alienate reality – and the support of the majority.

Second, a two class society hardly applies today. Of course, one can shoehorn everyone into two boxes with the required labels, but it the result is not very satisfactory. A singular example is Giddens and his The Class Structure of Advanced Societies first published in 1973. (It looks at the various theories of class, rather than the empirical application of the theories). Twenty years later he has lost confidence in the elegance of the theory (or theories), to the point that he abandoned traditional socialism and articulated the ‘Third Way’.

That leads to the third point. Not only is capitalism fluid as far as classes are concerned, but the notion of ownership is fluid too. Rather than explore all the intricacies we simply note here that public ownership of capital can be and has been just as exploitive as private ownership. Moreover countries dominated by some forms of social ownership have been as coercive on their citizens as those dominated by private enterprise – in some cases it has been more exploitive. It is no longer obvious that ‘the social ownership of the means of production, distribution and exchange’, whatever that means, resolves the problems the Left were concerned with, unless the solution defines the problem.

Additionally, private ownership is fragmented into a variety of forms. Perhaps the most loathed nineteenth century form was the passive rentier capitalist, who lived on the returns from capital, but was otherwise idle rather than productive. There are probably absolutely fewer of such people today than there was 150 years ago (if we excluded the retired). Keynes promised the ‘euthanasia of the rentier’ because he saw in a stagnant economy the return on safe investments falling to zero.

What he did not envisage was the central role in a modern economy of innovation and the associated entrepreneurial capitalism. But even were all entrepreneurs loathsome individuals – they are not – there is no gainsaying of their contribution to economic welfare by the introduction of new products, better quality products, and more efficient production (i.e. lower cost, releasing resources for other uses) processes. The entrepreneur provides a major challenge to government dominated economies which are unable to parallel their dynamism. It is true that the government can focus on particular sectors in innovative ways – the Soviet Union built nuclear weapons. But its record of improving the lot of consumers with new, quality, and cheaper goods and services (including shopping services) is poor. The improvements have come from individual entrepreneurs. Keynes saw a continuing role for entrepreneurs, but like Marx and Schumpeter, he had no conception of the technological possibilities which have driven economic growth in the last half century.

Between these extremes of rentiers and entrepreneurs are a spectrum of other types of capitalists, although that perhaps does not capture the importance of corporations. Today, the classical entrepreneur is probably not as important as the business which acts like an entrepreneur, despite being dominated by bureaucrats (although the managers would dispute such a title). It is not in the scope of this paper to discuss the thorny issue of the importance of corporations in innovation and rising economic standards. The point here is simply that the private sector often does it better, in part because the function of the government is to stabilise society not to destabilise it. (Mao’s ‘permanent revolution’ illustrates the point: it did not last long.)

So the nineteenth century problem of industrialisation seems irrelevant to the twenty-first century, which may explain why the Left has lost its economic way. Yet there is another way of thinking about the issue which remains as true today. The Left’s response to industrialisation was about attempting to control the violent technological and economic forces which were transforming society in the nineteenth century. They generally attributed it capitalism, but that was the institutional arrangement which facilitated the forces. I avoid here saying ‘harness the forces’ because that would imply that there was a degree of control over them which hardly existed. Capitalists like to give the impression they are in control, and while for periods they may be, they come and go, while sometimes nobody seems in control. (See Galbraith’s The Great Crash for an example of the impotence of even the powerful American financial establishment during the Wall Street crash.)

During one of the debates that the British Labour Party had over the retention of clause four, it was said that the objective should have been the social control (rather than ownership) of the means of production, distribution and exchange. Providing we interpret ‘social’ with care – as I shall try to below – that implies a far better formulation of the problem: how are ‘we’ to harness the powerful, amazing and potentially creative technological forces, which we saw unleashed with industrialisation and which continue to drive the economy today, for some sort of social betterment? Indeed the social ownership was seen as an answer to the question – albeit with hindsight not as convincing an solution as it seemed at the time.

However the ‘social control’ version of clause four is not really an answer. Even though it leaves much unanswered, ‘Ownership’ is far clearer policy direction than ‘control’, and the formulation exposes questions about ‘social’ which the older one obscured.

What do we mean by ‘social’? It would be very easy to equate this with ‘national’ although the Fabians were committed to a role for local government and Guild Socialism, which grew out of them, wanted workers’ control (as did the more anarchist leaning syndicalism). Moreover we know that nations can be as repressive as has been capitalism.

What we might have in mind is that each person should have as much control over their life as is practical. It would be wrong to take an individualist or volunteerist approach here. Humans are social animals which a solely individualist philosophy overlooks. In any case many of the actions of one person cannot but impinge on others. Now of course individual can encompass voluntary associations but in practice there is a role for collectivist (that is compulsory) associations in the sense that individuals tend to be better at attaining their aims using them for some purposes. (The most obvious one is that without a government setting the framework for economic transactions the economy is likely to work much less efficiently.)

My tendency is to have a minimalist notion of social control which goes something like this. Individuals are usually the best judges of their own interests, even when they make bad decisions, for it is rare that someone else can make a better one. The main exceptions are children, the intellectually handicapped, and addicts, although even here their own preferences should be taken into account as much as is reasonable. I acknowledge the difficult problems raised by the stages of enlightenment: Mill’s argument that an unhappy philosopher is in a superior state to a happy pig. (Even so I find testing, the orchard scene in Brecht’s The Life of Galileo in which the priest argues that it is better for the peasants to have the certainty of a traditional-but-wrong theory of the universe rather than be disturbed by science’s new and better one.) The resolution is a culture (including its education system) which encourages the life long pursuit of enlightenment.

Individuals making their own decisions as far as is possible requires a high degree of social decentralisation. An economic mechanism for decentralised decision making, especially where the opportunities are complex and individuals varied, is the market. This is not to argue it is a perfect mechanism, but it is a good place to start. It requires a sound set of enforceable human rights and a distribution of the underlying resources of society (or a redistributing mechanism) which enables people to unlock their potential. It also requires various laws to make the market work, including solid private property rights.

Now this may be sounding like the prescription of an economic rationalist – or would if I had not mentioned the distributional problem. Perhaps that is why I am not considered on the Left – except by right extremists.

However, the decentralised market will not give as much social control as is possible, or desirable. So there is a need for a series of social institutions to attain this. I am pragmatic about intervention, right from my first full book Social Policy and The Welfare State in New Zealand which defended the welfare state by looking at where there was a ‘market failure’ (to use the jargon of the day), and what could be done to remedy it. In the privatisation debate of the 1980s and 1990s I was not so concerned at the reduction in social ownership but the cavalier way the assets were sold and the incompetent economic arguments used to justify them. I favoured some of the sales, although not where there was a natural monopoly, and have no difficulty arguing for (re)-nationalisation where pragmatic considerations warrent the purchase.

It is not necessary here to go through them all nor the host of resulting policy frameworks for such things as the macroeconomic stance, free trade, competitions policy, environmental policy … However there are some issues which are more central to a left-wing economics program. What the left needs to do is go through the existing economics and evaluate each component of the paradigm in terms of its relevance to effective social control. They will find that what have been treated as powerful justifications for economic rationalism can be turned upon their head, and used to justify quite different policies.

There are also lacuna. The most evident of is the way economists eschew distributional questions. They focus on ‘efficiency’ – maximising economic output, arguing that it is someone else’s function to make the equity decisions. But whom? It is a nonsense to imply that economics cannot contribute to those decisions by the simple act of setting down the distribution implications of a policy (or other) change and, often, measuring it.

The vast majority of policy changes have far greater distributional impacts than efficiency impacts (free trade for instance). Economists have nary a thing to say about these effects, and wander around innocently wondering why a policy that so obviously increases economic output (albeit by a negligible amount) is so bitterly contested by the competing groups, who may benefit or lose amounts far in excess of the output gains. It is not that economics is bereft of the tools to analyse such issues. It is just economists do not generally use them.

Although I have done considerable research on the aggregate distribution of income (and to a lesser extent wealth) and on poverty, I am no ‘bleeding heart’ socialist who sees the issue as redistribution of income and wealth to select groups. Yes, the distribution of the resource endowment (of wealth and abilities) is an issue, but it is not the only issue. It is certainly not about using bad economics to advocate on behalf of some of the poor at the expense of others. (As an indication of the gap between many advocates and reality, consider this: the majority of the poor are Pakeha, the majority of the poor are in households with two adults; the majority of the poor depend on wages; the majority of the poor live in their own housing. How come the bleeding hearts talk only of Maori and Pacific Islanders, single parent households, beneficiaries in rental housing?)

A rigorous approach to income distributional issues leads onto political economy issues. For starters, explain how is it that economists profess to be neutral to distributional issues in their advice, but the majority of the advice favours the richer end of the spectrum? (No, it is not just because most economists belong there too. It also says something about the nature of the policies that economists rail against, and an implicit normative framework behind their explicit positive one.)

Classic class analysis is no longer useful, because social position is so much more complex. (Where would one place a household whose husband is a doctor and wife is a receptionist? Those insensitive to feminism should skip this question, especially as the next one is what if the occupations are the other way around?) There remain tensions which are akin to the traditional class conflict. The most obvious is the contest for control of the work process. This may explain the difficulties that hospitals face, with managers and health professionals disputing as to whom determines staffing levels (although their rhetoric is resource shortages). This suggests that some traditional Left analyses may still have relevance, if it is sensitively adapted to new circumstances.

Then too how is the output constraint to be handled? There is only a certain amount to be shared (although the incentive structure of the economy may influence the amount available). Santa Claus policies do not work: the elves in the North Pole can producer only so much in a year. It is nonsense to claim that (unspecified and analytically muddled) policies of the Left can accelerate economic growth and making Santa’s sack large. Is accelerating growth a left-wing thing? Does the Left want to accelerate growth as it is conventionally measured? Is the quality of the output important? Railing against GDP is not enough, especially as most of the critics do not understand the measure.

What about the location of power, remembering that political power does not exactly align with economic power? Perhaps economics does not have much to say about this – so much the worse for the narrow scope into which the subject has evolved. But the paradigm has something to say about institutional decentralisation. There is a practical need for greater decentralisation of power under MMP, to local authorities as well as individual to prevent political stasis, but the notion of social control propounded here requires it any way. The same point applies to globalisation, which has been going on since the beginning of capitalism. Again the issue is the extent to which there is social control over the process – just as earlier the Left critique was about social control of industrialisation, for the two processes are closely connected.

The approach here is incrementalist rather than radical. But it addresses from the perspective of the existing paradigm, some of the economic issues which might be a part of a Left economic program, especially if the core of the Left’s concern is social control over forces which can be life enhancing but, if unharnessed reduce, individual freedom and welfare.

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New World Disorder: Where Is the World Economy Going After Iraq?

This entry was posted in Globalisation & Trade, Macroeconomics & Money on by .

Listener: 19 April, 2003.

Keywords: Globalisation & Trade; Macroeconomics & Money;

We see only vaguely the world order which will follow the flames of Iraq. The whole episode has confirmed the American (Hard) Right’s suspicions of the old order, based on alliances and multilateral institutions, which Franklin Delano Roosevelt and Harry Truman (and, indeed Peter Fraser) contributed to creating after the Second World War. They argue the case for, what amounts to, an American imperium – a world empire over which it wields unqualified power. With President Bush they have an administration which could pursue such a unilateralist goal, with profound international political and military implications. But as this is only a short economics column, the focus is on the economic and financial ones.

The United States is not as economically powerful as it is militarily powerful. Indeed, there are many who interpret the war on Iraq as the US using its military might to strengthen its economic power, most notably via commanding Iraqi oil, and its financial power, to reinforce the US dollar as the world currency. (There is a parallel argument that it has been using its military to compensate for its relative international political weakness in a heterogenous UN-led world.) Even so, the military and imperial requirements may be a drag on the economy.

The relative economic power of the US may be diminishing anyway. There are grave structural imbalances in the American corporate sector, indicated by falling share prices over the last three years, plus continuing gloomy news on employment, investment profits and bankruptcies. The war expenditures – thought to amount to a not inconsiderable 1 percent of US GDP – will stimulate some sectors. Additionally, in order to strengthening the weakening US economy, the Bush administration is proposing further tax breaks involving almost inconceivable sums. (Whether they will work is another column.) One projection – probably an underestimate – suggests a budget deficit of $US2 trillion over ten years. That is equivalent to around 40 years of New Zealand’s current production.

The deficit means that the US government has to issue US dollar denominated bonds to a value of (roughly) two trillion, which have to go into the world’s balance sheets. In the past, the US dollar has been the currency of international choice, so investors were very willing to hold them. But twenty years ago, when the Reagan administration was similarly increasing the US budget deficit, there was no Euro, which has the potential to be the preferred international currency. Because the European Union is a major part of the world economy, we must expect some reduction in the dominance of the US dollar and rise in the significance of the Euro. However, the US budget deficit may accelerate the shift, as international investors become reluctant to hold so many dollars. (That would drive up US interest rates – ouch!)

It is even possible that the world will return to trading blocks, although an economically powerful East Asia probably wont have its own currency, but straddle the dollar and the euro. The fragmentation of world trading arrangements is a worrisome prospect to New Zealand. The US-Iraq war has put back any conclusion to the Doha round (the latest multilateral trading negotiations), although whether by six months or six years is unclear. In the interim the US ‘Imperium’ is likely to pursue preferential bilateral free-trading deals, especially with those who supported it during the Iraq war. Australia will rank early in the line-up, but New Zealand not, although the Australians have said they will support us in our US trade negotiations. (The cynic would say ‘as much as they can, without undermining their own prospects’.)

That raises very real problems for us, not only because any preference Australia has over New Zealand is likely to affect choices by international investors. More fundamentally, where would New Zealand fit into a fragmenting world economy? The European Union is focussed on incorporating a raft of new members – in any case we have not been paying a lot of attention to that market in recent years. The East Asian economy (centred probably on China rather than Japan) is unlikely to take international initiatives, being too politically heterogeneous and far too busy producing things.

This is why in the sixty years since Peter Fraser, New Zealand has increasingly pursued a multilateralist strategy – politically, militarily and economically. That is where Helen Clark’s instincts lie. But if the new world order has a vigorous American Imperium, as is likely to be pursued by Bush and may continue under a Democrat president, New Zealand may have to alter its strategy. But it is not obvious to what.

Readers will be deluged with prognoses about the post-Iraq-war future, many of which reflect the political preferences of the writer. The ponderings here reflect neither the columnist’s best hopes, nor his worse fears.

******
Some readers’ queries arising out of the column are covered in A Note on Iraq, Oil and the US Dollar

Iraq, Oil and the US Dollar

This entry was posted in Globalisation & Trade, Listener, Macroeconomics & Money on by .

Note in response to questions arising from the ‘Disorder Afterwards’ Listener Column of 19 April, 2003

Keywords: Globalisation & Trade; Macroeconomics & Money;

In the past few weeks I have been asked by a number of people about published opinions that argue the US is invading Iraq in order to get access to its oil, and to strengthen the role of the US dollar, it being noted that a few years ago Iraq decided to settle its oil deals would be transacted in euros.

While such articles appear convincing, I have read other equally compelling articles which argue that the US has invaded Iraq for quite different reasons: it is tied up with Israel; it is a fundamentalist Christian attack on Moslems; confused US domestic political pressures are blindly lashing out at terrorism; the US military wants to demonstrate its might; US business wants the contracts for reconstruction; George W. Bush is settling the humiliation that his father received in 1991 by not successfully conquering Iraq; and so on. Strangely, none argues the invasion has anything to do with Iraq’s alleged cache of weapons of mass destruction.

The fact of the matter is that the US government has not made it clear why it is invading Iraq, and I shall not be surprised if future historians conclude it did not have a clear objective. Perhaps the answer is ‘all of the above’.

So how important is the oil-dollar dimension? As I argued in Rhetoric and Iraq, Iraq’s oil – they have the second largest reserves in the world – is important to world prosperity, but it is a high risk gamble to unlock via an invasion, because it is likely to destabilise the Arab World, and hence the whole of the Middle East supply. At the time of writing, in mid-April 2003, the danger of destabilisation remains real. Even so, it is possible that a significant factor in US thinking has been Iraq oil. Only time will tell if they have got it right.

But what about the US dollar? That is the point of my Listenercolumn of 19 April, written three weeks earlier. The US dollar is the currency of international preference, so it is not surprising that oil – which makes up a quarter of the world’s exports – are traded in it, especially as the US is the world’s largest importer. (As I write this, it occurs to me the countries of European Monetary Union may be – or may soon be – a larger importer. We tend to collect data by individual European countries, so the comparison is not readily available. If this conjecture is true, than it reinforces what I say below.)

There are three functions of money, each of which may – or may not – have a role in the oil market. The first and simplest is that money is a standard of account. This functions occurs when the price of oil is set in US dollars. It may add to the prestige of the US, but it is little advantage to the US economy, since the trade price could be in US dollars, but the settlement could be in Euros.

The second function of money is the medium of exchange, which occurs when the oil is exchanged for currency. US dollars are the most common international medium because the dollar is the currency of international preference. This may result in a small gain of ‘seigniorage’ to the US government, as when a traveller holds US dollar notes, is in effect lending purchasing power to the US Treasury without it paying any interest. It is not in the interests of oil traders to forgo interest, so any cash they hold is quickly turned into interest paying assets (e.g. Treasury bills), so the seigniorage benefits to the US government from using US dollars to trade in oil are likely to be small.

The third function is a ‘store of value’, which includes holding dollar notes because they are valuable (the holder may think the alternative currency is going to depreciate in value), but the notion might be extended to a preference to hold dollar denominated financial assets (some of which will be liquid enough to, in effect, be a medium of exchange). There has been a tendency for the world to hold a high proportion of dollar denominated assets in its balance sheet. As a result it seems likely that US interest rates are slightly lower, and this may be of considerable value to the US Treasury. (Even so, the column argues that the US government interest rate will rise as its debt increases, in order to attract more holders of it bonds.)

When an international actor chooses to settle in US dollars, or hold its balances and investment funds in US dollar denominated currencies, it does so because the US economy is, and for over fifty years has been, the most powerful in the world. It is an advantage to the US to have its dollar used as the international trading and investing currency, but that is not the main reason why it is a strong economy.

The column argues that there may be along term movement towards also using the euro as an currency of international preference, reflecting the growing strength of the European Monetary Union. That might mean that more prices being set in euros, more trading deals using euros in the excahnge, and more euro denominated assets in balance sheets (especially if US fiscal management is seen as incautious).

On the whole, the column discounts that the Iraq war will influence this trend much – one way or another (although, on reflection, it occurs to me that it may speed up the Arab countries’ greater use of the euro).

But even were the world to switch entirely over to the euro as the currency of international preference, US banks would remain active and important (just as today British, French and German banks are important in a US dollar world). However the US Treasury would lose some seigniorage and have to pay higher interest on its debt. So the US would be a little worse off, and no doubt would feel it had lost some prestige.

It is possible that the oil-dollar nexus is the primary reason for the US invasion, but if so it is surely based on miscalculation – the same misunderstanding of the effect of the three functions of money that are also made by the articles that argue that the nexus is the reason for the invasion.

Air Force: an Answer to Our Power Needs May Be Blowing in the Wind

This entry was posted in Environment & Resources, Growth & Innovation, Listener on by .

Listener 5 April, 2003.

Keywords: Environment & Resources; Growth & Innovation;

Lincoln University meteorologist, Neil Cherry, wonders aloud whether New Zealand is too windy to convert its wind power into electricity. Germany with the most wind power installations has winds averaging 6 metres/second. Denmark, the world leader in wind turbine manufacturing, has sites up to just over 7m/s, as has California the biggest wind power state in the US. A typical New Zealand site is 10m/s, which yields at least twice as much power. That means much more stress on the machinery. Half the European made gear boxes on one New Zealand wind farm had to be replaced within the guarantee period (and ten percent of them re-replaced).

Yet we need wind power. With the Maui gas field running down (although part of the reduction will be less petrochemicals exports and other gas fields will maintain domestic supply), the world target of reducing carbon dioxide emissions (which restricts the use of coal), and economic growth which will require more energy, New Zealand needs new electricity production. A particular concern is a few years out, when we may be more vulnerable to a dry year when the hydro-stations cant produce as much.

Wind power is likely to be cheaper than coal (even ignoring the consequences of greenhouse gases) if we can get them up and a-blowing. A major problem is the not-in-my-back-yard syndrome which has meant some prime sites have been turned down for planning permissions because the locals dont want a wind farm. Obviously there are some visually important sites which deserve protection – harbour heads would be near the top of my list – but NIMBYism can get ridiculous, while some of the claims, such that they are noisy, are not supported by overseas experience. There is a proposed amendment to the Resource Management Act before parliament to make planning approval for wind farms easier. (They are not always seen as a negative. The residents of Wellington’s Brooklyn are so proud of their wind turbine that it features as a pavement motif at the local shopping centre.)

There are no up-to-date government electricity projections for New Zealand, but a recent report prepared for the Ministry of Economic Development, Availabilities and Costs of Renewal Sources of Energy for Generating Electricity and Heat, provides some guidance. Depending upon various assumptions it expects that between a quarter and a third of the economically viable renewable energy (costing below 8c/kwh) available by 2025 will come from wind power. (Geothermal will contribute about two fifths, and most of the remainder (about a third) comes from hydro-electricity, with a very small biomass contribution, and solar power still too expensive. There may be only a limited additional contribution to the power supply from coal, because the cheap sources are located away from energy users.)

There is more wind energy available at above 8c/kwh. The total potential contribution from wind power could be as much as 4000MW, a figure to be compared with current installed electricity capacity from all sources of just over 8000MW. (World wind generation capacity stands at 31,000MW. Denmark, with a land area of Canterbury but somewhat flatter, plans to produce half of its electricity from wind by 2030.)

How much of that will be available depends upon costs as well as planning approvals. There is an active program of technological innovation to bring them down. One attempt involves a pilot 500 kW wind turbine at Gebbies Pass near Christchurch, the first of a planned ten. Its 33m two (rather than the standard three) rotor blades are made from laminated wood using technologies first designed for Americas Cup yachts, while New Zealander, Geoff Henderson (the chief executive of the company), has developed a torque limiting gearbox system to even out New Zealand’s strong winds. He initially designed it overseas, and the gearbox has been operating in windy UK sites for years. But he came home to develop it. So there is a couple of local technologies which if they succeed have export potential. (On the other hand all of the other installations are importing overseas technologies.)

Cherry heads Windflow’s board of directors, despite having motor neuron disease which has confined him to a wheelchair, limiting his life in environmental politics. His mind and spirit remain as active as ever, as he finishes off some key scientific papers and works with his family and friends preparing us for his early leaving. Meanwhile, he answers his own question of whether New Zealand is too windy for wind power by leading a practical New Zealand response.

Addnotes

Neil Cherry died in 24 May 2003 a week after he saw the prototype wind turbine commissioned at Gebbies Pass.

I have made a couple of small corrections of fact to the original article.

Being a Public Intellectual

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History on by .

Lawrence Simmons and Brian Easton in dialogue

 

The following is based on a dialogue between Lawrence Simmons and Brian Easton, which took place in early 2003. It is the basis of a chapter in speaking Truth to Power: Public Intellectuals Rethink New Zealand, edited by Laurence Simmonds and published by Auckland University Press in 2007.

 

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

Laurence Simmons: One of the first questions I have is why is there such a feeling of unease about being an intellectual in New Zealand? Is this anti-intellectualism inherent in our culture? Why do many public intellectuals have such a mistrust of admitting their roles in public? Why do they fear the contempt or the mistrust of the people in the street?

 

Brian Easton: There are two issues: one is the anti-intellectualism of the community and the other is the labelling. Even the word intellectual is very ambiguous. Then you’ve complicated it further by introducing the notion of public intellectual. My situation was that until a very good friend said, ‘Oh yes, you’re an intellectual’, I didn’t even think about it, it wasn’t an issue – I just did my thing. When you said that I was a public intellectual, I thought ‘that’s interesting, I wonder what a public intellectual does?’ Behind this is the problem that we don’t actually have a tradition of talking about intellectuals, in the way the French do; and we don’t have, like the British or the Americans, fora which attract intellectuals. If you’re writing for the New York Review of Books I guess you know you’re a public intellectual; if you’re reading the New York Review of Books you are a private intellectual. On top of that, there is an anti-intellectualism in New Zealand.

 

LS: Does that come from our pioneering background, the fact that the country has been made through a struggle with the land – in some respects, a sort of physical struggle?

 

BE: This is a quotation I came across by André Siegfried in his Democracy in New Zealand: ‘Their outlook, not too carefully reasoned, and no doubt rather scornful of scientific thought makes them incapable of self-distrust. Like almost all men of action they have a contempt for theories, yet they’re often captured by the first theory that turns up if it is demonstrated to them with an appearance of logic sufficient to impose upon them. In most cases they do not seem to see difficulties and they propose simple solutions for the most complex problems with astonishing audacity.’  That’s Siegfried writing in 1914. When I was writing about Karl Popper’s Open Society, I found on the imprint page a quote from Samuel Butler’s Erewhon: ‘It will be seen that the Erewhonians are meek and long-suffering people, easily led by the nose and quick to offer up common sense when a philosopher rises among them’. So, as far back as the 1860s, there is that element of anti-intellectualism in New Zealand. In many ways it represents the best of New Zealand, which is ‘give it a go’. But there is a lack of careful, rigorous thinking. We often just grab a fashion: Rogernomics was a fashion, the earlier economic policies were fashions. We don’t think about them systematically and we tend to follow the herd.  

 

LS: Is that partly because we don’t have a body of public intellectuals who are debating these ideas for us; because there isn’t a public forum? Did we partly accept Rogernomics because there wasn’t enough discussion about Rogernomics?

 

BE: It was partly because the way New Zealand was organised then, and indeed now, is that the top few control debate very substantially. It soon became very clear that the penalties of debating were extremely painful, scarring.

 

LS: You questioned Rogernomics consistently. Was the situation made difficult for you personally in some respects?

 

BE: Extremely difficult.

 

LS: To get back to a general question again. One definition that I found of a public intellectual is from Stanley Fish who is an American academic in an English department. He says it is ‘someone who takes as his or her subject matters of public concern and has the public’s attention’. What kinds of people in New Zealand fit that definition? What kinds of New Zealanders become public intellectuals in that sense, do you think?

 

BE: In some ways the answer is not very many, and it happens through idiosyncratic accidents. On Rogernomics, I was in a particular position where I really had no choice. If you were writing, if you were making regular public comment on economics, you took on Rogernomics because it was not a well-thought-through policy. Lots of my colleagues would say today that they were against it too but they didn’t have the platform and they didn’t choose to look for a platform. So my guess is that ‘public intellectuals’ properly defined are a very idiosyncratic group. That reflects the nature of New Zealand, and that we’re small society; so even if we weren’t anti-intellectual we would still have an enormous amount of trouble having a proper debate. We are still a society which is very nervous of having proper debates, we are very nervous of intellectual excellence. It’s not what we say but it’s what we do. I was at the ‘Knowledge Wave’ conference in February 2003. If there was one thing that was clear it was that almost none of the New Zealand speakers were top-flight intellectuals, and none of them were engaging with some very good overseas intellectuals. There was very little opportunity for public debate.

 

LS: Can a public intellectual be independent? Bruce Jesson, someone whom I know you admire, wrote: ‘an intellectual serves society best by maintaining a position of critical independence’. So is it possible for an intellectual to be committed to an established ideology – can there be a Catholic or a Marxist intellectual? Was Bruce Jesson an independent intellectual in that sense?

 

BE: An intellectual always has an intellectual framework, a conceptual framework, and it may be Marxist, or Catholic, or feminist, or whatever. So, in that sense, of course you have an ideology. I belong to the tradition of intellectuals who are very conscious that you’re continually making assumptions. Because there are so few intellectuals in New Zealand, I’m in continuous critical dialogue with myself. What Bruce was talking about there was quite interesting. For a while he was the head of the Auckland Regional Trust, and he got into difficulties with the conflict between the public intellectual and the public servant. Going back to the Fish definition, one could think of, for instance, the Prime Minister as a public intellectual, but the public intellectual, in the Jesson sense, has to be independent of the forces that are dominating society, to be able to stand back critically and say that’s wrong or that’s right in a way that the Prime Minister cannot. I think that’s what Bruce was saying, he was talking about the need to be independent of the various pressures in society, to not be committed to any particular group.

 

LS: What about the nature of the public space that intellectuals occupy. How do you gain access to that space? How does one become a public intellectual in that sense and where does that public space for new ideas and debate come from?

 

BE: The problem is where fora exist. I happen to be very privileged in that I have fortnightly column in the Listener. But there are not a lot of fora, and in some respects the fora have been reduced. That’s partly tied up with the way things have been changing in the last twenty or thirty years. It’s also tied up with very deliberate strategies to reduce fora. It’s not generally known, but I have this documented, that in the early 1990s there were representatives of major pressure groups who were going around newspaper and magazine editors saying you shouldn’t use certain people, shouldn’t give space to certain people; some of the editors appear to have caved in. One woman wrote to me and said that she believed that one newspaper actually had a list of people that were banned, and she was on it and she said I was on it. Over the last twenty years there has been a dumbing down. The sort of place where I see it most is that public debate has shifted from hard copy to television and radio. There’s clearly less and less public debate going on in the print media. I don’t think that’s just because they responded to the pressures mentioned earlier. They’ve actually become less committed to open debate. Blog discussion groups and the like on the web have become increasingly important. During the 2005 election, some were much more lively and more interesting than the formal media, which tended to provide facts laced with stodgy, self-important non-comment.

 

LS: What about the internet and new technologies? You have a website, which you maintain, a very large website. Do you think that the internet and new technologies are going to provide new opportunities for intellectuals, new spaces for intellectuals in that sense, in the dissemination of ideas?

 

BE: My website  is relatively new. What struck me, what strikes me, is the people who come to me and talk to me. I sometimes get people who  have particular obsessions with which they want me to agree. On the other hand, I am currently talking to two people overseas – one a New Zealander and one who may be a New Zealander – who came across the website and wanted me to discuss certain elements in it. It’s extremely valuable to me, in a professional way, for improving my understanding of some important issues. So in one sense what’s happened is that the sort of conversation that once occurred, say in the eighteenth-century coffee house, has now gone onto the web. The other thing is that the website also gives you this enormous range of information. In my case the website is recording my intellectual history. So there is a scholarly process going on. But who can debate? It’s very rare, at least in my area, to have a genuinely open debate: almost invariably the debate is very carefully controlled so certain views cannot be discussed.

 

LS: Yes. You’re not formally attached to any institution, and when you spoke to me you characterised yourself as an independent scholar. Is it possible, in New Zealand, to build a life, a career, as a sort of freelance intellectual – which you seem to have done – outside an institution such as the university? I suppose the question would be: what are the advantages of being outside the university in that way, and what are some of the difficulties involved in building that sort of career, or what are the advantages?

 

BE: The difficulties are enormous. With tenure in universities you have security, you have income, you have support, you have status – all very important things which the independent scholar doesn’t have. Ours is a society in which we don’t believe in class and we don’t believe in aristocracy – unless you’re a professor.

 

LS: Did you make a conscious decision to be outside?

 

BE: No. The universities decided that I didn’t have a contribution to make within them. You’d have to go and ask them why they thought that. One of the advantages – I’m talking here about economics, because it seems different in some other subjects such as literature – but the great advantage in economics is that while university economists are generally extremely isolated from the economy, I’m continually interacting with it. For example, at the Knowledge Wave conference there was not a single university economist. On that day we went to a number of lectures – some were very good – we talked to people in the government and the business community. You get contract work, all around this room are boxes of contract work. So I’m continually interacting. Most academics are very isolated. Having said that, in the 1970s when I held an academic position, I don’t think I was as isolated as the academic of today, so there may either be a shift or it may be a question of character. You know the summary of the academic who’ll say more and more about less and less until they know everything about nothing.

 

LS: You’ve been critical of the standard of debate, economic debate; you’ve suggested in fact that it’s been inferior to what it was two decades ago, three decades ago. Why do you think that has happened? Other educated liberal intellectuals complain about the dumbing down of the media. Is this linked to the dumbing down of debate about economic issues?

 

BE: I don’t fully know. One must recall that when Rogernomics took place there was a very sharp change in the whole mood of the profession. Under Muldoon, everyone hated Muldoon, so it was a time of open debate. When Rogernomics (or economic rationalism) took over, it certainly became clear there were extremely heavy penalties for getting out of line. The penalties could be losing your research grant – it happened to Bryan Philpott, it happened to David Shepard, both professors incidentally. It could be not being invited to a certain government department’s Christmas party. So there was a whole range of repression like that. In the early 1990s there was a very conscious proposal to cut certain groups of people out of public discussion. Go back to the 1970s and list those who were involved in the debate – the list is longer. I don’t know why so many academics withdrew, you’ve really got to talk to them. Economics tends to be within the business faculty, which is much more rationalist than economics. The deans were very discouraging and the appointment process actively discriminated against people who it was feared were not rationalists. Though, that may be a peculiarity of the economics profession.

 

LS: Do you think that the public’s understanding of economics, respect for the economist, has dumbed down or has changed as well? Was someone like Bill Sutch understood more, appreciated more, than someone today?

 

BE: Sutch was unique and my Nationbuilders book is written around him. The way I’ve described the dumbing-down process is this: in the 1960s there was a standard joke, which was that someone wanted to be an economist, but he didn’t have the personality so instead he became an accountant. Nowadays the joke is that he wanted to be an accountant, and he didn’t have the personality and became an economist. Journalists tell me that they found that academics weren’t very helpful. If you had a problem and you went to an academic economist they, on the whole, couldn’t actually help the journalist, so journalists stopped going to academics, who in some sense are independent. If you look at the public debate today it’s primarily driven by business economists who work for financial institutions. Why the academic economists just gave up I don’t know, but that dumbed the debate down. This applies to economics where the debates have been the most vigorous. I don’t know if it is representative.

 

LS: In the 1940s Antonio Gramsci distinguished between what he called traditional intellectuals, and he included priests and teachers but I suppose we can add in writers and philosophers as well, and organic intellectuals, bureaucrats, civil servants, lawyers he cited, and I suppose we would put advertising executives or PR people in there today. Is that distinction still accurate or valuable, and can we distinguish between a traditional intellectual and organic intellectuals, and maybe create a hierarchy?

 

BE: I don’t know that we’d want to. Gramsci is talking about the intellectual as a mind-worker, and he’s looking at all the people who are creative or intellectual and that’s a very wide class. We’re talking about an enormous chunk of the community, perhaps 30 or 40 per cent. He’s saying they can be separated into two groups. Is it a useful separation? I’m not entirely sure. For instance, he has teachers as traditional and lawyers as organic. I know lawyers who are closer to public intellectuals than many teachers, who are very deep thinking about their own profession, who read widely, who send me material that has interested them and they think might be of interest to me. What he might be saying is that there are different functions within the intellectual community. There’s one group, the priests and the teachers, who are in some sense talking about the individual, whereas others are talking about the system. That may be a useful distinction.

 

LS: I suppose the other possible use of the distinction might be to ask, do we believe now that the second type, the organic intellectuals, have taken over? Is it the class of experts, the technocrats who are taking over?

 

BE: Well, they have a very dominant role. Let me give you a very simple case – it was worse in the mid 1980s. In art, there was a fashion for essentially corporate art, because it paid well. There were various rules about corporate art: it had to be big, because it had to be seen, it had to be flashy and so on; it could not touch certain sorts of topics because it would be too uncomfortable. What you have here is Gramsci’s organic intellectuals controlling art. After the share market crash of 1987, there were these massive paintings and nowhere to put them. So the more intimate art, which may not be responding so much to economic issues but to personal issues, became more relevant.

 

LS: Recently there’s been quite an interesting book by Richard Posner, who’s an American appeal court judge. In the book he notes a passing of critical intellectuals from positions of prominence in the cultural lives of the community to more marginalised places in the universities. His argument is that intellectuals have disappeared and they’ve ended up marginalised in universities, and they’ve become divorced from the conditions of social reality which once they dealt with.

 

 

 

BE: I have a lot of respect for Posner and I probably have about half a dozen of his books. But when I saw the reviews of that book I decided that that wasn’t going to be one. In many ways it’s deeply flawed. Some of Posner’s positions are very interesting but difficult. As I recall from reviews of the book, he’s talking about American intellectual life, and I didn’t think it was very relevant to New Zealand. A hundred intellectuals in America is about two on a per capita basis in New Zealand, so we’re not talking about very many. The second thing is that many intellectuals in America make very good money simply because of the bigger markets. If you write a regular column in an American magazine or a British magazine, you get paid well out of proportion to what you get paid here.  If I find another economic writer, even though I don’t agree with them, I will read her or his column to improve my own skills, because I can see the column dealing with problems in an interesting way. Now, there aren’t really any New Zealanders whose column I read regularly thinking, ‘Gee, it’s going to make me a better writer’. On the other hand, for instance, I regularly read the Economist. It has a lot of strengths, and an awful lot of weaknesses, but the main reason I read it is for the skill in the writing: sometimes you think ‘Gee, that’s a nice way to do it’. They’re dialoguing. If you’re in America or Britain, you’ve got a number of people you can read and then think, ‘I want to be in dialogue with them, I want to improve on them’. In New Zealand on Saturdays and Sundays you pick up the papers and you say ‘these columns are all predictable’. They are so predictable, they’re usually all on the same topic, and they don’t usually have a lot of original ideas to express So that’s another consequence of smallness, you don’t have a lot of chances to really compete. You upgrade your skills simply by being pressed by someone else doing better than you.

 

LS: Despite that discussion of the smallness of New Zealand and the restricted possibilities in New Zealand – you’ve remained here, you’ve remained committed to New Zealand culture and society. Have you ever thought of leaving and going overseas?

 

BE: Well I did an OE, and in the 1980s I was offered what amounted to a chair in Australia and I chose not to go. I’m committed to New Zealand. In a later generation, we’re beginning to get a number of people committed to New Zealand who live offshore, because of the net, because of the simplicity of travel and so on, but I’m a New Zealander.

 

LS: Still in the same vein I think, one of the key words that surfaces in your writing is ‘nation-building’. One of your books is entitled The Nationbuilders. You’ve criticised New Zealand’s abandonment of nation-building in the 1980s, and I think you’ve spoken about its infatuation with foreign models, particularly American models. But one of my questions might be, in the wake of the collapse of communism and the proliferation of discourses around the global in which nationalism has become something of a dirty word, what’s the importance of cultivating a sense of nationhood, of building a nation, still in New Zealand today?

 

BE: People belong to communities; that’s one of the most important features about being human. Economics fails when it denies the existence of communities. Now, one belongs to various communities, but, particularly if you’re a New Zealander, one belongs to a New Zealand community. That is a way of thinking about yourself culturally. I find some of the New Zealand chauvinism very uncomfortable, some of the criticism of the Alinghi crew during the America’s Cup racing seemed to me to be just totally unacceptable. On the other hand, there’s a sense in which that’s our community and we can, with a bit of skill, use that community to do well for ourselves. What riddled New Zealand in the 1980s, and what riddles New Zealand universities, is the colonial cringe: that we’re not good enough, that we are second and third and fourth rate. So we take models. Now, I continually use foreign models, but not just those based on the United States. So it’s not the models themselves with which I am concerned but the uncritical use of them, and especially locking on to a particular country; it’s especially unfortunate that probably you can’t get a worse country economically to use as a model for New Zealand than the United States. It’s about a hundred times bigger, for a start.

 

LS: There was a time in the past that we used to compare ourselves with Sweden, for example; when we had a thriving welfare state, we compared ourselves with other small welfare states.

 

BE: Well, yes. Some part of it was chauvinism, and part of it was to see if we could learn from them. One can think, for instance, in the 1960s, a number of people – of whom Roger Douglas was the most important – looked at the welfare states of Europe and tried to import them into New Zealand through the New Zealand super fund of 1974. Yes, it makes sense to look critically and say ‘what have the Swedes got right, and what have they got wrong, what can we learn from them?’ But that’s not the way we do it today. Instead we have this cringe to be obsequious to every passing foreigner, no matter how bad.

 

LS: I think in the past you’ve criticised New Zealand universities for appointing foreign candidates to jobs where good New Zealand ones existed, and because of the problems of having to learn about the culture.

 

BE: What we do is import a person who has probably been trained in an American economy to come and teach New Zealand. There are appalling examples of this. If you wanted to say one thing about New Zealand, it’s that we are a small, open, trading nation. It’s been a part of us. If you want to be a political economist you talk about us being a colony and a neo-colony. Characteristically, most New Zealand textbooks which you use in Stage I are American and they don’t talk about the reality that we’re actually facing. Moreover, because of the colonial cringe we’ve appointed a whole lot of people who are not of high quality – I’m talking about economics. One of the things we need to ask is why anybody would come to New Zealand if they’re as good as they’re cracked up to be? One answer is it’s a New Zealander who wants to come back: I understand that one. But if you get an application from a person from overseas it’s probably because they can’t get a job in America, and it might be because they’re not as good as they pretend to be. If you look at their actual performance they’re not, they don’t know very much about New Zealand and they don’t bother even to learn.

 

LS: You’ve written on the impact of economic policies on Maori, and you’ve been involved in several Waitangi Tribunal claims. Do you think that as a progressive intellectual you can speak for the oppressed, or does the intervention of intellectuals inevitably reproduce the kind of silencing or marginalisation of the oppressed?

 

BE: You always have to be very careful about speaking for somebody. For a social scientist, one of the great advantages of Maori is that we can see them in the data, and use them to contrast with others. But let me talk about another group, which I got really quite tangled up with, who were oppressed in the 1970s: women. I was interested in the role of women in the economy, and I’ve always been, I think compared to many of my colleagues, sensitive to those issues. But some women said to me, ‘no we don’t want you to be involved, we don’t want you to speak on our behalf, so butt out’. So – put it this way – I still do the work, while I don’t always report it. When I’m doing anything I check to make sure that I’m not coming from a male perception, that I’m sensitive to the fact that a woman’s economic experience is often very different. If women ask me to speak I’ll do that for them, or background them. In each case in the Waitangi Tribunal claims, some body (some iwi) commissioned me.

 

LS: Do you have a position on biculturalism?

 

BE: Yes. It depends where you’re coming from and what you’re doing, but we can’t be a bicultural nation because, in one very obvious sense, there are Asians who are not one single culture, there are the Pacific Islanders, who are also fragmented. Pakeha are highly fragmented. Biculturalism not only ignores the other ethnic minorities, it also lumps us all as being English, and we’re not. We’re Scots, and we’re Irish, and we are Jewish, and other non-Europeans beside. So ultimately we’re not going to be a bicultural nation.

 

LS: Is biculturalism then a useful strategy on the way to what we might become?

 

BE: It’s a stage of development, very much tied up with fragmenting from the view of the Pakeha or, really, the British dominance.

 

LS: Let’s turn to the topic of education. We’ve touched on it before, but you’ve focused on education in many of your Listener columns. Again, you’ve documented how, to some extent, the educational system in the 1980s was captured by the economists, was put under pressure to commercialise, and you’ve criticised very strongly this human capital model of education as opposed to education as an investment, which we might regard as an older model of education, or a social entitlement. What suggestions do you have for combating this now prevalent belief that education should be viewed as a commodity, that it’s something that can be commercialised? Is this still a battle to be fought?

 

BE: There’s an enormous degree of pressure to commodify in our society. We really have to resist it. I don’t know anything about combating, I just try and explain these things. One issue that we need to be clearer about is why are we after economic growth, why are we interested in material output? Economists just presume that more material output is better, and we don’t usually ask such questions. The American constitution talks about the right to liberty and the pursuit of happiness. So the Americans have been, for over fifty years, regularly surveying people to find out whether they are happy. One of the oddities of this is that there has not been an increase in happiness in the last fifty years despite consumption per person going up. That’s a really worrying result because economics assumes the more output you have, the happier you are. Instead of looking over time we could ask, are richer people happier than poorer people? The answer is ‘yes, a little’. For instance, happiness relates a lot more to whether you are married, than whether or not you are rich. In one column I said that being married was equivalent to having an extra increase in your income of roughly US $100,000. So your wife is a million-dollar baby, if you think about it that way. At issue is to get people to asking what really matters.

 

LS: Well, I would argue that this view of education is actually restricting choice, that people coming from working-class backgrounds are just not now going to university, for purely economic reasons: they can’t pay the fees or get the loan.

 

BE: Yes, I accept that but I’m saying something else. I’m asking how much we should be driving our education system to be primarily or only for economic purposes. We’re also doing it in the arts, in a whole range of areas we have this drive to make them economic. So, all the time I’m resisting this notion that we should turn students, the education system, into grimy workers. What are the arts faculties doing towards the economy is the wrong question. We could close down all the arts faculties and increase the New Zealand GDP. And yet these faculties are providing something valuable which is not being captured by the economy.

 

LS: Well there have been suggestions to do that!

 

BE: So what happens, what’s your response? Typically, I’m not speaking personally, but typically the response is ‘ah yes, but think of all the jobs that literature creates’, but that’s not the answer. The answer is to think of all the people who are reading novels, watching videos, listening to music and enjoying themselves and are being happy. Whether or not it actually improves GDP or not, who cares? If I want to do anything for education it’s to give those of you who are in education for objectives other than purely commercial ones a bit of courage, a bit of backbone, a bit of argument to say, you know, ‘we actually are doing important things, even if it doesn’t add to GDP’.

 

LS: Well, one of the criticisms one might make of universities is the fact that we have just sat back and let it happen to us in a way. New Zealand universities it seems to me are very conservative.

 

BE: I couldn’t believe what happened to universities in the early 1990s. One could see the train coming down the track, and they stood on the track saying ‘hi!’ You only have to go back to the Hawke report on Post-Compulsory Education and Training to see what was happening. It said we will make no difference between education and vocational training. I would have thought genuine academics would have rioted, but generally they just stood there and watched the inevitable outcome. I couldn’t believe it. Perhaps that’s why I’m not in a university.

 

LS: Well, perhaps that’s a reason why we should have you inside the universities, as a critic. I want to ask you a question now, going back to 1996. You organised the Winter Lectures at Auckland University on the intellectual in New Zealand, and you took your title for that series from Bill Pearson’s widely read essay ‘Fretful Sleepers’. In that essay – he was writing in the 1950s and on the point of coming back to New Zealand – he reflected on New Zealand society as a mixture of colonial cringe, which we’ve talked about, conformity, and inherent puritanism, but decided in the end that New Zealand was better than England, that he would come back. I wonder if much has changed for the intellectual in New Zealand society; if we found ourselves in that same position today would we come back like Pearson did? Has it changed for the better?

 

BE: I’m not an expert on intellectual activity at that time. We’re probably doing better today, especially in particular areas – literature, and the arts generally, for instance. But we could do a lot better. If we don’t we are going to end up as a state of Australia which becomes a state of the US. That’s what the cultural cringe means. It’s much harder within the social sciences than in the arts. Why has it been easier for the arts? If you wanted to be unkind, you could say it is because the arts are so ‘irrelevant’ to the central issues of society, they can actually have the freedom to do these things. The corporate sector has put money into art, and into literature, and performance and so on – I’m not complaining about that – where the amount it puts into intellectual activity is negligible.

 

LS: Let me ask you another question about someone else whom you’ve written about in very warm terms, and who was a friend: Bruce Jesson. You delivered the second Memorial Lecture for Bruce Jesson in 2001, and in that lecture you explored Bruce’s notion of New Zealand as what he called a ‘hollow society’. He argued that the social institutions didn’t develop in an organic fashion from the community, from the people, but they had been imposed form the top down by government decree. In fact, I think I even found a phrase ‘elected dictatorship’ referring to the government in those terms. Do you think that a healthy scepticism of the government, and the role of the government in our lives, is essential as a public intellectual in New Zealand because of this very structure?

 

BE: Can I just deal very quickly with the elected dictatorship? The actual phrase comes from the British Lord Chancellor, Quentin Hogg, in the 1960s, when he was talking about the British parliamentary system. MMP is much less a dictatorship, and one of the things I said in that lecture is that I think MMP is partly filling the hollow society which made the dictatorship possible. Should an intellectual be sceptical of the government? They should be sceptical of everything. There’s a really interesting tension in New Zealand. On the one hand, we have seen the government as a way of doing things: on the other we all do our best to avoid the government. Once, when we had the trailer getting sand I said to my father, ‘Dad, is it illegal to take sand from sand dunes?’, and he said ‘no, it’s illegal if you get caught’. There is a whole tradition of, almost, anarchic libertarianism. In my salad days I was very influenced by social libertarianism, and I have a very natural scepticism of the government. But it is offset by the belief that there is a need for collective action. Sometimes the government has to do it, so there’s no sense that I am a pure anarchist, and I’m certainly not a right-wing libertarian either. But scepticism of everything, basically every statement, you’re testing it, whether it comes from the government, or the corporate sector, or the Maori, or feminists, or whatever. That’s what the public intellectual’s job is, and when you’ve tested it and found it’s true, then you can support it. But very often the main job is to get people to understand better. 

 

LS: Can I ask you a question about the welfare state, which is another topic you’ve written widely on? To a certain extent, in the 1980s and 90s we’ve participated in the collapse of the traditional welfare state, and I don’t think that New Zealand’s the only place that that’s happened. Many commentators have wanted to understand the demise of the welfare state as a consequence of the transition from what they call an industrial to a post-industrial society, the breakdown of the family unit, a shifting labour market and so on. Do you agree with this analysis, or do you think the welfare state still has some future as a notion, or even as a reality?

 

BE: I expect that there will be collective institutions, administrated in various ways by the government. I don’t necessarily think they will be exactly the same as the ones I grew up with. Sitting underneath them are the various types of social objectives which I hope will be with us for a long time to come. So my guess is that the welfare state will continue. There are some practical reasons why. There are two central welfare state institutions in New Zealand. One is the public health system, which came under enormous privatisation pressure in the early 1990s, and yet people weren’t willing to forego it, for there’s no obvious better system. The other is the retirement scheme. It will hold together because while we may be able to think of a better scheme, we can’t actually get from here to there without causing political havoc. Just suppose, this isn’t my view, but suppose that voluntary savings without a government backup gave you the best retirement system. For you and me it’s too late: we can’t get from there. So we’ve got those two elements of the welfare state locked in. On the other hand, there are bits of the welfare state which will continue to go through very substantial change, partly through the changing circumstances, and partly through the new technologies. To give an example, it is said that the Minister of Labour knew the name of every unemployed person in New Zealand in the 1950s, both of them. Now it turns out that’s probably a historical fiction, but it is true that at one stage we had two people on the unemployment benefit. When you move from a situation of two to 150,000, you’ve changed dramatically the way that you’re managing a core part of the welfare state. So circumstances changed. In a funny sense today the Left are the conservatives. They are nostalgic rather than saying ‘look, we’ve got these changes going on, how are we going to cope with them?’ To take another example, how do you cope with a system that has women as well as men? The welfare state was designed on the basis that women were financially supported by men. One of the extraordinary things about the capitalist system is its ability to adapt and to meet needs, and it’s quite clear that the market doesn’t meet all the major needs. The welfare state had a certain philosophical underpinning, which I’ve written about, which I think is deeply valuable. How we meet those philosophical objectives in the long run may be rather different.  So I don’t see us actually going back to the doctrine of a ‘nature, red in tooth and claw’.   

 

LS: Most of us can think of teachers, writers or books that have been influential in our lives, they gave a direction to our thinking. What teachers, writers or books would you name if you were asked that question?

 

BE: It depends how long you give me to answer that. The most important person in my life happened to be my mother, who wasn’t a teacher from that point of view; and then there’s just an enormous plethora of people who have impinged on me in various ways, some personally and some through their books.

 

LS: Can I ask you why your mother?

 

BE: She was just a person who was very intensely committed to intellectual activity, not that she’d ever use the word. I was the brightest kid in the family so she put an enormous amount of effort into me – she put effort into the other kids in other ways. Had she the opportunities that I had, she would have ended up Vice-Chancellor of the biggest university in the country! There was no primary or secondary school teacher that was particularly influential. The one person who was important though, and this is not obvious, is a mathematician, Walter Sawyer. His daughter was in the same class as I was, and he fostered my mathematics. Although I think of myself as a very literary person, I know a lot about science, and I know a lot about mathematics – I love mathematics. If you wanted me to choose the book that really mattered, around about the age of twelve or thirteen I found in the public library an extraordinary set of four volumes called The World of Mathematics by J. R. Newman. Newman got a whole set of papers that had been written about mathematics during the years, and put them together. There are papers written by Archimedes, for instance, there’s Bertrand Russell, and there’s someone I’d never heard of before when I first read him, John Maynard Keynes. What it did was put the mathematics in a social context, so basically I have these very powerful mathematical skills but always in the social context. So that’s the mathematical side. Another person who was really important was Karl Popper. I never met him, but I still read him, partly because I came from the University of Canterbury where Popper taught. It’s from him I learned the importance of being critical. The New Zealander who has influenced me most was probably Bill Sutch. I am in constant dialogue with him. I don’t always agree with what he said, but if you want to think about New Zealand in any sort of serious way as a social scientist you have to read Sutch. He was just so intellectually dominating; he offers ways of thinking about the whole of New Zealand society. So there are all sorts of people like that, and lots of books. I read enormously so all the time I’m being affected by different views. Perhaps that’s the real measure of me as a scholar: I still haven’t stopped learning.

 

LS: As a final question, could you tell me something about the project you’re engaged in at the moment, are you writing a book at the moment?

 

BE: My life is a series of threads that twine together. I have received a Marsden Grant to study globalisation. I have some insights – deeply technical economic insights – which provide powerful ways to think about globalisation. The book is almost complete, although I keep getting new insights so the work never will be. Before I received the Marsden Grant I was writing a book called ‘Transforming New Zealand’, about the economic growth debate. If I can get funding, I hope to pick it up again after the globalisation book is finished. It will be fascinating to see how it changes as a result of the Marsden work. It’s a book about some of the things we’ve talked about such as why we pursue economic growth. Then it will discuss how we can pursue economic growth. In particular, in terms of the first question, it will suggest that economic growth is a subsidiary objective, not a primary objective, and that there are other things that are important. We should be quite willing to sacrifice economic growth for other things – it might be the environment, or it might be welfare and so on. The second part of the book will point out much of the conventional wisdom is nonsense, fashion. Take the Knowledge Wave. Those people who are genuinely committed to knowledge would do well to be sceptical about its commodification. We know virtually nothing about knowledge’s impact on economic growth, even though everyone assumes it does. But it is fashion. One week it’s knowledge, and the next week it’s education, and the next week it’s creativity, and the next week it’s infrastructure, and there are all these people rushing around saying ‘this is the solution to the problem’. You’ll find quite a bit of my writing is just saying ‘we don’t know, but let’s think about the issue systematically’.

The Marsden ‘globalisation and New Zealand’ Project (revised)

This entry was posted in Globalisation & Trade on by .

Revised Version of paper for ‘New Zealand’s Role in World Affairs’ VUW, 5 December, 2003. Published in New Zealand in a Globalising World ed. R. Petman, VUP, 2005.

Keywords: Globalisation & Trade;

In late 2003 I was awarded a three year Marsden Grant to study globalisation and New Zealand’s role in it. This paper sketches the research program, which is primarily driven from an economist’s perspective, but also poses some of the international relations issues.

Globalisation is a topic I have been long working upon, developing out of my earlier study of the New Zealand economy summarised in my book In Stormy Seas: The Post-War New Zealand Economy, whose theme was that the fate of New Zealand will be largely a consequence of what happens overseas, together with our ability to seize the opportunities and manage the problems those events.

The topic presents definitional problems. Many writers avoid defining globalisation analytically, instead characterising it by a series of particular phenomenon such as increasing trade, or capital flows, or logos, or international inequality; or to particular international institutions such as the World Trade Organisation or the International Monetary Fund and the World Bank or the European Union, or multinational corporations; or to particular policies such as free trade, liberalised capital movements, and so on. The London Economist described globalisation as ‘international capitalism’: many anti-globalisers might agree, perhaps adding ‘together with US hegemony’, or even ‘imperialism’.

Stanley Fischer, one time chief economist at the IMF, describes globalisation as ‘the ongoing process of greater interdependence among countries and their citizens’. Joseph Stiglitz, who held a similar position at the World Bank, defines globalisation as ‘the closer integration of countries of the world as a result of lowering transportation and communication, costs, and the removal of artificial man-made barriers.’ Both are focussed on contemporary phenomenon. But it is important to take a historical perspective. Scholars argue that nineteenth century globalisation was in many ways a more powerful and pervasive phenomenon that late twentieth century, at least among peoples of European origin because migration was unrestricted.

Moreover it was not just an inter-nation phenomenon. Indeed it would be ahistoric to think of the states of the beginning of the nineteenth century to be similar to those of today. The modern nation state was a creation of the globalisation process of the times, as it integrated regions and made central government and national markets possible. The ‘United’ States of American became a more meaningful concept when canals and railways brought the states together.

In the end a simple phenomenon-based definition like Fischer’s, may be the most fruitful. We follow Stiglitz, albeit also covering the nineteenth century, with globalisation is the closer integration of nations and regions.

However, for an economist, a definition is not sufficient. We need a process, a mechanism which underpins the phenomenon. The research program is organised around the analytical proposition of globalisation as the consequences of the reductions in the costs of distance.

That these falls have been dramatic is easily demonstrated by considering the world centred on New Zealand. One hundred and fifty years ago it took three months to sail from Britain to New Zealand – carrying goods, people and information. Changes since then has reduced the shipping time to about three weeks, quartering the effective distance in the world. But people, and light valuable goods can fly to Britain in under two days, a reduction of more than 98 percent. Information can be zipped around the world virtually instantaneously.

If these changes are not spectacular enough, think of the changes for meat and dairy products. One hundred and fifty years ago, one could not ship them to Britain at all. The introduction of refrigeration reduced the cost of distance from – effectively – infinity, to a small proportion of the products’ costs of production, and transformed New Zealand’s economy and society.

There is another lesson here. The cost of distance does not diminish uniformly for all products, people, and information. Therein lies its problem, although the technical explanation for which belongs to another paper. Even so a short sketch of the economic analytics may be helpful.

In some useful ways. the costs of distance are analogous to tariffs. The theory of tariffs tells us that while a total elimination of tariffs can be beneficial – in a certain limited sense, under certain restrictive assumptions – a partial reduction may not. The best known example is that a partial free trade agreement need not be beneficial to the participants, if the trade diversion effects are greater than the trade creation effects. Analogously a reduction in the costs of distant (which is always partial) may not be of benefit in all destinations. Much of regional policy is predicated on this outcome, but it can apply also to countries. The regional example also highlights a resolution: if everything is sufficiently mobile then the depressed region can migrate to the prospering one. But in practice not all the population can easily move and the differential labour mobility can compound the region’s difficulties. The same applies between countries, with the additional complication that (nineteenth century Europeans excepted) there are severe restrictions on labour mobility. The implication is that a reduction in the costs of distance, and the consequent increased globalisation, need not be beneficial to all the countries and regions affected.

Of course, very often it is, but there is a tendency to accept the beneficial upsides of any change and grumble about the detrimental downsides. This effect is reinforced by another result, evident in trade theory but which arises much more widely. A technological change can change the income distribution, and make some people worse off. In the case of a fall in the cost of distance, it is not only that the rise in air travel has been a set back for sailors – that is an industry effect, but industries may leave regions with consequent loss of wages to its workers – that is a location effect. Thus there is a considerable political backlash against globalisation, which reflects some of the damage that the process generates to particular workers and regions, albeit without an understanding of the entirety of the process, good and bad.

Another complication is that, as trade theory shows, economies of scales – in the production process or in an industry – undermine some of the clarity of even the limited conclusions of traditional trade theory. But the recent developments involving economies of scale and differentiated product also enhance its relevance to the real world.

In particular an important post-war phenomenon has been the rise of intra-industry trade, where broadly the same product is exchanged between different countries (Germans may buy Renaults and the French Volkswagens). Intra-industry trade hardly existed fifty years ago, but today it makes up about a quarter of the world’s trade, and so is one of the fastest growing parts of it. It cannot be explained merely by comparative advantage – the underpinning notion in traditional trade theory. The relevant concept to describe the new phenomenon is ‘competitive advantage’, although of course a phrase cannot capture all the subtleties of the analysis.

New Zealand has a low involvement in intra-industry trade. Among the industrial nations it is near the bottom (on some measures Australia is a little lower), more like a developing country than a rich one. Undoubtedly comparative advantage served New Zealand well in the past (and undoubtedly we should continue to enhance it by seeking reductions in international barriers to primary product trade). But it seems likely that for long term survival the economy needs to accelerate its intra-industry trade – shifting to a better balance: from comparative advantage to competitive advantage. In my view that is much of what the government’s Growth and Innovation Strategy is about: for the vision implicitly has New Zealand exporting pharmaceuticals to Europe, IT to the US and films to Hollywood as well as importing similar products from them. The strategy’s difficulty is that competitive advantage involves different policies from those appropriate for comparative advantage. (This is in addition to the challenge of creating new competitive advantage industries in an environment where many of the established comparative advantage industries remain successful.) We are only learning what those better policies might be.

Not surprisingly, given my disciplinary training, the Marsden’s research program is founded on the economics of globalisation. However there are some wider issues, which I hope to look at if there is the time and the resources.

One of is the impact of globalisation on culture. There is the possibility of ‘convergence’, where the forces of globalisation eliminate cultural differences, or whether some independence, some choice of national living style, is possible. I am alternately optimistic and pessimistic about this outcome – even in the same paragraph. I am going through a mildly optimistic phase at the moment, after observing that despite over one hundred years of strong globalisation, the United States still contains a number of vigorous cultures within its melting pot, while Canadians are distinct from Americans in numerous ways, despite their closeness to the US and the degree of economic integration between the two economies. This is not to deny that globalisation has, and will, profoundly affect the course of cultural development, and it seems likely that it will extinguish some cultures or meld them into others. The difficulty is – as in most things to do with globalisation – to separate out changes which would happen anyway, from a nostalgia for the past.

A particularly interesting element of culture is the diaspora, those that live outside the geographical boundaries of a culture (or where, in effect, there are no boundaries, as applied to the Jews for more than a millennium). Because diasporas are in part the consequences of labour mobility, they are an integral part of the Marsden project.

A variation on the cultural issue, although also with significant other facets ranging from economics to international relations, is the changing role of the nation state. In many ways nation states are the creation of nineteenth century globalisation. I expect to pay particular attention to the history of Germany, a nation state created in the nineteenth century (it is said that it is the consequence of railways). And yet the same globalisation processes, initially working through the EU, may change the state out of recognition by the end of the twenty-first century. Intriguingly German culture is at least 500 years old, and may outlast the German state.

Nostalgia aside, the changing role of the nation state is arguably the consequence of a need to impose a common rule of economic law in international trade, just as the rise of the nation state in the nineteenth century in part was necessary to create regional economic order. (Think of the Zollverein, the customs union which contributed to the establishment of Germany.) Similarly, increased international economic intercourse is leading to supranational organisations such the WTO. They are a consequence of globalisation not its drivers. (There may be a similar phenomenon of the institutional creation from the international political order.) Those who grumble about supranational institutions often miss the point, which is not their existence but how they function. A useful parallel is how national governments initially acted in the interests of the elite, but how over time they became more democratic and act more in the interests of all. I would have thought the grumblers should be more concerned with the democratisation of the supranational organisations rather than the elimination which their rhetoric often conveys.

Indeed, one might draw a parallel with today’s anti-globalisers and their nineteenth century predecessors, who were concerned with the effects of industrialisation (in part a consequence of the globalisation of the day). That industrialisation was destructive on people and the communities they lived in. The resistors of the day identified the hardship, but they took two broadly different approaches to it. There were those, such as Pierre-Joseph Proudhon, who wanted to reverse the process and return to some sort of (as it happens, idealised) past. But the English radical tradition wanted to harness industry for the benefit of society. Today we live a far more comfortable life than our nineteenth century ancestors because they succeeded. (Karl Marx went further and saw industrialisation as a process which was inherently progressive and would lead to the benefits for the workers. He may have been correct, although the actual path was different from that which he vaguely predicted and some of his followers attempted to enforce.)

The implication of this is that the supranational organisations which the anti-globalisers detest are not so much wrong institutions, but flawed institutions which need to be democratised (although what exactly democracy means in this context has to be clarified.). The optimistic may expect this to happen in due course: the realist may expect a lot of hardship on the way.

It is not obvious that the creation of supranational organisations effectively eliminates nation states. Some interesting analysis by economists Alberto Alesina and Enrico Spoloare argues that middle size nations (that would include New Zealand) perform economically more effectively that larger ones. [1] While there may be economies of size in some economic production processes which benefit large nations’ economies, they seem to be offset by diseconomies of governance. Large nations have difficulty managing the diversities in their population, while smaller economies offset their economic size disadvantage through international trade. The counter-example is the US, which is both large and economically very successful. The authors argue that the US is organised in a very decentralised way, with the implication being that in order to survive as effective nation states, it is necessary that the governance be as decentralised as practicable. If that is true for nations, it may also be true for the world as a whole. A natural unit of decentralisation – but not the only one – is the nation state, which suggests there may be a role for nation states in a highly globalised world albeit, no doubt, a different one from that of today.

Moreover, Alesina and Spoloare’s point out that the existing international boundaries are not inviolate. Indeed there are more than three times as many countries as there were fifty years ago. While this might be seen as a process of decolonisation, the break up of the Soviet Union is an example of what may be better described as democratisation, which might be the ideal of decolonisation.

This analysis, which its authors extend in a number of different directions, is undoubtedly attractive, but it ignores that whatever the strength of markets towards resolving people’s needs, they exist in a context of rules and that different rules give different market outcomes. Size – and military power – may be important in determining how much influence a country has on the defining those rules, and inevitably each will attempt to influence the rules in their own interests. The implication is that globalisation may begin with the economic phenomenon of reducing costs of distance, and there is much economic analysis to follow. But a comprehensive approach requires political and social (and cultural analysis too). Whether the Marsden project (or its researcher) has the resources to tackle these non-economic questions is a matter to be addressed in the future. At the very least it should provide a foundation for others to tackle them.

Even the limited economic focus reminds us that size is not necessarily a disadvantage, providing the economy is reasonably open. Thus it is not only ahistorical to bemoan New Zealand’s size – in the past the economy was more affluent relative to the rest of the world despite being relatively smaller – but the pessimism is not consistent with current economic analysis. Similarly it is ahistorical to bemoan that distance is a major problem for New Zealand’s economic growth – the economy was practically further from the rest of the world in the nineteenth century, but that did not prevent solid economic growth, — and it ignores that distance is diminishing for practical economic intercourse.

Such thinking leads to defeatism, since it suggests there is little option but to grow slowly. (Merging with Australia is sometimes associated with these attitudes, but an Australasian economy would still be small and distant on a world scale.) Instead the evidence says that while size and distance are problems for New Zealand, they also present opportunities.

Just what those opportunities are, is what the Marsden project is about. However the core of the project is to understand the phenomenon of globalisation, not to judge it, and certainly not to come to definitive policy conclusions. But by sharing the understandings of globalisation that the funding enables me to pursue, I hope that my Marsden research project will help New Zealand, and the world, to learn to cope with better, and to control better, one of the most powerful processes shaping the future.

[1] Alberto Alesina and Enrico Spoloare (2003) The Size of Nations (MIT Press).

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Busting Booms: Unrealistic Growth Targets Could Sink Us Again

This entry was posted in Growth & Innovation, Listener, Macroeconomics & Money on by .

Listener: 22 March, 2003.

Keywords: Growth & Innovation; Macroeconomics & Money;

The salutary America Cup image was the sleek black yacht limping back to port. Twice they tried to sail it faster than conditions allowed, the boat shipped tonnes of water, bits broke, and they gave up the race.

Economies can also be like that. In the early 1970s, the National Development Conference projected a growth rate of 4.5 percent p.a. for the economy. Impractical in the circumstances, the economy averaged nearer half the target over the next few years. Today’s calls for an economic growth rate of 6 percent p.a. are probably even more irresponsible, and the demand that New Zealand should return to the top half of the OECD in GDP per capita terms by 2011 is totally unrealistic.

It is so typical of New Zealand commentators to grab numbers from the air, without any understanding of their meaning. The same thing happened in the early 1980s, when New Zealand’s per capita GDP was then at the OECD average (as it had been for almost a decade). Calls to accelerate the economic growth rate, led to policies that reduced our relativity to 85 percent of the OECD average. It is broadly the same ideologies and pressure groups making the higher growth demands today, even to the extent of advocating similar policies. (The big exception is that today’s Treasury is far more realistic.) If they repeat their performance, we could be behind Spain, South Korea, Portugal and, possibly, Greece by 2011.

How fast can the New Zealand economy grow? No one knows, but it is possible to think about the question systematically. The last major attempt was a ‘National-Sectoral’ projection published by the Trade Development Board in 1991. Here is a simplified account of what was done.

The economists asked each sector of the economy (such as manufacturing) what was its sustainable growth rate. Typically, the domestically oriented sectors said they could grow at virtually any rate if the domestic economy did. Some asked for subsidies – they always do. Some drew attention to government policies which were practically inhibiting their growth. (For instance, today the biotechnology sector might say that the regulatory framework had high compliance costs compared with key overseas competitors).

The export sector responses were more restrained. Some might said their sustainable growth depends upon the growth of world markets. (If one is exporting to saturated markets in Australia, then the exports are likely to grow at about 4 percent p.a. at most.) Others – most notably farming, fisheries, forestry – mention the practical biological limitations on their supply-side. Some sectors cite supply restraints from other sectors – energy supply may prove to be a bit of a problem, while the tourist sector worries about the availability of hotels and the capacity of airports.

And of course there may be specific labour shortages – not all skill deficits can be quickly resolved – in addition to a total labour constraint. Similarly there may not be sufficient investment to meet all the requirements. (Can we build the power stations, hotels and airport extensions in time?)

The economists then took all these various sectoral projections and used a quantitative model to assess to what extent they were consistent with each other and an economy as a whole. (Would there be enough labour, enough investment, enough savings? Would the assumed prices ensure that sectors would be profitable?) After some iterations – going back to sectors where they seemed over-optimistic – the study ended up with an overall economic growth rate.

I do not place great emphasis on the precise quantitative growth rate of the projections. If targets worked, the Soviet Union would have been an economic success. But the exercise does assist thinking systematically about economic growth, rather than depending on fantasy.

The 1991 study concluded that it would take almost twenty years to return to the top half of the OECD (The 1991 slogan was ‘10 in 2010′). The stretch growth rate was about 4 percent p.a. In the 1990s the New Zealand economy grew about as fast as the OECD (3 percent p.a.) so there was no significant movement up the OECD relativities. Perhaps the growth targets were over-optimistic, perhaps the government’s policies inhibited their attainment.

Meanwhile, the capacity to carry out such national-sectoral projections was run down. Thinking systematically about the growth of the economy was not popular in the dominant economic ideology of those times.

I do not know what the conclusions of a National-Sectoral projection exercise would come to today. But we are unlikely to be able to turn the ship around much faster than in 1991. Certainly the sorts of demands being made by the strident but uninformed commentators look quite unrealistic. They need to remember that trying to sail a boat – or an economy – too fast, can turn a boom into a bust.

After Uncle Sam

This entry was posted in Listener, Political Economy & History on by .

Contribution to a Listener feature article “After Uncle Sam” by alister Bone, 15 March 2003.

Keywords: Political Economy & History;

The most likely scenario for a major and early demise of American financial and economic hegemony would be that the financial fundamentals of the private sector are already ruined, and that Bush’s tax cuts creates a government deficit which is as damaging to the public sector. This would be reinforced by the depleting resource base – especially for oil and water – which, coupled with an extraordinary vigour and optimism, has been the foundation of US economic development.

The outcome, perhaps after a devastating inflationary depression, would be a tri-polar world, the other two components being the European Union (soon to be a bigger economy than the US anyway), and East Asia. (The current thinking is that, rather than Japan, China – already the 11th largest economy in the world – would be the pre-eminent player. One summary is that China is going to turn international manufacturing into a commodity.)

The US dollar would cease to be the world currency (the euro is the obvious alternative) which would undermine the US dominated IMF and possibly other world economic institutions (the World Bank and the WTO). Under very pessimistic assumptions there could be an end to the international economy’s open trading regime and a return to the fortress economies of the 1930s.

Even if the open regime trade continues, there will be less emphasis on the notion that self-interest (especially the US one) reflects the world’s general interest. (In any case there has to be more attention to environmental issues.) Characterisations of economics as based on an idealised US economy will end. The dominant ideology in economic and political theory is likely to be moderated by pragmatism on one hand, and a commitment to social values on the other – ironically a shift towards Bush’s father’s promise of a ‘kinder gentler society’. Almost certainly there will be a greater component of ‘oriental’ values and experiences in world thinking, although English will continue to be the dominant language.

After Uncle Sam

This entry was posted in Globalisation & Trade, Listener on by .

Listener 15 March, 2003.
This was a response to an invitation to envisage a world in which the United States was not as dominant economically.

Keywords: Globalisation & Trade;

The most likely scenario for a major and early demise of American financial and economic hegemony would be that the financial fundamentals of the private sector are already ruined, and that Bush’s tax cuts creates a government deficit which is as damaging to the public sector. This would be reinforced by the depleting resource base – especially for oil and water – which, coupled with an extraordinary vigour and optimism, has been the foundation of US economic development.

The outcome, perhaps after a devastating inflationary depression, would be a tri-polar world, the other two components being the European Union (soon to be a bigger economy than the US anyway), and East Asia.. (The current thinking is that, rather than Japan, China – already the 11th largest economy in the world – would be the pre-eminent player. One summary is that China is going to turn international manufacturing into a commodity.)

The US dollar would cease to be the world currency (the euro is the obvious alternative) which would undermine the US dominated IMF and possibly other world economic institutions (the World Bank and the WTO). Under very pessimistic assumptions there could be an end to the international economy’s open trading regime and a return to the fortress economies of the 1930s.

Even if the open regime trade continues, there will be less emphasis on the notion that self-interest (especially the US one) reflects the world’s general interest. (In any case there has to be more attention to environmental issues.) Characterisations of economics as based on an idealised US economy will end. The dominant ideology in economic and political theory is likely to be moderated by pragmatism on one hand, and a commitment to social values on the other – ironically a shift towards Bush’s father’s promise of a ‘kinder gentler society’. Almost certainly there will be a greater component of ‘oriental’ values and experiences in world thinking, although English will continue to be the dominant language.

Frankenstein’s Corporation: Why the Cult Of the Manager Is So Dangerous.

This entry was posted in Business & Finance, Governance, Listener on by .

Listener 8 March, 2003.

Keywords: Business & Finance; Governance;

Underneath the world economy’s financial crisis is one of corporate governance. A decade or so ago there was considerable confidence that the best way to run the great businesses of the world (and just about everything else) was the way in which they were run.

Consider the following apparently noble sentiment expressed to a business ethics conference in 1999: what a chief executive ‘really expects from a board [of directors] is good advice and counsel, both of which will make the company stronger and more successful; support for those investments and decisions that the interests of the company and its stakeholders; and warnings in those cases in which investments and decisions are not beneficial to the company and its stakeholders.’ They proved weasel words from the chief executive of Enron, the thoroughly disgraced company which went on to disgrace its auditors. And if Arthur Anderson has also fallen over, another of the great auditing firms is being sued for an almost as reprehensible lack of integrity.

If supervising boards dont seem able to supervise, and auditors to audit, management consultants are struggling, most prominently the doyen, proud McKinsey whose internal management system is being criticised (just as they have criticised everyone else’s). Much of the ‘independent’ advice investment analysts give to shareholders, proves to be primarily in the interests of the analysts’ employers. And there are widespread calls for stricter rules on the composition of company boards, who are meant to represent shareholders but, as best, represent only some of them. Brian Gaynor has pointed out that two boards of New Zealand’s top ten companies fail to meet the NZ Stock Exchange standards, and only five would meet the tougher standards proposed by the British Higgs committee. Another local campaigner for tougher, shareholder-oriented, standards is banker Joseph Healy in his recently published Corporate Governance & Wealth Creation.

Once private sector governance seemed so sound that it was the basis of the reforms of the public service, replacing the notion of public service in favour of private sector models in which the cupidity of Enron’s managers were but an extreme. Fortunately our public audit service has proved far less corruptible, not only because it has maintained its notion of public service, but because the Auditor-General is a servant of parliament, not the managers he is meant to be checking on.

Even so the cult of the manager dominates. This is nicely illustrate by a Wellington District Health Board report ‘process for developing organisational values’, which advocates the establishment of ‘values [to] reinforce the purpose of an organisation’. The document, steeped in logical confusions, nowhere mentions that for over two thousand years the medical professions have been grappling with value issues (remember Hippocrates), perhaps demonstrating the upstart management profession is ethically challenged. The question may be, dear general reader, obvious to you, but in case a manager is reading this column, one asks ‘how on earth does a hospital have any meaningful values, if it ignores those of the people who actually provided raison d’etre for its existence.’ Doctors, nurses and technicians are way down the hierarchy in the document, when it lists ‘planner, funder and provider of health and disability services’, and in the phrase ‘our key constituents viz communities (including patients), staff and providers.’So the ‘staff’ are divorced from of ‘us managers’, are they? The document goes on to claim that values will ‘give it [the organisation] a soul’. Excuse me, I’d have thought that was God’s prerogative.

Sometimes managers give the impression they are out of control and subject to no one. The Wellington board’s last annual report shows that the number of non-medical managers earning more than $100,000 almost doubled from 16 to 28 in the year. But is it more managerially top heavy than other DHBs? Would not that be an interesting set of comparative statistics to collect? But the survey would be developed by management consultants, who would favour over-management.

I have seen it in other reports. The consultants propose increased management systems (creating more jobs for their profession and more friends for future consultancies) in order to control the professionals – without any recognition of their burden nor evaluation of the effectiveness. No wonder there is widespread dissatisfaction among professionals at the management imposed on them. More than one dedicated professional has said they cannot bear to be treated so badly, and are off overseas or into retirement.

And what do the managers do, as well as imposing extra controls on the real workers? Corporate plans, and ‘mission statements’ despite a survey that found seven out of ten senior business managers ignore them. And ‘values statement’ as Frankenstein like, managers aim to give their organisation a ‘soul’. I reckon that instead using the resources that produce such documents for hip replacements would be of greater value.

Governance (index)

This entry was posted in Governance, Index on by .

Keywords: Governance;

Note, this index only covers direct governance issues. Indexes which cover some issues indirectly are Education; Globalisation; Health Reforms; Maori.

Public Sector Governance
Crisis in the CRIs (October 1994)
Systemic Failure (December 1995)
The Wild Bunch?: An Inquiry is Needed to Restore Treasury’s Integrity (August 1986)
Dispirited News (February 1997)
Accounting for a Difference (May 1997)
Public Finance Act (July 1997)

Out of Tune: Even the Officials Admit the Health Reforms Were Fatally Flawed. (December 1997)
Money for Jams: the Government Response to Roading Reforms is Commercialisation. (January 1998)
Pressure Points: When Accountants Reign Supreme (June 1998)
Two Styles of Management (July 1999)
With A Whimper: Put Public Service Back in the Public Service (August 1999)
The Cult of the Manager: Those Who Can, Do; Those Who Cant, Become Managers (February 2000)
Value Added (March 2000)
Official Channels (April 2001)
Something Rotten: The Ship of State Keeps Striking Leaks (August 2001)
The Treasury and the Nationbuilding State (December 2001)
Does Professionalism Matter? In Health and Education it Still May (April 2002)
Centrifugal Forces (May 2002)
Cutting Off the King’s Head: The Bill of Rights and the National Library and Archives (May 2002)
Does Professionalism Matter? (NZIPA Paper) (June 2002)
Frankenstein’s Corporation (March 2003)
Review of Valuation Guidance for Cultural and Heritage Assets, a Treasury Report. (May 2003)
Performance Anxiety: Why Incentive Systems Often Fail (July 2003)
University Financial Statements, Operating Surpluses, and Student Fees (July 2003)

Local Government
That ‘D’ Word: What are We Voting for this Week? (October 1998)
Low Politics (October 2001)

Private Sector Governance
Law of the Jungle: Is Ours a Market Raw in Tooth and Claw? (June 1998)
Tales of SOEs: A Review of Books About Corporatisation (January 1999)
A Hubris of Managers (November 2001)
Guard Dogs That Fail To Bark (April 2002)

Also
The Commercialisation of New Zealand
The Whimpering of the State: Policy After MMP

Regional Economics (Index)

This entry was posted in Index on by .

Local Government
Low Politics: Local Government and Globalisation (October 2001)
That ‘D’ word. What are we voting for this Week? (October 1998)
A Tale of Two Cities (September 1996)

Regions and Globalisation
Auckland in A Globalised World (September 2001)
Innovation and Growth in Nelson (June 2002)
Canterbury and Globalisation (March 2002)

See also The Globalisation Index

Maori studies which involve region al analysis are:
The Far North (June 1993)
Ninety Mile Beach (March 1991)
Western Bay of Plenty (October 1995)
The Chatham Islands (September 1993)

**********************
Footnote for Listener 9 May 1998

BOOSTING THE ECONOMY
Jim McAloon’s very readable Nelson: A Regional History, describes “boosterism”, when nineteenth century locals put up provincial development projects, which were not very financially viable, but from which the advocates would benefit from fees, contracts, and property speculation, even if the investment failed.

Shortly after the 1991 “mother of all budgets”, a couple of public relations consultants from a minister and a major interest group, visited our media editors. They asked the media to stop using certain commentators who were considered too pessimistic. Stout independent fellows, the editors rejected such pressures but some (not all), concluding that caution were not boosting the nation’s prospects, instructed their journalists (so they told me) not to use the commentators.
Thus the economic debate has been distorted, with many of the public hearing or seeing only part of the spectrum. Journalists, no longer talking to everyone, became increasingly dependent upon commentators who were advocates for their employers. Financial journalism became limited and elementary errors more frequent. Boosterism is now a national phenomenon.

The Best Deal: How Should We Deal with Monopolies?

This entry was posted in Business & Finance, Listener on by .

Listener 22 February, 2003.

Keywords: Business & Finance;

Economists have an ambiguous stance towards monopolies. Is the advantage of being one ‘the quiet life’ (John Hicks) or are they the key to technological innovation (Joseph Schumpeter)? Are the profits they make unfair, or is the problem that they distort the price system? There is a sort of compromise in the view that all businesses seek to be a monopoly, but the competitive process frustrates them. But what steps have to be taken to make sure the competitive process works?

Until the 1980s New Zealand regulated monopolies by a creaky and hardly comprehensive pro-competition legislation, various interventions – most notably price controls, and the public ownership of many of the most prominent monopolies. The view was that often the New Zealand market was so small that a monopoly was inevitable, and any misbehaviour could be resolved by public control.

As a part of reforms of the 1980s, many of the public monopolies were sold off (sometime without any consideration of the competition implications), the interventions were abandoned (with particular attention to removing of artificial barriers to entry) although there remains reserve powers of price controls, and the legislation was replaced by the Commerce Act of 1986.

There was a concerted attempt to neuter the effectiveness of the anti-monopoly provisions of the Act, led by the Business Roundtable which, like an Orwellian pig, grunted ‘public monopoly bad, private monopoly good’, a view based on that there is no need for public intervention because private monopolies are undermined in the long run by technical change. Most economists would broadly agree with the latter proposition, but observe the opportunities for profit and distortion in the medium run are substantial.

There were further attempts in the 1990s. The most outrageous proposal was that anti-competitive mergers should be allowed if they increased efficiency. Every economist knows ‘efficiency’ is difficult to define conceptually, is even more difficult to measure, and that merging companies would promise efficiency improvements which they would not deliver (already a common – and repeatedly broken – promise to shareholders during takeovers). The effect of the proposal would have been to allow virtually all mergers, whatever the public interest.

The New Zealand competitions regime is described as ‘light-handed’ regulation. Basically it involves the removal of all barriers to entry by potential competitors and a reliance on the competitive process unless outcomes are really disastrous. The approach’s strength is that it requires little intervention from the government, so does not have to second guess business.

Its weakness became increasingly apparent in the 1990s (notably from the continuous litigation between Telecom and other telecommunication providers). The most obvious problem is the ‘natural monopoly’ or ‘common carrier’ where market and technological conditions are such that there is only one room for a provider. There is only one phone or electricity line to a house, and each region is likely to have only one port or airport. Because New Zealand’s market is small, natural monopoly type situations probably occur here more than in the economies we try to imitate.

Since 1999 the government has addressed various specific issues with changes in the electricity industry legislation and the introduction of a telecommunications commissioner, while price controls have been proposed for some airports.

But the problem is not confined to lines and ports. Consider the Air New Zealand-Qantas merger. It appears that the domestic air travel system means that there will be one dominant provider. Any other airline is marginal (and perhaps, as in the case of Ansette, unprofitable). The effect of the merger may increase that dominance, and make alternate provision even less attractive. (The same story – perhaps less strongly – may apply to Trans-Tasman and long haul routes from New Zealand.) However the Commerce Commission may allow a merger if it considers the detriment from the loss of competition is outweighed by other public benefits.

But it is also possible the Commission may disallow the merger even though there are considerable public benefits, because our light handed regulatory regime cannot deal with natural monopolies. For instance, it may be that some sort of price control may protect the public from rapacious charging of a dominant corporation in one market, while allowing the capturing the public benefits in others.

In the case of the creation of Fonterra, the government seems to have decided that the Commerce Act would prohibit the merger of the two big dairy companies and the Dairy Board. So it passed legislation overriding the act. That is a perfectly acceptable approach – in the end only the government can decide on major public interest issues – but it was not part of a comprehensive policy framework. As more opportunities for potentially beneficial monopolies arise we are likely to end up with a pragmatic, but Heath Robinson, approach to their regulation, rather than a coherent one which gets the best deal for New Zealand.

Competition and Monopoly: Index

This entry was posted in Business & Finance, Index on by .

Highly Concentrated (February 1981)
The Stock and Station Agent Industry (November 1995, but originally written in 1986)
The Public Interest in Competition Policy (October 1989)
Risking Dialogue: Electricity Outages Show How Consumers Are Powerless (August 1998)
Electric Rhetoric: Sneering Instead of Thinking (July 1999)
The Air New Zealand-QANTAS Merger: An Application in the Public Interest? (December 2002 )
Waccy Economics: Are there clear rules governing government investment? (September 2003)
*************
Footnote for Listener 13 March 1999

It was Watties

Twenty-five years ago a colleague, Tony Rayner (now, alas, dead), received a letter from a large New Zealand corporation complaining that he had described them as a “monopoly” in a first year economics lecture. We were not concerned by the reporting – lectures are public events, although students must distinguish between the presentation of an argument and the presenter’s views. We were aghast because surely Watties was a monopolist.

About the same time, Watties took on a young accountant, David Irving, who eventually rose to chief executive, retired, and has just written (with Kerr Inkson) a book about his time with the firm. The book, It Must Be Watties, reports Irving’s view that the company was indeed a national monopoly then. It goes on to describes the travails that the firm went through, as the economy opened up and firms became subject to the pressures of competition, here and in its new export markets. Eventually, intensely nationalist Watties was taken over by the giant transnational Heinz, which previously had been its main competitor. For those interested in the impact of market liberalisation, this business history is a must-read.

Abstract Of Research Proposal for Marsden Fund Application 14 February, 2003.

This entry was posted in Globalisation & Trade on by .

Diminishing Distance: New Zealand in a Globalising World

Keywords: Globalisation & Trade;

Globalisation is the greatest challenge that economies and nations in the world economy face today. It impacts on where people can work and live, what jobs are available, where investment occurs, and the ability of the nation state to control its destiny – the very foundations of nationhood. It generates both prosperity and disruption, with an uneven impact. Globalisation is not new. It was as significant – some argue moreso – in the nineteenth century international economy. New Zealand is a response to that globalisation, and its destiny is intimately tied in with future globalisation.

There is a plethora of studies on the globalisation but very few attempt to define and study it in any rigorous analytic way. Instead, they usually accept some phenomena, policies, or institutions a fact and write about their implications. Why these phenomena occur are rarely considered. Instead this research proposal is premised on an analytic foundation that globalisation is the consequence of reductions in the costs of distance. Falling transport and related costs change where industry can function and where people can live. Their effects are reinforced by economies of scale (the increased market from lower distance costs enables the reaping of falling costs as production scale increases, and the concentration of production in fewer plants) and increased factor mobility (an increased ease with which capital, labour and technology can relocate itself geographically).

The intellectual novelty of this research proposal – the extraordinarily powerful analytic insight – is that there is an analytic analogy between the impacts of the costs of distance and the impact of tariffs, so that standard international trade theory can be modified (apparently with little loss of generality) to provide the foundation for analysis. However, advanced versions of the models are necessary. As well as incorporating economies of scale and factor mobility income, distributional implications have to be addressed, as does intra-industry trade (the same product is exported and imported between two countries as when Germans but Renaults and the French buy Volkswagens – about a quarter of world trade today is IIT, up from almost nothing 50 years ago). Recent research shows under these more general conditions, outcomes such as the location of industry between different nations may not be as determinant as in the traditional international trade models. (This has the very important policy implications of to what extent – and how – can a country exploit this indeterminism to its own benefit?)

Additionally, in the last decade economists have given increasing attention to institutional frameworks (such a laws) and common understandings (such as social trust) at the national level. This perspective extends to their international equivalents such as the IMF and the WTO, albeit they are early (and not always just and democratic) ones. Thus the analytic foundations provide the basis for the issues which are the popular concerns. It is possible that those foundations will also assist understanding of some non-economic phenomenon such as international diplomacy and military activities. Cultural impact is another dimension (the applicant has one paper accepted for publication on this topic), as is nationalism and ethnicity.

The project will publish further learned articles building on past work and contribute to public debate. However, the long run intention is to produce a book, tentatively titled Diminishing Distance: New Zealand in a Globalising World. Although the orientation for an international audience may result in a lower profile on New Zealand, the work will be continually informed by the particular perspective of New Zealand (whose experiences are especially illustrative of the globalisation phenomenon), together with the rigorous use of the underlying theoretical models.

The proposed structure of the book (which gives an indication of the research program and its coverage) is Part I: introduction; Part II: nineteenth and twentieth century globalisation; Part III: trade; Part IV: capital, investment, finance; Part V: labour mobility, diasporas, nationalism; Part VI: technology; Part VII: distributional issues; Part VIII: national sovereignty, taxation, regulation, policy independence (illustrated by the future of the welfare state); Part IX: supra-nationality, the future of sovereignty; Part X: responses – from national, community, and individual perspectives.

The Washington Consensus: When Facts Get in the Way Of Economic Orthodoxies

This entry was posted in Globalisation & Trade, Growth & Innovation, Listener, Macroeconomics & Money on by .

Listener 8 February, 2003.

Keywords: Globalisation & Trade; Growth & Innovation; Macroeconomics & Money;

Overseas economists visit New Zealand regularly, seeing politicians, officials, business people, and even independent commentators. One, late last year, began his session with me, by saying that New Zealand’s economic relativity in the OECD had deteriorated throughout the last half century. The government wanted to accelerate our economic growth, he said ,but since coming to office it had
– delayed unilateral tariff cuts;
– raised income tax rates;
– ruled out further privatisation;
– toughened regulation;
– introduced a more active industrial policy ;
– re-regulated the labour market.
He concluded that he did not see a single policy change which would contribute to increasing economic growth.

You will recognise his critique as an unreconstructed ‘Washington Consensus’ position, formulated in the early 1990s (although advocated earlier), that economic growth would be promoted by free trade, low taxes, privatisation, market de-regulation, a non-interventionist industrial policy and a ‘free’ labour market.

I could have responded that there was no agreement that the policies he was advocating were beneficial to economic growth citing, for instance, Joseph Stiglitz’s Globalisation and its Discontents. The book has been a cause celebre because of its accusation that the IMF and the US Treasury have acted as agents for the US financial community, using their financial power to enforce (Washington Consensus type) policies which, Stiglitz says, are often to the detriment of the countries they are meant to be helping. I was more intrigued with the book’s bemusement about how these policies are not based on sound economic theory. In part it is because Stiglitz pioneered these theories – he was awarded a Nobel prize for some of his insights – and one cannot expect ordinary economists to be up with the latest developments. (Keynes famously said ‘in the field of economics and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age’, and there is a further lag when their teachers and other sources are behind the frontier too.)

But rather than arguing the theoretical deficiencies of the Washington Consensus (based on an extreme version of theories almost forty years old, but ideologically attractive to the powerful financial community) I pointed out that it was not true that there had been a continuous economic deterioration in the post-war era. For about two thirds of the period the New Zealand economy grew at the same average rate as the rest of the OECD (perhaps a fraction faster). There were just two periods when we grew markedly slower. One was the decade after the collapse of the international wool price in 1966, in the days when wool was so important that economic performance would inevitably suffer. The other period of disastrous economic performance was from 1985 to 1993 when New Zealand was implementing policies which would be called ‘the Washington Consensus’. So even were the visiting economist’s policy framework not theoretically flawed, the empirical evidence said they did not work when they were applied to New Zealand a decade ago..

I could not help wondering whether he had not been challenged earlier, because the numerous New Zealand economists to whom the visitor had already spoken were sympathetic to his analysis, despite its theoretical and empirical contradictions. There may not be a lot of support in the New Zealand economics community for the government’s policies. Too many were committed to the past policies – they are over thirty, or were trained by those so committed.

In fact, the list exaggerates the change in the government’s policies, for the reversals are small compared to the radicalism of the 1980s. This partly reflects that many of the 1980s changes made good economic sense – as indeed Stiglitz would argue. It was the ideological and obsessive extremism that was so damaging. But it also reflects that this government is cautious, not only because MMP encourages incremental rather than radical government but because its Labour predecessor of the 1980s instituted extremist policies and made a terrible mess. And in truth the government is not sure what will work – even though it is sure the Washington Consensus will not. Perhaps the marker of the government’s approach is that last year’s business leader’s conference was dominated by producers, with very few from the financial sector – a dramatic change from the last two decades, despite the increasing power of finance here too. (It helps that the government accounts are running a financial surplus and do not have to borrow from financiers.)

About the same time, the Director-General of the far more pragmatic OECD gave a public address on the way through. He looked at our economic policies and said they were all good or very good – better than the OECD average. Of course their implementation could be improved, but he concluded by saying he did not know what else to advise to accelerate the New Zealand economic growth rate.

How Representative Of Inflation Are Changes in the CPI?

This entry was posted in Macroeconomics & Money, Statistics on by .

DRAFT: Comments welcome. (The origins of this paper are evident in the text, but its stimulus was a question arising from the interpretation of a standard textbook on international trade.)
The paper was revised in April 2003.

Keywords: Globalisation & Trade; Macroeconomics & Money; Statistics

Over a decade ago I investigated to what extent the CPI could be used to represent the prices of the economy of the whole (GDP), as a part of the study which led eventually to In Stormy Seas. In the process of reducing the vast quantity of material that was produced into the book for publication, the material was left out. (The first draft of the book was about twice as long.)

I must have thought the issue as a methodological curiosum at the time, but since the book’s publication on a number of occasion during public discussions I have wished the material had been publically available. As the next section explains, the section was an illustration of one of the general issues with which In Stormy Seas was concerned, and it is also – as a later section explains – crucial to the understanding how monetary policy works, and how the current management regime may inhibit economic growth.

Prices in the Macro-economy

It is common for an economic exposition to posit the existence of a ‘price level’ (usually designated by ‘P’) which, if any consideration is given to its definition and measurement, is defined as the cost of a representative basket of goods and services. Little attention is given to what might be in the basket, as if it hardly matters. This paper shows it does.

I illustrate this (and other parts of the) conventional wisdom and another points from International Economics: Theory and Policy (5ed) by Paul Krugman’s and Maurice Obstfield. The choice is because it is one of the standard – centre of the paradigm – textbooks rather than because it is particularly remiss. The text first uses an aggregate price measure on page 34 introducing is simply as ‘any price of manufactures PM’ in a microeconomic context. The macroeconomics begins from Chapter 12, and the first reference to an economy wide price index may be on page 340 where the definition of the real rate of return includes ‘measuring asset values in terms of some broad representative basket of products that savers regularly purchase’. On page 367 the aggregate demand for money is introduced with one of the ‘three main factors’ determining it as

The Price Level. The economy’s price level is the price of a broad reference basket of goods and services in terms of currency. If the price level rises, individual households and firms must spend more money than before to purchase their usual weekly baskets of goods and services. To maintain the same level of liquidity as before the price level increase, they will therefore have to hold more money.

Households and firms face different ‘baskets of goods and services’ – conceptually different because households are spending while firms are producing. Yet the textbook draws no attention to the issues.)

They textbook then expresses – quite orthodoxly – the aggregate demand for money as

Md = P X L(r.Y)

with no further attention paid to the choice of P, the price level.

This, as we shall, see becomes important later in the text. Because the ratio Md/P is effectively fixed, various key results are controlled by it.

That there is a stable demand for money equation is not being disputed here. At issue is what is the appropriate price variable in the equation. Econometric estimates of the equation, based on a particular P (and also the particular definition of money, M) are subject to a random error (if not econometric bias), which in part might be due to the wrong choice of price index (and issue further complicated by multicollinearity among the explanatory variables). Moreover the size of the random error (let alone the potential bias) is usually sufficient to make the equation of little value for forecasting GDP (‘Y’ in the above equation: ‘r’ is the interest rate), an error large enough to make a difference to the growth path.

In contrast, In Stormy Seas pointed out that price relativities have varied considerably between sectors, and that at least six different sectors were necessary to describe the behaviour of the New Zealand economy over the last fifty years (pastoral products; energy; other exportables; importables; private non-tradeables; government services). Since the prices of these moved differently it followed that different baskets – that is with different proportions of goods and services from each sector – would reflect different price levels and movements in price levels.

The ‘one-price’ level characterisation of the economy is widespread. In effect the economy is assumed to consist only of a single commodity. For short term macro-economic forecasting this assumption is usually satisfactory, but it rarely makes sense in terms of the medium run economy. Indeed, the assumption is inadequate as it fails to explain one of the most important characteristics of the New Zealand economy – its participation in international trade. In that sense, international economics texts which rely heavily on a single measure of the price level (such as Krugman and Obstfeld) miss the whole point of open economies. Why does a one commodity economy need to import (and export), since apparently the same (composite) commodity is imported (and exported)? Heuristically one might assume a rigid price equivalence between the exports and imports (that is assume that the terms of trade are fixed), and between the tradeables and non-tradeables (that is assume that the real exchange rate is fixed). But that means that the international economics textbook is unable to explain what happens when such relativities change – and thus unable to explain the central experiences of a small open multi-sectoral economy such as New Zealand.

Moreover, the single commodity assumption in economics teaching models is as almost as pernicious as it is widespread. Far too much policy and analysis unconsciously assumes that there is no problem over the choice of the measure to reflect the aggregate price level, and so even more unconsciously it assumes that relative price changes are unimportant in long run economic performance. This is not true for relativities over which New Zealand policy has little practical influence (such as the terms of trade). They have despite their having an integral impact on the growth performance. Even more insidiously, it is not true for relativities over which New Zealand has some influence (most importantly the real exchange rate). If they are either ignored or analysed at a such a simplistic level that the policy conclusions are valueless.

Are Changes in Price Relativities Significant?

In Stormy Seas draws attention to substantial variations in
– the relative price of pastoral exports to imports (the pastoral terms of trade, pp.77-81);
– the relative price of energy relative to production prices (pp.158-160);
– the relative price tradeables to non-tradeable (the real exchange rate, 87-88; 103-106).

As the prologue to this paper mentioned, the research study on which the book was based also looked at the relative price of consumer goods to productions goods.

Consumer Prices

The price of consumer goods is usually measured by the Consumer Price Index (CPI). This is the longest official price series available, beginning annually in 1914 (it is linked back to 1891 – see NZOYB 1990:614), and quarterly from 1925. Over the years the regimen (the items in the index and the weights given to them) has changed. More controversially the treatment of housing and interest payments has undergone major changes over the year, so although it is presented as a continuously defined series it strictly is not. Each figure is published a fortnight after the end of the quarter whose price level it measures, and is not revised.

(There is a second potential (SNA) consumer price series, the ratio of actual nominal consumer outlays divided by the volume (or real or constant price) consumer outlays (as defined and estimated in SNA – System of National Accounts – terms). The available official series is much shorter (annually from 1982?). It becomes available about six months after the end of each quarter and may be revised (for years) thereafter as new data becomes available. This series is particularly useful for international comparisons, because while that the consumer price indexes of most countries have different assumptions, the SNA series are more consistent.)

Producer Prices

The particular producer price series used here (and in In Stormy Seas) is GDEF, which is a price index of all goods and services produced in an economy. It is calculated as the ratio of nominal GDP divided by the volume (or real or constant price) GDP, as defined and estimated in SNA terms.

(Note that the index is – in the conventional notation

Σpnqn/Σp0qn

The base prices (p0) have been updated every year since 1988. This is called ‘chain linking’.)

The available official series is much shorter (annually from March Year 1954/5 and quarterly from 1982?). It becomes available about six months after the end of each quarter and may be revised (for years) thereafter, as new data becomes available.

GDEF also experiences regimen changes over time, just like the CPI. It has the additional complications that until 1971/2? there was no Inventory Valuation Adjustment made to the nominal series. This reduces the recorded stock change by the increase due to inflation.

In summary, the CPI is a longer series, a more timely one, and within its (changing) conceptual framework, it measures more precisely. The advantage of GDEF is that it spans all produced goods and services, and it is not conceptually complicated by the treatment of the housing asset and interest rates. Another distinction – which becomes important later in this paper – is that the CPI basket consists of expenditure items including imports, whereas GDEF is based on a basket of items which are produced.

(An alternative to GDEF would be the producer price indexes. At various stages in the study I used these, and their predecessor wholesale price indexes. This is discussed further below.)

The Relationship Between the CPI and GDEF

The following graph shows the ratio of the CPI to GDEF for the period for which the latter is available. (Note that to make it comparable with the GDEF, the CPI is the year average, not the March quarter on March quarter.)

CPI/GDEF Ratio – Percent Deviation from Trend

It appears that the CPI increases on average about .06 percent a year (.67 percent a decade) faster than GDEF. This hardly matters, despite being econometrically significant. The source of this difference may be that the CPI basket has a higher proportion of services than GDP, or a lower proportion of pastoral products whose terms of trade suffered over the period. In order to assess the interpretation of the graph this trend has been removed.

The graph shows that the ratio of the CPI to GDEF fluctuated between 4.2 percent above and 6.0 percent below the trend. The fluctuations are not entirely random. (The Durban Watson statistic which measures autocorrelation is .87, some distance from the 2.1 value which would indicate there was no year to year correlation between the random errors of the equation).

The fluctuations are sufficient to be horribly misleading if the CPI is used instead of GDEF to deflate nominal GDP to estimate volume GDP. The worst case would have been between the 1968/9 and the 1972/3 year, where using of the CPI would have over-estimated GDP growth by 2.7 percent p.a. While volume GDP grew 16.7 percent over the four year period, the use of the CPI as a deflator would have shown a 29.7 percent increase.

Considerations such as this were sufficient to suggest the CPI was not a good measure of overall inflation. In Stormy Seas used GDEF as the prime price measure indicator (a decision reinforced by the need to make international comparisons).

In passing it should be noted that if inflation is defined as a ‘general (and continuing) increase in prices’ then there was inflation in every year on either measure. The issue is not whether there was inflation, but how much.

The Reserve Bank Target

This work was first done at the end of the 1980s, and has informed my thinking since. However, until this paper I have not consciously applied its implications to the Reserve Bank of New Zealand’s inflation targeting regime. On a number of occasions I have criticised it (see The Reserve Bank Index, although it is not complete). But this is the first occasion that I have explicitly involved this research into the criticism.

The Reserve Bank of New Zealand Act requires the Bank to pursue price stability which it does not define. This is provided for in the ‘Policy Targets Agreement’, which the Minister of Finance and the Governor of the Reserve Bank sign. The PTA of 17 September 2002 says:

Policy Targets Agreement 2002

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

1. Price stability

a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices

b) The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

2. Policy target

a) In pursuing the objective of a stable general level of prices, the Bank shall monitor prices as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b) For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term.

3. Inflation variations around target

a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

b) When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its medium-term target.

4. Communication, implementation and accountability

a) On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target.

b) In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.

c) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

The visitor from Mars might ask why the PTA targets the Consumer Price Index. The historic explanation might be that for most of the seven decades until the passing of the Reserve Bank Act, a major inflationary consideration was the linkage between consumer prices and wages, and the Consumer Price Index became enshrined in the public as ‘the’ measure of inflation. Little consideration seems to have been given when the policy was developed as to whether a better price target would be more appropriate. (Indeed, from the papers made available under the OIA, very little attention was paid to the mechanisms by which the Bank could affect the price level. Rather there seems to have been an acceptance of the theory which underpins the simplest monetarist prescriptions, including the single commodity description of an economy.) Perhaps it might be argued that the primary issue seen to be facing the Bank was to ‘squeeze out’ inflationary expectations, and it was therefore necessary to use an index with which the public was familiar. That is not an reason for continuing with the CPI as the inflation target.

Now-a-days the Bank looks at a range of price indexes (including GDEF) as a part of informing itself of the state of the inflation. But the target remains the CPI. This would not matter if the prices all moved closely together. The CPI versus GDEF comparison shows they do not.

There are 47 years (since 1955) for which there is data on the annual price changes. In over half (28) the price changes in the two indexes differed by more than 1 percentage point. In another 13 (over a quarter) the price changes differed by between .5 and 1.0 percentage points. Thus in only 6 years (less than a quarter) was the difference less that half a percentage point. These are much larger differences than are accepted as tolerable in the public discussion on the forecasting and outcomes of the CPI. (The Standard Deviation of the difference over the full period was 2.1 percentage points.)

Is this only a short term phenomenon?. The PTA does not specify how long the medium term is, so let us take a three year horizon – about the length of the average business cycle. In 26 of the 45 observations (over half) the changes in the two indexes differed by more than 1.5 percentage points (or .5 percentage points a year).

What about the period in which the Act was in force? Excluding 1990/1 (a bad year in which the divergence was 3.1 percentage points), in the remaining 13 years, there were four in which the percentage increase between the CPI and GDEF exceed 1 percentage point, and another five when the divergences was between .5 and 1.0 percentage points. So the pattern of deviation since the Act has not been very different from before the Act. (I have not detailed the three year pattern, because the run is so short, but the long term conclusion probably applies to it too.)

In summary, there has been considerable year to year deviation between the two price indexes over the period for which we have data, and it is not evident that there has been a significant improvement in the last decade either as a result of the Reserve Bank Act or of the improvements in the measurement of GDEF.

Are There Consequences from the Choice of Price Index?

Whether there are consequences from the choice of the price index used to define price stability in the PTA is a bigger issue than this paper’s concerns. Here I simply set down some down.

The CPI and GDEF measure very different forms of economic behaviour. The CPI is an expenditure-side price index, and GDEF is a production-side one. Effective targeting on the CPI requires some theory of the determination of expenditure prices, whereas targeting on GDEF has a more production orientation.

In fact, the Reserve Bank’s account of the inflation mechanism seems to focus on the production side, especially the output gap in aggregate and in individual markets. Ii is unclear how this relates to the expenditure-side price measure which the Bank is targeting on.

In a one commodity model there is no problem. But in fact the CPI is based on a basket of which only around 60 percent of which is domestically produced, the other 40 percent being imported. (This is an old ratio and has not been updated. It is net of indirect taxes and subsidies.) Assuming, for a moment, that the price of imports (and the exchange rate) are fixed, monetary policy is targeting on only 60 percent of the CPI basket, which makes up about, say, 36 percent of GDP (since private consumption is only about 60 percent of GDP). In particular the pricing behaviour of most of the investment, almost all the public sector, and a large part of the export sector have little relevance to the CPI.

IUnfortunately the prices in that 36 percent do not move in parallel with the other prices in the economy, as the CPI to GDEF ratio shows.

Moreover, the CPI’s considerable dependence on import prices leaves another circuit to reduce its level – the exchange rate. Monetary policy can be used to push up the nominal exchange rate, which lowers import prices and thereby reduce the rate of CPI inflation. Textbooks, such as Krugman and Obstfeld, imply this is not possible in the long run, but they use a single price (that is, they are single commodity models ill suited for open economies) and the whole point of an exchange rate change is that it changes the relative price between the expenditure and production side of the economy. The analytics of aggregate price determination models become very murky when the exchange rate appears in the aggregate price level. It seems that the models may generate multiple equilibria with a high and low GDP (although the higher one may be unstable).

Once the exchange rate becomes an intermediate target (whether consciously or unconsciously) it impacts on the CPI inflation rate through the following circuits:
– it directly lowers the price of consumer goods and services via a lower price of imports;
– it pressures domestic producers competing with imports to keep their prices as low;
– it eases wage pressures, in so far as wage demands are in part determined by changes in consumer prices.

Under the fixed exchange rate regime before 1985, New Zealand had a practice of over-valuing the exchange rate for anti-inflation purposes . Under the floating rate which followed after 1985, monetary policy restrained inflation by using the same over-valuation circuit.

The Exchange Rate and the Growth of the Economy

But as experience of the decade after the float shows, an over-valued exchange rate restricts the expansion of exportable sector, which depresses the aggregate growth rate of the economy. This was a major theme of In Stormy Seas, and the evidence since its writing confirms the conclusion that the health of the exportable sector is crucial for sustainable economic growth. (Notice this introduces an extra commodity in the story: ‘exportables’. Krugman and Obstfeld do not even cite ‘tradeables’ in their text book’s index.)

What differed between the pre- and post-float regimes of exchange rate over-valuation was that in the earlier period the government subsidised (in a variety of ways) the exportable sector (while imports were also restricted). This is not to argue for those policies, but to explain how the interventionist wedge enabled the exportable sector to grow.

Almost all the export subsidies and import restrictions were eliminated from 1985, while the exchange rate valuation was maintained. Exports now almost stagnated. while imports surged. The actual growth rates between calendar years 1985 and 1993 were 3.1 percent p.a. for goods exports and 4.5 percent p.a. for imports of goods, according to the OECD Outlook, while OECD exports grew 4.8 percent p.a. and 5.6 percent respectively. Without going into details – I have done so elsewhere – New Zealand lost world export market share, while its import penetration ratio (relative to GDP) rose. Exports did better than the pure theory might have predicted given this over-valuation, because there was a carry-over from earlier (pre-1985) policies which stimulated the export supply of petrochemicals, forest products, and horticultural products (probably others, but these impacts are measurable), while the energy/petrochemical expansion also reduced imports.

What happened was exactly as economics predicted. When the return to exporting fell from the over-valued exchange rate (and the removal of subsidies) the export industry shifted back down the aggregate export industry supply schedule until all that was left was the (diminished) industry which was viable at the higher excahnge rate. At that point it began expanding again – as did the New Zealand economy as a whole.

Much of this analysis was available over a decade ago. What this section does is tie in how the choice of target price index in the PTA can limit the poor performance of the New Zealand economy by further detailing the mechanisms involved. This is also the most detailed account I have written of the ineptitude of the single commodity model to characterise the small open multi-sectoral economy.

What should be the PTA Target Price Index?

The extension to this paper is to raise the question as to what is the appropriate price index (or indexes) to target upon, since the choice of index matters. The long run relevance of the CPI is unclear given that it is an expenditure side index, covers a relatively small part of the economy, and is overly influenced by the exchange rate.

On the other hand GDEF is to slow to be published, and subject to revisions. However there are other quarterly production based price indexes – in particular the producer price indexes – which are much more economy wide that the CPI. One might envisage Statistics New Zealand upgrading the indexes, including speeding up their publication, so that one (probably the PPI-Outputs) could be phased in to replace the CPI over a number of renegotiated PTAs. A weakness of the PPI series is that we do not have the same experience of their use (historically they are – in their current form – a shorter series), and they may be subject to greater error. But as Keynes famously said ‘it is better to be vaguely correct, than precisely wrong’.

However, it even more important to limit the use of an over-valued exchange rate as the primary circuit for controlling inflation in New Zealand. The first step would be to discard single commodity accounts of the economy, to recognise there are a variety of price relativities which are relevant, and that they move quite differently from one another.

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Distributional Economics: Index

This entry was posted in Distributional Economics on by .

Research (Indexes)

The Economic and Health Status of Households Project (Index)
Household Equivalence Scales (Index)

Research (Articles)

Beware the Median (May 2002)
Income Distribution and Equity (August 1999)
What Has Happened in New Zealand to Income Distribution and Poverty Levels (July 1999)
Globalization and A Welfare StateChapter 3: The Progress of Poverty & Chapter 7: Thinking Systematically About Poverty (December 1997)
Income Distribution: Part I and Income Distribution: Part II (January 1996)
Poverty in New Zealand – 1981 to 1993 (November 1995)
The Fallacy of the Equity vs Efficiency Tradeoff. (June 1995)
Properly Assessing Income Adequacy in New Zealand (January 1995)
There are a number of earlier research papers, notably Income Distribution in New Zealand 1983 (Book not on website).

Other Relevant Pages concerned with the policy implications

Family Policy (Index)
Globalization and A Welfare State (Index)
The Commercialisation of New Zealand Chapter 3 ‘The Abandoning of Equity’ (July 1997)

Listener Columns (Miscellaneous)

Closing the Gaps: Policy Or Slogan? (November 2000)
In the Midst of Plenty (December 1985)