Does Professionalism Matter? in Health and Education It Still May

This entry was posted in Education, Governance, Health, Labour Studies on by .

Listener April 20, 2002.

Keywords Education; Governance; Health; Labour Studies

In Graham Scott’s Business Roundtable published Public Sector Management in New Zealand”, the ex-Secretary of the Treasury provides an account of the late 1980s public management reforms with which he was closely involved. The book includes a few pages on critics of the reforms, including a half-hearted account of my views in The Whimpering of the State (and these columns). Scott writes, ‘Easton makes the extraordinary claim that reformers ignored, or sought to undermine, the personal responsibility and professionalism of the core public sector.’ I am not sure I went that far, but I did report American expert Alan Schick’s concern that there appeared to be an unaddressed tension between the reform’s managerialism with its emphasis on accountability, and professionalism which emphasises responsibility. Curiously (I will not write ‘extraordinarily’), Scott’s book does not provide much evidence that professionalism is a central concern, for its few mentions are desultory. There is more concern about ‘professional capture’, the danger that professionals will administer the system in their interests rather than the wider public good. (The issue echoes the corporate management/shareholder tension I wrote about in my last column Guard Dogs That Fail to Bark.)

In management theory there is a dichotomy between the ‘scientific management’ and ‘human relations’ approaches. Scientific management emphasises a pyramid of control topped by a single chief executive, with a need to provide mechanisms to ensure that those at lower levels do what is required. The human relations approach was a reaction, arguing that effective work processes require a more decentralised management style, in which social norms and non-economic rewards are crucial, and collegial relations important. The public sector reforms were dominated by scientific management notions. Universities, once preeminently collegial, are now by law required to be hierarchal, with the vice chancellor the chief executive rather than the ‘primus intra pares’ academic.

We are so seduced by the notion of ‘scientific management’ that we become insensitive to it. That those who deal with employment relations are likely to be in a ‘human resources’ divisions, suggests the workers are to be treated just like any other input in the firm, not as human beings. Or consider the State Services Commission report, Review of the Centre’, released in January, on how the core public service should be managed. It uses the ‘accountability’ notion 36 times, but ‘responsibility’ gets only 14 mentions, and ‘professional’ a mere four.

The core public service may be moving away from notions of professionalism and individual responsibility. But the public still requires them in the education and health. A doctor recently complained to me that a manager had closed beds in his ward without any discussion with the staff involved. He was not questioning whether the beds should have been eliminated – how could he know all the issues if he was not informed. His concern was the lack of consultation, for under scientific management those lower in the hierarchy need not be involved, even though the upper level managers do not have the professional competence to evaluate the effect of a decision on patients. Their competence is its impact on costs. Another doctor has complained publicly that entire wards have been closed down, without any appreciation of the implications for cross-infection in the closely packed remaining ones. He says that patients have died as a result. Not however, I imagine, to any consternation to those who made the decision, since they are only accountable. It is the professional and responsible doctors and nurses who grieve over unnecessary deaths. Their concern was sufficient to force an enquiry about emergency services at the Christchurch Hospital, which proved very critical of the managers’ competence.

One may ask just how competent the new managerial hierarchies are. They may be good at creating corporate plans and mission statements – do they have any real effect? – but while the impending shortage of radiation therapists to treat patients was known in 1998, it took last years’ crisis for any action to be taken. What does that say of the strategic capacity of health sector managers?

The universities are in suppressed turmoil too. Academics complain that once their administrations were to service the teaching and research, whereas nowadays the academics’ main function seems to be to earn sufficient fees to fund the administration. When universities need to reorganise, it is usually done without consulting their staff, who are bewildered rather than informed. The same happens to clinicians, who find a big chunk of their medical budget unilaterally charged to overheads. In a hierarchical system there is no accountability to those at the sharp end below.

The tension between the managers and professionals in our hospitals is most evident in Christchurch, but exists less publicly elsewhere. The new District Health Boards, with their elected representatives, may become the arbiters between the antagonists. They remain accountable fiscally to the central government, but they are likely to insist that managers recognise and respect the professionalism of the doctors and nurses and involve them in the resource decisions. The most important effect of the current health reforms may be a better balance between scientific management and human relations.

Note The arguement in greater detail appears in DOES PROFESSIONALISM MATTER? (NZIPA Paper)

The Origins Of Four Books

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

Part of submission for the degree of Doctor of Science from the University of Canterbury. (April 2002)

Keywords: History of Ideas, Methodology & Philosophy;

I began studying economics at the University of Canterbury in 1962, while doing my honours science degree in mathematics, and in late 1963 took up the position of Research Assistant at the N.Z. Institute of Economic Research, completing my B.A. in economics at the Victoria University of Wellington. As a result I got a very wide training in economics – in macroeconomics, microeconomics, development economics, and public policy – covering both theory and applied economics.

I went to the University of Sussex in late 1966, initially as an assistant lecturer in economics but I was later promoted to a lecturer in economics and social statistics. Again I was required to teach across a broad range of economics, my research reflecting this range of interests. By the time I returned to New Zealand at the end of 1970, as a lecturer in economics at the University of Canterbury, I had been working almost nine years as an economics student, teacher and researcher.

My initial research project was a study of the New Zealand income distribution which led to Income Distribution in New Zealand (1983) and to my ongoing work in distributional economics. This topic is not being submitted as part of the application, despite my work being substantial and pioneering. It is mentioned here because it forced me to think about macroeconomic issues from a microeconomic perspective, and led to my interest in the multisectoral nature of the New Zealand economy.

To give a brief illustration. The New Zealand economy has a substantial self-employment. The sector is given little prominence in overseas writings of rich economies, and has a very different role in poor countries, where it is often backward and traditional rather than dynamic and modern as it is in New Zealand. About half the self employed were farmers, so to understand the self employed sector with its crucial impact on the income distribution, one had to investigate farming. Thus one was led here, and in other ways, to looking at the production sectors in some detail.

Early in the research program I struck upon another key element which was important to my subsequent thinking. It is worth detailing the story. In 1974 I had constructed two rates of return on capital series which were in serious conflict. One showed a statistically significant secular rise over time, the other a secular fall. Because they were from different statistical sources – albeit in principle conceptually broadly the same – they were over slightly different periods, and it occurred to me that they might be opposite sides of the peak of a quadratic. A test for this curvature supported the conjecture. Moreover the peak in about 1967 proved to coincided with structural breaks in numerous other statistical series on the supply side. (See ‘!966 and All That’.) And so I constructed a story of the economic disruption, which is centred around the fall of the terms of trade in late 1966 (See chapter 5 of In Stormy Seas.) What is important here is not only am I working between prices and sectors (as the previous paragraph described), but I begin modelling the economy as subject to external shocks with long term impacts, which affected different sectors of the economy differently. It reinforced that central (but not original) vision that the evolution of New Zealand has been dominated by the impact of the world economy.

(There is a widely held view that the end of the post-war boom occurred in 1973 rather than 1966. This seems more based on a nostalgia for the British connection, rather than any systematic evidence. Some expenditure series show breaks in their secular trends in about 1975 or 1976, but these seem to be the result of policy responses to the earlier production changes. However I had picked up the production breaks in 1974, too early to identify any 1973 one.)

Thus at the University of Canterbury in the 1970s I was working on two broad topics: the income distribution and the post-war history of the New Zealand economy (although I kept pushing back the time frame back before the war, and into the nineteenth century – I joke that perhaps ‘post-war means after Musket Wars). A summary of my macroeconomic research at the university is encapsulated in my inaugaral director’s address to the N.Z. Institute of Economic Research, External Impact and Internal Response (1982).

The research program continued vigorously at the NZIER and is reported in my valedictory director’s address The Exchange Rate since 1981: Performance and Policy (1986).

The work continued through the late 1980s and into the 1990s as I worked as a consultant, usually funding it from any ‘surplus’ from the consultancy, teaching and writing. This led to the publication of In Stormy Seas in 1987, although it should have been out a couple of years earlier, except for publishing delays. In the interim there were other publications including a couple of commissioned policy oriented booklets Open Growth (1990) and Getting the Supplyside to Work (1993). Each is based on the research program that underpinned In Stormy Seas, a program which was always a scientific one, attempting to understand the world, rather than a policy oriented one, with a policy agenda to be justified or identified.

As In Stormy Seas shows, the policy response of the period after 1967 is an attempt to deal with a major supplyside shock, without a comprehensive understanding of it, and at first trying to respond without substantially changing the income distribution either through changes in factor prices nor employment conditions. This constraint made the task impossible but what really strikes the analyst is that the policy response had a substantial endogenous component. Policy makers like to present themselves as if they are in control of the options, but practically they are usually dealing with a problem outside their control (and often their understanding).

This is not to argue for pure economic determinism. Ideas are important and individuals and accidents of history matter. However it differs from the standard approach to the theory policy making, as expounded in Wellington for instance, which almost completely ignores that the economy sets a context in which the decisions are made, and which both generates problems, and limits the available solutions.

This approach dominates my next major book, The Commercialisation of New Zealand (See the book’s appendix for some discussions on methodology. In fact the whole book – indeed the research program – is pervaded by the Popperian approach in which I was bathed as an undergraduate at the University of Canterbury.) The transitional work here is The Making of Rogernomics, a book I edited in late 1980s, where there is both a mixture of macroeconomics (Chapter 4) and the microeconomics (Chapter 5). My attention had turned to microeconomic analyst, in part because the book is based on a public policy course, whose students were adequately trained in macroeconomics. In the mid 1980s was that the dominant policy group identified a strategy which they thought would resolve the problems which the previous government had not solved, by relaxing the distributional constraint (see Chapter 3). I called this approach ‘commercialisation’, partly because I wanted to break away from the populist expression ‘privatisation’, and partly because the approach was broader and more subtle than simply privatisation. (Today, of course, the expression is widely used, without appreciation of how recently it was coined.) The first part of the book describes the origins of commercialisation as a policy idea and how it became politically dominant, the second illustrates its application to various policy areas.

The following book, The Whimpering of the State: Policy After MMP is a continuation of the argument using a nice economic approach – in the tradition of Mancur Olsen (See In Stormy Seas Chapter 13) – in which a set of logical propositions leads to a behavioural outcome. In particular it suggested how a government elected by an MMP system (strictly, any system which results in a non-majority party government) will function in policy terms. (See pages 16-21) This led to a review of the evolution of policy as a single party government lost its parliamentary dominance. This book is in the same two parts as its predecessor. (Note chapter 4 is an update of In Stormy Seas, confirming the story it tells, but offering no new theoretical insights.)

About this time I was asked to prepare an entry on Bernard Ashwin, the founder of the modern Treasury, for The Dictionary of New Zealand Biography. This lead to The Nationbuilders which covers the period from 1931 to 1984 when the approach developed in the 1930s ended (although as implied above it was becoming less effective somewhat earlier). While the book can be read as a series of biographical chapters, it is really a study of the policy community of the period with various themes threading through the chapters, most notably that of macroeconomic policy development. Thus the book can be thought of as a complementing In Stormy Seas, that book being the story of the economy over the period, while the later one is an account of the policies accompanying the economy (ending earlier because other books deal with the post-1984 policy regimes).

This brief description of the four books has the purpose of showing that while each is a standalone work, there are intricately related both in terms of their construction and conception. To round off, I add that my current research program (other than the ongoing ones in heath economics and the income distribution) is on globalisation, and is a logical successor of the one described above.

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References
‘!966 and All That’, Economics for New Zealand Social Democrats (McIndoe, 1981) p.18-20.
External Impact and Internal Response: The New Zealand Economy in the 1970s and 1980s (NZIER Discussion paper No 26, 1982)
Income Distribution in New Zealand (NZIER, 1983)
The Exchange Rate Since 1981, Performance and Policy (NZIER Discussion Paper 30, 1986)
The Making of Rogernomics (Auckland University Press, 1989)
Open Growth: A Response to the Ministerial Task Force on International Competitiveness (NZEU, 1990)
Getting the Supply-side to Work (NZEU, 1993)
In Stormy Seas: The Post-War New Zealand Economy (University of Otago, 1997)
The Commercialisation of New Zealand (Auckland University Press, 1997)
The Whimpering of the State: Policy After MMP (Auckland University Press, 1999)
‘Ashwin, Bernard Carl 1896-1973,’ C. Orange (ed) Dictionary of New Zealand Biography (AUP, 1998) vol IV, p.21-2.
The Nationbuilders (Auckland University Press, 2001)

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Guard Dogs That Fail to Bark

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

Management and Shareholders
Listener 6 April, 2002.

Keywords: Business & Finance; Governance

In 1932 Adolph Berle and Gardiner Means showed that there was an increasing separation between the shareholders who legally own the corporations and the managers who control it. Their seminal insight suggests that managers may have sufficient independence to pursue their own objectives – higher pay, better conditions, prestige, technological excellence – at the expense of shareholders. (The New Industrial State by J.K. Galbraith is the best know book setting out the case.) Those committed to the pure market approach responded that the shareholder can sell the shares of under-performing companies to others whose managers would produce higher shareholder returns. They described the sharemarket as the ‘market for management’, where competition would result in higher returns to shareholders, as efficient managers took over inefficient businesses.

This ingenious argument suggests firms specialising in takeovers, such as Brierlys in the 1970s, serve a useful economic purpose. ‘Asset-stripping’ was shifting assets (and labour) into more productive uses and eliminating inefficient management. Meanwhile managers of other firms, fearful of takeovers, would raise their performance.

The purests went on to argue that privatised businesses were more efficient than nationalised ones, because their managements were under pressure from the threat of sharemarket takeovers, while publicly owned businesses were not. (Derek Frew cited a Journal of Economic Literature survey to dispute my assertion that privatised firms were not necessarily more efficient than nationalised ones. (‘Listener Letters’, December 15) But the article has many more cautions than he implied. Even had it not, he missed the point. Many nationalised firms become more ‘efficient’, in a particular meaning of the term, when privatised because their objectives are shifted from social purposes – say job creation – to shareholder value. The dispute is about the extent to which nationalised firms with the same efficiency objectives are less successful than privatised ones. The research suggest they need not be.)

Firms take the threat of takeovers seriously and have numerous strategies to repel them. Management grants itself ‘golden parachutes’ – generous redundancy payments following successful takeovers – form alliances with managers of friendly firms (‘white knights’) to protect one another, and create ‘poison pills’, ‘sandbags’, and other devices to protect them from takeovers. Sometimes the largest shareholder in the firm is its worker’s pension fund whose trustees are the management. None of these seem especially efficiency seeking, or in the shareholder interest.

Is the ‘market for management’ efficient? The research evidence shows that on many, but not all, occasions the effect of a takeover is to lower the unit shareholder value of the successful firm (although usually the shareholders of target firms do better). Apparently management typically overestimates its ability to improve the efficiency of the firm it is taking over.

More recently, another serious objection to the theory has appeared: how to measure the shareholder value. Measurement of a corporation’s profits and net worth is basically the management’s task and they have a strong incentive to bias the figures, which are an indicator of managerial competence. (Usually managers try to make them as large as possible, although when there is a loss that gets magnified too, unwinding past overstated profits.)

The accounts of a business involve numerous judgements over which honest accountants may differ. There are rules of ‘Generally Accepted Accounting Practices’ (GAAP), which limit the range of difference, but even then valuations still have a judgmental element. Moreover such rules cannot be comprehensive. (Some country’s are better than others. I am told that New Zealand’s would get a B measured against international best practice.) Meanwhile management uses the gaps and uncertainties to its advantage.

Auditors are meant to restrain management from fiddling the figures. Officially they are appointed by the shareholders and are meant to act on their behalf, but their appointment is normally the decision of the corporation’s board who are usually allies of management. Auditors’ practices are being increasingly questioned, especially following the demise of the American ‘energy-giant’ Enron. (The quotation marks are because the company’s collapse had little impact on energy markets. It was primarily a financial company posing as a major energy player.)

Enron’s auditors appeared to have been deceived by the Enron management. Some commentators have suggested that they may even have connived with them, a suspicion reinforced by the consultancy fees they received from Enron which exceeded their audit fees. Extraordinarily, despite the potential conflict of interest, there is no prohibition in America – or New Zealand, for that matter – on accountancy firms doing other work for the businesses they audit. Providing auditing and consultancy services to the same business is rife. Personal integrity may be insufficient to prevent impropriety. The auditing watchdog may be too busy chewing the (juicy) consulting bone.

The autopsies on Enron are incomplete, and the litigation and reflection will take years. In the interim shareholders would do well to ponder on the insights that develop from Berle and Means. This is not to say all corporate management is inefficient and corrupt, or even entirely self-serving. But again we see how an unregulated market does not fulfill the tasks the ideologists claim of it. At the very least there appears to be a need for major reforms in auditing and accounting practices.

Subjects Business economics

Who Goes to the Doctor?

This entry was posted in Distributional Economics, Health on by .

Overheads for a presentation to an Independent Practitioners’ Association Seminar, April 2002.

Keywords: Distributional Economics; Health;

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This work comes from a report on research being prepared by Brian Easton and Suzie Ballantyne.

This research arises from a limited grant from the Health Research Council.

It uses Statistics New Zealand data. However they only provided the data, and the results presented in this study are the work of the author, not Statistics New Zealand.

The data is based on unit records from the Household Economic Survey for the three years between 1994/5 to 1996/7. Access to the data used in this study was provided by Statistics New Zealand in a secure environment designed to give effect to the confidentiality provisions of the Statistics Act 1975.

*******

The results reported here are preliminary, and should not be quoted without permission of the researchers. The intention of presenting the preliminary data is to illustrate some general principles. The final report will look at a much wider range of issues.

Note that the samples are large:
21332 people
7298 households
But the explanatory power is limited, suggesting there are many elements, other than those the survey records, which contribute to the observed behaviour.

The Household Economic Survey is a random sample of New Zealand Households, in which various household characteristics are surveyed including:

*******

INDIVIDUALS
– age, gender and ethnicity.
– holder of a Community Services Card (CSC), High Use Card (HUC), or Medical Insurance.
– utilisation of 13 types of health services in the previous 12 months, including visits to GPs.
– health status (excellent, good, not so good or poor). (This health status and utilisation data is used to construct a health status index..)

HOUSEHOLDS
– household disposable income
– housing tenancy, location, size.
– house hold expenditure, including 12 types of health care, one of which is outlays on primary care. Almost 50 percent of the households outlayed on primary care. (Only 23 percent spent nothing on medical care.)

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WHO USES A GENERAL PRACTITIONER?

These results come from an econometric equation. It predicts the probability of a person with a particular specific characteristic going to the doctor, relative to another with a different state of that specific characteristic. All other measured characteristics are taken to be the same.

The results are ‘odds ratios’ which tell of the likelihood of the individual utilising the doctor, relative to the base case.

asterisks show statistical difference at level of
10% (*),
1% (**), and
.1% (***).

Age-Gender Determinants of Number of GP Visits: Odds Ratio females 65+ Reference Group)

AGE F M
0-14 1.160 1.622*
15-24 1.448 0.808***
25-34 1.743 0.554***
35-44 0.935 0.422***
45-54 0.766 0.681
55-64 0.942 0.813
65+ 1.000 0.709**

statistical test is on gender difference at same age.

Ethnicity Determinants of Number of GP Visits: Odds Ratio (Pakeha Reference Group)

Pakeha 1.00
Maori 0.96
Pacific Island 0.97
Other 0.93

Eligibility Determinants of Number of GP Visits: Odds Ratio (None Held Reference Group)

None 1.00
High Use Card 4.99***
Communisty Services Card 1.53***
Medical Insurance 1.41***

Health Status Determinants of Number of GP Visits: Odds Ratio (Excellent Health Reference Group)

Excellent 1.00
Good 2.27***
Not so Good or Poor 10.75***

Income Determinants of Number of GP Visits:
Odds Ratio for an additional $10,000 p.a. of Disposable Income = 1.13

The overall conclusion is that access to GPs seems to be primarily on the basis of health need

but

1. Note CSC and Medical Insurance holders high use. Is this a price effect? (They may have above average poor health in a manner not picked up by the other measures.)

2. There are personal characteristics which we have/can not measure.

Question
What does this tell us about the “gateway” role of GPs?

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WHO PAYS THEIR GP?

These results come from a (log linear) econometric equation which predicts how much additional spending is caused by a change in a variable.

These results reflect household – not individual – spending, and they apply for all primary care services – not just GPs.

Generally these estimates are for the percentage increase/decrease if the household is not the base case.

Age-Gender Determinants: Percent Increase on Primary Care Spending (Females 65+ Reference Group)

AGE F M
15-24 -22.7 -38.8
25-34 -3.2 -25.6
35-44 -2.1 -22.5
45-54 4.2 -17.5
55-64 6.4 -15.8
65+ 0.0 -20.9

The econometric equation specification meant it is not possible to do statistical tests on gender difference at same age. However the overall gender difference is statistically significant.

Ethnicity Determinants: Percent Increase on Primary Care Spending: All Pakeha Household Reference Group

Pakeha 0.0
Maori -13.3
Pacific Island -20.6
Other 1.2

None of the differences are significant.

Eligibility Determinants: Percent Increase on Primary Care Spending (None in Household Reference Group)

None 0.0
High Use Card -4.9
Community Services Card -17.7***
Medical Insurance -13.8***

Health Status Determinants:
Percent Increase on Primary Care Spending of a household all of whom are in 0% excellent health, compared to a household all of whose members are in 100% excellent health = 64.2%***

Income Determinants:
1% increase in Household Disposable Income increases spending by .17%**

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SOME CONCLUSIONS

The following conclusion uses other results from the research – especially total household spending on medical care.

Underpinning the financial analysis is the earlier conclusions about utilisation.

The Sick

A household with sick people spend relatively more on primary services (and all medical care) than one in which all are well.

High Use Card

Households with people with high use cards spend much the same as others on primary services, even though they have higher utilisation.

However they spend less on prescriptions, more on specialists, and more overall.

Income

Why do high income households spend relatively more on primary services (and all medical care) than low income ones?

1. Utilisation does not seem to be a factor in regard to GP use. It may be relevant for other primary services.

2. GPs might charge them more or they might go to more expensive GPs.

3. The might use free provided services less.

Because the coefficient is less than unity, the rich spend a lower proportion than the poor of their income on primary care. (This is true for all medical care spending.)

Ethnicity

Why do Maori and Pacific Island households spend relatively less on primary care (and most other medical care) than Pakeha and Asian ones?

1. GP utilisation is same as average (but lower utilisation for many other services).

2. GPs might charge them less or they might go to less expensive GPs.

3. The might use free provided services more.

Community Services Card

CSC spend relatively less on primary care and on each and all medical services, despite being higher utilisers of health services.

Does this reflect a success of the CSC?

High utilisation may reflect better access to free services or possibly a higher rate of sickness which the other measures are not picking up. (Also possibly they are more likely to be not-in-employment, which makes visiting easier.)

Medical Insurance

Those with medical insurance use more primary services and pay more than those without. The recorded payment is often before refunds are deducted.

They also utilise relatively more of all medical services and pay more for all their medical care if medical insurance and refunds are included.

Higher utilisation may reflect cheaper access to services.

There is also some evidence that the insured are relatively sicker. (Is ‘moral hazard’ – the effect of the sick insuring – stronger than ‘adverse selection’ – where the company discourages the sick from joining its schemes.)

*******

SUMMARY

The sick pay more. Primary care charges contribute to their higher payments, but other components make substantial contributions too.

The Community Services Card appears relatively effective in reducing their holder outlays, despite greater utilisation rates. The High User Card reduces outlays, but holders till pay more overall.

Those poor who do not have the CSC or HUC pay a larger share of their income in medical expenses than the rich.

Medical insurance seems to generate utilisation behaviour a bit like the CSC.

Reviews Of Two Books on Labour Skills and Social Progress

This entry was posted in Education, Labour Studies on by .

High Skills: Globalisation, Competitiveness, and Skill Formation by Phillip Brown, Andy Green & Hugh Lauder (Oxford University Press, 2001).
Capitalism and Social Progress: The Future of Society in the Global Economy by Phillip Brown & Hugh Lauder (Palgrave/Macmillan, 2001)
NZ Journal of Adult Education April 2002.

Keywords Education; Growth & Innovation; Labour Studies

‘Knowledge-driven economies are associated with polarization and inequality rather than convergence and equality’ is the sort of challenge that our ‘Knowledge Wave’ adherents, wrapped up in rhetoric rather than analysis, would want to ignore. High Skills goes on ‘How societies tackle the problem of social exclusion and positional competition fro education, training and jobs is therefore an important pressure point for all countries’. So the writers are not rejecting the potentiality of the knowledge based economy, and its benefits – higher living standards of more and new products and better quality jobs. Rather, both books consider how we need to organise society given the knowledge-driven economy which is a response to globalisation.

High Skills is based on research project in which the occupational training systems of Germany, Singapore, Japan (and Korea), and Britain are compared. The 105 pages of description alone makes this a very worthwhile book, showing how skill acquisition can be organised in quite different ways. As is common in these sorts of comparisons, the United Kingdom system appears least successful. The problem is not at the top. The Brits produce as high quality top skilled workers as anywhere in the world. Their weakness is the lack of middle skilled workers, nicely summarised in the table at the end of this review. Of course international comparisons are difficult, given different educational structures, standards and demographic patterns. The book has two-thirds of a page giving the definitions for the original table (so those who want to use the table below need to go back to the book). But the conclusion, reproduced in smaller studies for some decades, is clear enough.

The British production of sufficient graduates, but fail to produce sufficient skilled workers to go with them, reflects an elitist vision of technology. It is imposed by the scientific equivalents of philosopher-kings on those below, who are expected to dutifully follow out instructions. In organisational theory terms, it is that of ‘scientific management’, where there is a strong division of labour and control imposed from the top, in contrast to the ‘human relations’ approach with its more group than individualistic orientation, and where each group has considerable control over its working activities. The choice between the two styles is partly one of philosophy, but it is also a matter of technological development.

I recall a frustrated unionist, whose members were called in by a harassed management because a very expensive, recently imported, piece of machinery was working well below the capacity the German manufacturer promised. The worker’s explanation was that they had never been trained in the use of the machinery, did not know how to fine tune it, and if anything went wrong had to hang around until the specialists came in. At a more mundane level, this word processed document will be transferred into the pages of this journal by a worker who is likely to be less ‘educated’ than the writer but will be bring to bear a whole set of skills which derive from a sound post-secondary school training coupled with occupational experience and a supportive work place. (The way in which the adult population has grasped the personal computer technologies is a fascinating story. There is a brilliant, and instructive, study to be done here.)

These anecdotes illustrate a general proposition: the quality and quantity of post-secondary school training – in formal, workplace, and informal institutions – plays a crucial role in the introduction and management of technology, especially given the relevance of ‘continuous improvement’ where innovation does not only come in quantum leaps, but incrementally as the users (workers rather than those higher up) adapt the technology for the work process.

High Skills is rich in ideas: this review has space only for a one other, which illustrates how different formal institutional arrangements may affect national skills acquisition. How does the skills base of the foreign owned firms (which are among the more advanced technologically) get transferred into the domestic sector when the training institutions are excessively siloed? The book argues that the British system will be much less successful at skills transfer than the German one, with its better national integration which has not only produced relatively more skilled workers, but is also better oriented towards the transfer of skills between workers in different businesses.

The book’s concern with foreign investment is not for illustrative purposes, but because the writer’s see globalisation as intimately linked to skilling strategies. This is even more explicit in Capitalism and Social Progress. The authors see the post-war era split into two roughly equal periods. First there was a ‘Golden era’ of ‘western capitalism … built on “walled” economies of massed-produced goods and services which offered a decent family wage to low-skilled workers.’ More recently border protection has been rolled back – not least because workers want the benefits of international goods and services – and that has also meant that the internal protection of worker’s jobs and living standards has become much more difficult (although some countries have been more successful than others).

The resulting globalisation is the central content of many books, and these two have chapters which will be familiar to most readers. What is distinctive is this book’s perceptions about future possibilities. The ‘Golden era’ cannot be recreated. Instead we need to harness the ‘forces of knowledge-driven capitalism’. Capitalism and Social Progress emphasises ‘collective intelligence’, which is ‘integral to the reinvention of society’, although the other book provides some of the research background to the thinking.

There is a fashion for combining two grandiose words, such as ‘Knowledge Wave’, to give the impression of a deeply significant concept, which on careful analysis proves to be as shallow as the phrase’s creator. ‘Collective intelligence’ would appear to be such a phrase, except the writers are expert. Phillip Brown is a social science research professor at Cardiff University, and Hugh Lauder is professor of education and political economy at the University of Bath. Lauder will be known to many as a long time New Zealand university teacher, a vigorous opponent of the penetration of rogernomics into the education sector, and who also wrote poetry and was the poetry editor of Landfall. (Andy Green is Professor of Education and Co-director of the Centre for Wider Benefits of Learning at the London University Institute of Education)

After setting down the professional understandings of the underlying notions of intelligence, Capitalism and Social Progress argues we must ‘reclaim “intelligence” from the grip of the eugenics movement and from its impoverished representation in the form of IQ tests. … The idea of intelligence in the Golden era is redundant in the world in which we live.’ It now has to encompass the artistic and emotional dimensions of human capability, the ability to solve problems, to think critically and systematically about the social and material worlds, to apply new skills and techniques, to empathize and to have personal skills needed to communicate and live along side one another.

The ‘collective’ comes from the author’s rejection of individualistic accounts of the human condition. ‘Private troubles felt by people require public solutions, which cannot be resolved without collaboration with family, friends, neighbour, co-workers or fellow citizens. In post-industrial societies it is the collective intelligence of families, communities, companies and society at large, which will determine the quality of life as well as competitiveness.’ These notions are used to set out in the concluding chapters a learning strategy for a high skills economy.

These books may be read as a contributions to a contribution to our understanding of what is going to have to happen to post-secondary schooling and education, or to the debate on globalisation and the prospects for the world and its workers. If one’s sole focus is the former, then High Skills is the more relevant book, if the latter go for Capitalism and Social Progress. My grump is that their different publishers chose different book sizes, so they do not sit as easily together on the physical bookshelf as they do on the intellectual one.

Highest Qualification by Percentage of Working Age Population (about 1998)

COUNTRY – (HIGHEST QUALIFICATIONS : Level 3
Post-secondary schooling; Level 4 Sub Degree; Level 5 Degree, etc.: Level 3 & Above:)

UK (18.0; 9.0; 10.0; 41.0)
Germany (50.6; 7.8; 11.3; 69.7)
Singapore ( 9.2; 7.2; 10.2; 26.6)
S. Korea (40.9; 4.7: 13.2: 58.8)
Japan (41.8;11.1: 13.1; 66.0)

Notes:

High Skills, p.76. See original for definitions and sources. (In the original version of this article I included the New Zealand figures based on the Population Census. The definitions proved incomparable and I have deleted that entry.

They’re Thinking Big Again: What Is Wrong with Too Much Foreign Investment?

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

Listener 23 March 2002

Keywords Business & Finance; Growth & Innovation

When you choose a target, make sure it cannot distort your real objectives. Consider the man desperate to diet, who decided at New Years not to eat between meals. He kept strictly to his resolution. By the end of February he was eating his May 23rd dinner.

The Government has made a similar mistake when it said it aimed to return New Zealand to the top half of the OECD in GDP per capita terms. GDP (Gross Domestic Product) measures the total market production in a country, but the income from its production has to be shared between those who live there and the foreign investors who make investments in the country. The share that the locals receive is called ‘National Income’. (Clue: Domestic = ‘inside a country’s boundaries’; National = ‘of a country’s people’. The ‘gross’ refers to the inclusion of depreciation in the total.) In New Zealand National Income is about 93.5 percent of Domestic Production. In Ireland, with its substantially greater foreign investment and debt, the figure is closer to 84.0 percent. While Irish GDP per capita is greater than Britain’s, its National Income per head is less.

(There will be readers – and politicians – who would favour a broader goal that the economist’s National Income, which does not cover non-market activities, including non-material ones, nor the manner in which any prosperity is distributed. I am sympathetic to their concerns, but there is no internationally agreed quality measure which could be used as a target instead.)

The absurdity of the GDP based target, was nicely illustrated by the Boston Consulting Group’s report Building the Future: Using Foreign Direct Investment to Help Fuel New Zealand’s Economic Prosperity, released with the prime minister’s speech which opened parliament. The report is not a carefully thought through economic analysis, but more a public relations effort to get us to adopt a strategy of increasing FDI.

(The companion New Zealand Talent Initiative” by LEK consultants, is also spin. It advocates developing Auckland as ‘New Zealand’s global life style city’ but fails to define what it means. One is left wondering whether they hope that Auckland will catch up to Wellington’s arts, or Christchurch’s ambience, or perhaps they mean Bangkok’s congestion and Chicago’s crime. But at least they recognise Auckland. My copy of the FDI report has a cover map which omits the top third of the North Island.)

The Boston Group want to increase FDI from its current level of $4 billion in 2001 to near $11 billion in 2011. Unfortunately the report does not define what it means by FDI, for it is an even more tricky concept that GDP. For instance some of the data seems to include existing New Zealand firms sold off to foreigners, although behind the razzamatazz the report is primarily concerned with new (greenfield) businesses or significant extensions to existing ones.

I would have liked to have discussed the impact of the proposal on the economy, but the report’s economics is so vague it is not possible. I doubt the writers even thought about the effect of their proposed enormous increase in foreign investment spending. It is possible that the rest of the economy (that is New Zealander’s investment and consumption) would have to be held back to make possible this ‘Think Big’ FDI investment surge from the $4b to $11b a year.

So while the report claims that the FDI will add to GDP, it does not address whether it will add to National Income, or the prosperity of New Zealanders. Indeed the ominous recommendation that the taxpayer should spend money attracting (read that as ‘subsidising’) FDI could mean that New Zealanders may be worse off, if the additional growth in production and more goes to foreigners.

Nothing in this column implies that New Zealand should be opposed to all foreign direct investment. It can be a valuable element of a growth strategy, enabling the country to have technologies, expertise and overseas markets which would otherwise be inaccessible. New Zealand would be much poorer had our European migrants not also brought with them capital and technology. But our prosperity today is the consequence of what we did here with our initiative and our savings. Foreign investment has its place, but ultimately our prosperity depends on us.

We need to be cautious about foreign businesses whose only reason for coming here is the subsidies and tax incentives. We need to be selective about those we assist, expecting them to bring to something which will add to our prosperity. As numerous examples throughout the world show, that does not always happen. The report’s proposed Investment Promotion Agency could be especially dangerous if its remit is as enthusiastic and uncritical as the report’s.

Neither this report nor the ‘Talent’ one have been adopted as government policy. My guess is that by the time the professional economists and other officials have gone through them systematically and rigorously, our FDI and migration strategies will be somewhat more sober than spin. And the resulting policies will probably be more clearly in the interests of New Zealanders.

2002-07-15 16:57:45

A Dissertation on Rare Essays

This entry was posted in Literature and Culture, Miscellaneous on by .

Presentation to ‘First Loves’, a session at ‘Reader’s and Writer’s Week, 17 March 2002.

Keywords Miscellaneous

Sometime in middle school – between Standard Three and Form Four – my class was read Charles Lamb’s Dissertation on Roast Pork. It may have come from a school journal, because others of my age have a similar memories, whereas commonly those who are a little younger dont know the essay. …

… Whether it was the decision of a teacher or a journal editor – both I suppose – I was transported into the realms of gold by the essay form. I still read essays, but they are typically from overseas journals – The New York Review of Books, say.

Consider a recent London Review of Books essay on escalators, by their art editor Peter Campbell. It opens, oh so seductively, ‘stepping onto an escalator is an act of faith’ – like beginning to read an essay – and then goes through much detail on the escalators in tube stations to move onto a discussion on the privatisation of public transport. The romp around the London Underground finishes that ‘one would scamper down a stalled escalator once in a while.’ completing the circle to the essays opening. I learned this trick of starting from one issue and concluding almost on another from Lamb. The Listener column I filed on Friday is an example of the technique, although its title – ‘Guard Dogs that Fail to Bark’ – misleads about the size of the gap between the column’s opening bark and the tail which wags it.

Yes, the columns in our dailies and weeklies are the modern New Zealand essay. Sadly, many are not crafted, but hurriedly ripped off on a predictable topic with predictable content, to meet an editorial deadline. Their one merit is they fill the space set for them. Few of the columnists are subtle or deep or sophisticated – the best tend to be humorous. Even fewer capture that indolence that Lamb used to conceal his craft. The biggest contemporary influence on my short essay or column is The (London) Economist: style that is, we dont agree on policy.

Columns are short, and opportunities for longer essays are very limited. The great venue was Landfall under the editorship of Charles Brash. But alas that vision has disappeared. Why are short stories still acceptable, but the essay hardly at all? They are closely related forms, differentiated by notions of truth: the essay has an ongoing external truth, the short story’s internal truth being part of a larger external one. Lamb on roast pork embodies much of a short story, which perhaps enabled me to reach out from the form I already knew, to the elegance of the essay.

I enjoyed Michael King’s Tread Softly, and I am looking forward to reading Greg O’Brien’s After Bathing at Baxters launched a couple of days ago. Many readers have treated my The Nation Builders, as a series of essays. In a way each biographical chapter is, but they are intricately and independently linked, so it is also a thesis – a book. But be it King, O’Brien or Easton, these essays are generally written for A SERIOUS PURPOSE. The joy of writing an essay for the sake of good writing, for the sharing with the reader, for amusing and informing her or him – the joy kindled by that first love from the reading of Dissertation on Roast Pork – is, alas, a charm from a distant era.

Canterbury and Globalisation

This entry was posted in Growth & Innovation on by .

Overheads for Environment Canterbury Seminar 13 March 2002

Keywords: Growth & Innovation

***********************

GLOBALISATION DEFINED AS

THE CONSEQUENCES OF THE DIMINISHING COSTS OF DISTANCE

**********************

GLOBALISATION IS A PROBLEM

BECAUSE

DIFFERENT DISTANCES DIMINISH AT DIFFERENT RATES

– INFORMATION

– PERSONS

– GOODS

– HEARTS

**********************

EXAMPLES OF GLOBALISATION

REFRIGERATION

MESSAGES

CONTAINERISATION

TRAVEL

TELEVISION

INFORMATION

MOBILE PHONES

FACTORIES – LARGE/SMALL

WHOLESALERS

COMMUNITIES

YOUR TURANGAWAEWAE

TELEVISON/TRAVEL/SUPER 12

**********************

OLD INDUSTRIAL STRUCTURES

PRIMARY – NEAR RESOURCES

TERTIARY – NEAR CONSUMERS

SECONDARY – TRADEOFF OF TRANSPORT COSTS VS ECONOMIES OF SCALE

**********************

NEW INDUSTRIAL STRUCTURES

PRIMARY

SERVICES NEAR CONSUMERS

SERVICES – CONSUMERS MOVE

SERVICES- INFORMATION CONNECTIONS

MANUFACTURING – LARGE SCALE

MANUFACTURING – SMALL SCALE

**********************

THE DETERMINANTS OF LOCATION

RESOURCE INDUSTRIES

INERTIA

MARKETS

ECONOMIES OF SCALE

ECONOMIES OF SCOPE/EXTERNALITIES

SPECIALISATION /CONNECTIONS

NICHES

AMBIENCE/LIFE STYLE

**********************

THE FUTURE OF GLOBALISATION

MOMENTUM (FOR DECADES?)

COULD THE COSTS OF DISTANCE CHANGE DRAMATICALLY AGAIN?

INFORMATION

PERSONS

GOODS

THE HEART

*********************

THE IMPLICATIONS FOR CANTERBURY

SOME BUSINESSES WILL CLOSE DOWN AS THEY CONSOLIDATE ELSEWHERE

BUT THOSE SAME PROCESSES WILL CREATE POSSIBILITIES FOR OTHER BUSINESSES

– LOW ECONOMIES OF SCALE

– LOW DISTANCE COSTS

– REASONS FOR BEING HERE

**********************

IDENTIFYING THE GROWTH INDUSTRIES FOR GLOBAL SUCCESS

STAY AWAY FROM THE HAS BEENS

DONT STEAL

THINK GLOBAL

SMALL SCALE

LOW DISTANCE COSTS

HIGH EXPERTISE

CLUSTERS

RESOURCE BASE

INTELLECTUAL BASE

Of Roast Pork: Treasury Debates the Economy

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

Listener 9 March, 2002.

Keywords: Growth & Innovation;

Just before Christmas the Treasury released seven papers on the ‘economic transformation’, the government’s term for where it wants the economy to go. The papers are individually authored, and do not represent the Treasury view. Indeed the Treasury has not yet got one. …

… (Given the precipitate policies of the 1980s, that is good news.) Rather, the papers are a part of the debate which is going on within the Treasury. There were such debates in the 1970s but the Official Information Act and electronic publishing mean that nowadays they can be more public. (The papers are available on www.treasury.govt.nz.)

Two of the papers – The Impact of Size and Distance on New Zealand Firms by Geoff Simmons and The Behaviour and Performance of NZ Firms by David Skilling – are really research papers, which ought to be done in the universities. They attempt to link firm size with exporting, but they give insufficient attention to exporting as a cluster activity, so that some of our smallest firms – farms – are our biggest export producers, because they use large agencies (such as Fonterra) to do their overseas selling.

The papers are trying to support two earlier papers by Skilling, The Importance of Being Enormous and Comparative Disadvantage. The papers seem to me to be profoundly wrong, when they argue the New Zealand economy is handicapped by its size and location. They only look at the last half century and do not consider how a much smaller and more distant (in economic terms) economy was doing so much better fifty years ago relative to the rest of the world. Something else must be happening. Because the papers ignore the diminishing distance, they do not consider its implications. It would be like explaining the long depression of the 1870s and 1880s by the distance of the world was from New Zealand, and not noticing that by the 1890s refrigeration and the telegraph had dramatically lowered effective distance.

Skilling’s fourth paper, The Cheque’s in the Mail, will no doubt be widely quoted as the first public admission by a Treasury official that the reforms have not been successful (but remember, it is not THE Treasury view).
“… there is little evidence of ongoing productive and dynamic efficiency gains in the business sector. That the improvements in growth have been small 17 years after the commencement of the reforms is concerning … My interpretation is that any further gains from the 1984-96 reform process are likely to be small, and will not improve NZ’s potential growth rate.”

Subject to a caveat below, I broadly agree with this conclusion, but I certainly do not agree with Skilling’s analysis. His papers see a steady slide down the OECD ladder in the post-war era. That is inconsistent with the evidence. The economy mainly lost its placing following two major shocks – in the late 1960s when the price of wool collapsed, and the late 1980s when there was a grossly overvalued real exchange rate. If Skilling was right about the remorseless decline, the best option might be to migrate. Because he is historically wrong, there may yet be a future for New Zealand.

Struan Little’s Lessons from the Losers compares the economic performance of four unsuccessful small economies (Uruguay, Switzerland, Tasmania and Canada’s Atlantic Provinces) and four successful ones (Denmark, Finland, Iceland, Ireland) to draw conclusions – generally that the conventional wisdom is wrong on some matters it is passionate about, like high government spending is a handicap to growth. (It seems not.) The paper is too dense to summarise here, but well worth reading.

Jas McKenzie’s Lessons from the Past reminds us that some – but not all – of the reforms of the 1980s were sensible. For him the key gain was the switching from an inward-looking growth strategy to an outward-looking one (called ‘Open Growth’ in my 1990 book). He does not think the switch was well managed (although he does not go as far as I do, to argue the macro-economics were so badly managed that the economy was set back a decade). The paper asks ‘where’s the roast pork’, recalling the same query by Secretary of Trade and Industry, Harry Clark in 1985, which alluded to the Charles Lamb essay in which a peasant invented roast pork by burning down his house.

McKenzie is more optimistic than Skilling, thinking that ‘there is now a very good platform for moving forward’, because more businesses are outward looking. If he means we are now capable of growing at the OECD rate again (Skilling’s thesis is that we will continue to slip), then I broadly agree (providing we maintain an open growth strategy). If McKenzie means we can grow significantly faster, the case is unproven. I am doubtful we will catch up the deficit caused by the macroeconomic mismanagement of the 1980s and 1990s for a very long time – if ever.

These are but some views from the diversity of Treasury officials. Regrettably there are none from its rogernomes. (There must be some, reflecting the diversity in the profession.) Whether they are in or outside Treasury, they will not have had much roast pork.

The Macroeconomics Of the Superannuation Fund

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

This was a note I prepared: 24 February 2002.

Keywords: Macroeconomics & Money; Social Policy;

Unfortunately the debate on the superannuation fund established by the Labour-Alliance Government in 2001 has largely ignored its macroeconomic effects. This paper takes the orthodox position that a government has to manage its fiscal position, including its deficit or surplus. There is no necessary rule – such as that propounded by the US right – that sets an a priori level for the fiscal position – such as the government should be in exact balance.

The Historical Perspective

The judgement from historical experience, underpinned by a theoretical perspective is that the New Zealand government should run a surplus on its current account. For most of the post-war era it did. Except in periods of extreme stress (or manifestly incompetent management) current revenue exceeded current outlays. The surplus was then invested in the state owned enterprises – electricity, communications, transport … – which however required more funds than the current surplus (and depreciation) provided. The government borrowed to fund these businesses’ investment, and so its overall position on current plus capital account was a deficit – it is was a net borrower.

The point here is not to defend the effectiveness of the investment in state owned enterprises, which is a growth and efficiency issue. The point is that for macro-economic purposes the government usually ran a current account surplus (a.k.a. the ‘internal’ current surplus), which was invested in productive enterprises. When the government divested itself of these enterprises it was no longer required to invest in them. Now they went directly to the financial market to raise funds, so that the macro-economic pressure on economy did not change much. (There is a second order effect from the balance between public and private financial paper, but that need not bother us here. Privatised Telecom’s bond may be judged by the market as only a little different from a government bond.)

Following the prolonged fiscal reorganisation of the 1980s, the 1990s saw the return of the current government surplus which had dominated the post war era. In my view – I set out the macroeconomic theory below – that surplus remains as necessary as it was in the past. In particular it is not available for current consumption (either as higher government expenditure, say on education and health, or higher private expenditure, say with lower taxation or higher social security benefits). One of my anxieties is that because the debate has ignored these macroeconomic issues, and the theory set out below, it will lead to fiscal irresponsibility, and ultimately fiscal instability and poor economic performance.

The Theoretical Perspective (1)

The following macroeconomic theory is orthodox. (I shall mark the one step which is not wholly accepted). Basically the argument is that given the poor domestic savings record (relative to total investment) the New Zealand economy needs a government current surplus to reduce the balance opf payments deficit which will contribute to New Zealand’s growth prospects.

The analysis begins with the standard national accounting identity that output (GDP = Y) is the sum of a series of expenditure comments.

Y≡ C + G + I + X – M,

where the relevant variables will be defined below. The equation can be rewritten

M – X ≡ (I – ((Y – T) – C)) + (G – T)
or
M -X ≡(G – T) + (I – S).

That is the deficit of the current account of the balance of payments (Imports (M) less Exports (X))
equals
the deficit in the public sector (Government Spending (G) less Taxation (T)) plus the deficit in the private sector (Investment (I) less Private Savings (S)).(2)

The import of this is that a smaller government sector deficit (or a larger government sector surplus) will contribute to the reduction of the current account (external) deficit.

There are a number of reasons why a smaller external deficit (all other things being equal) may be preferable, but they are often of second order.(3) There is a compelling first order reason. A large external deficit is associated with a high real exchange rate. A high real exchange rate discourages the tradeable sector. (The inverse of the real exchange rate is a measure of the profitibility of exporting and import substitution. (4))

In my view – it is the theme of my book In Stormy Seas – a competitive tradeable sector is the key to the growth performance of a small open multisectoral economy such as New Zealand. First it can grow faster than the economy as a whole as it penetrates overseas markets. Second this fast growth is usually the result of new technologies and other productivity improving activities (which, it must be added, feed from the tradeable sector into the domestic sector). That the New Zealand producers are competing against foreign ones forces them to adopt new and best techniques in a way that need not happen in the sheltered economy. Third, the tradable sector generates and conserves one of the most scarce of all resources – foreign exchange – which is demanded by consumers (and in New Zealand’s case investment) as the economy grows, and a shortage of which can choke of growth. (5)

Thus by maintaining a current internal surplus, the government can contribute to economic growth by keeping the external deficit down, and so increasing the profitability and ultimately the growth, of the tradeable sector which drives the growth of the economy. (While Keynesianism is often associated with deficit financing, this policy prescription – as distinct from the prescription that the surplus or deficit must be managed – only applies in particular circumstances, and arose when governments were large investors in enterprises and infrastructure.)

IIt should be noted that the history, and implicit in the application of the theory, makes the behavioural assumption an inability of the private domestic sector to fund the private investment required for economic growth. While we have exaggerated the failure of private savers (because the rhetoric ignores there is an interaction between the household saving on which it focuses and business savings which it ignores) there seems to have been a deterioration in the last fifteen years, which suggests a higher current internal surplus may be required. (6))

Implementing the Strategy

What we have seen here is that the New Zealand government needs to run an internal current surplus as a part of its economic growth strategy. The practical issue is what it is to do with the surplus. Aside from consuming it, and damaging the growth prospects, the viable strategies include:

1. Invest it in state owned enterprises. This was the strategy until the mid-1980s. It is not possible now because there are not the same depth of SOEs. (There is also the issue as to how wisely the government invested in the past, and to what extent it could more effectively invest in the future. One of the reasons for the government divestment of the SOEs was the lack of confidence in the ability of the political process to invest efficiently.)

2. Pay off government debt. This has been largely the strategy of the 1990s, and was probably a prudent thing to do given the high government debt. But eventually there will be no government debt to pay off, and in any case some public sector bonds are almost certainly necessary for the efficient working of the monetary system. (The government could go on to accumulate significant foreign assets. Probably this is impractical – leaving aside the domestic consequences – given that there will arise an almost irresistible public clamour to spend them.)

3. The government invests directly or indirectly in private enterprises. This strategy happened in the past through such mechanisms as the State Advances, the Rural Bank, the DFC, the contribution of the funding of Tasman and NZ Steel and so on. (Nationalisation may also seem to be another example, although strictly the purchase itself is portfolio rearrangement.)

This option has to be considered, not for ideological reasons of public ownership, but because prudent macroeconomic management requires it. Indeed I would greatly regret if the issue became an ideological debate over nationalisation, rather than a technical one of the best way to bet the macroeconomic balances right.

Any investment of the government surplus arising from these macroeconomic considerations in the private sector should be largely on the basis of commercial criteria. If there is a belief there is a need to subsidise or provide incentives for some particular enterprise or industry, this should be done with another policy instrument (and that should be transparent). (8) Moreover, any investment should be relatively conservative and low risk. As good a model as there is for such investments is a pension fund, especially if there is separation between the managers of the fund and the government.

I do not know whether the logic of the analysis set out here had any influence of the thinking during the development of the Cullen proposed superannuation fund. However as I understand the institutional arrangements, the outcome is not inconsistent with the pragmatics set out above. This does not mean the scheme is macroeconomically perfect, and cannot be fine tuned. But the broad structure seems sound.

There are potentially three other advantages to the arrangements. First the government has on its books an item which reminds us that we have a growing problem of funding New Zealand Superannuation (and, more generally of providing for the elderly) as the population ages. The amount is not an actuarial representation of the actual situation, but at least there is an institutionalised marker.

Second, the scheme does not interfere with private provision.

Third, the fund and its investments are less vulnerable to political interference, especially of the form in which the public wants the funds to be used for a (temporary) increase in consumption by selling off the investments. That the funds are instead being used for New Zealand ownership of New Zealand enterprises offers an understandable alternative that would be supported by many New Zealanders (and New Zealand businesses).

Summary

The public debate over the scheme has been largely in terms of it as a pension scheme for individuals. As such it has missed the macroeconomic implications of the scheme, which on the basis of the above analysis seem to be largely beneficial.

If the aim of the fund is to increase the prospects of the nation being able to handle the growing numbers of elderly in the future, the greatest gain is likely to be from the improved macroeconomic management of the economy.

Endnotes
1. The analysis here has been simplified (e.g. there is no government investment nor public non-taxation revenue, the flows are measured net), but the conclusions are robust to such simplifications.
2. Private Savings (S) = Total Income (Y) less Taxation (T) less Private Consumption (C)
3. Lower overseas debt means the gap between domestic production and national income is smaller.
4. Although import substitution can be important in principle, I do not see many prospects for efficient import substitution in practice at the moment, so the remaining account focus on exports.
5. While the views expressed in this paragraph do not seem particularly contentious, I am not sure they are as vigorously held as I hold them.
6. The so-called ‘Ricardo’ effect in which public saving is offset by private dis-saving has little behavioral credibility.
7. It is tempting to suggest the investment should be solely in the tradeable sector. Such a strategy should be eschewed insofar as it offers low cost funding to exporters. Their profitability should be governed by the exchange rate, and I do not see a case for additional support. If there is, it should be transparent.

Terrorism and the WTO: The Importance Of the Rule Of Law

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

Listener 23 February 2002

Keywords Globalisation & Trade; Political Economy & History

I fear the terrorists have won. Oh sure, they may all be eventually eliminated by the efforts of the Western Alliance, but another generation will rise, who will have had confirmed that the methods of bullies and thugs are justified. …

… Many people live in political systems where such arbitrariness and tyranny predominate. But we in the West generally do not. A few hundred years ago it did, but our sort of society evolved a system of the rule of law in which the brutal power of the executive was increasingly restrained.. The Red Queen’s ‘Sentence first – verdict afterwards’, is a joke to us, but a barbarous reality in some regimes, where even the trial, if there is one, can be a farce.

The terrorists were bullies when they crashed planes into buildings. They may argue that their actions were justified by some higher power, of which they were the sole judge. (The English cut off the head of the head of a king who argued that.) When America and its allies struck back against those who they deemed terrorists, they were appealing to the same principle. (The British government at least admitted they did not have enough evidence to convict Osama Bin Laden in a court. But they sentenced him anyway, and joined in the attempted execution.) The West’s responses sets a bad precedent for any terrorists: might is right; bully if you can get away with it.

The rule of law not only protects our human rights, but in doing so it protects private property rights, the result of which has been to promote economic growth. Thus the prosperity of security against arbitrary interventions by the state, is combined with material prosperity as business takes place in a context where outcomes are not upset by arbitrary interventions, and where there is the security of knowing that the proceeds of successful enterprise will not be arbitrarily confiscated.

While this broadly applies in some economies – perhaps not a majority of them, although in all prosperous ones that do not depend on quarrying resources – does the rule of law apply to trade between economies?

It is getting there. In 1999 the US slapped a tariff of at least 9 percent and up to 40 percent on our lamb exports despite an agreement that it was bound to (could not be higher than) only a few cents per kilo. The surcharge was entirely for domestic political purposes, and it may have cost New Zealand farmers up to $45m over three years. Our redress against the bullying was to follow World Trade Organisation (WTO) procedures, which found in our favour. The US, having stated it was bound by international trading rules, reduced the tariffs to the bound levels.

The role of the WTO is to develop a rules based international trading system, where traders cannot do the equivalent of acts of terrorism or invading other countries because they are angry. Of course the exact rules matter and, just as in our history, the powerful are most active in establishing them and the rules the create favour themselves. But rules evolve. When signing the Magna Carta the barons meant literally that they should be judged by their peers, and did not envisage the day where the principle would apply to their serfs.

Today’s barons are countries and corporations. How should New Zealand, down at the serf level, approach the WTO? In my view we should welcome the development of rules-based international trading system, but criticise – preferably in association with other small like minded nations – where the rules favour the powerful. But in the end we must expect – with rare exceptions – to sign up, even where the rules are onerous.

We should vigorously promote human rights, minimum (appropriate) working conditions, environmental standards, and the protection of culture and national identity. Sometimes another agency may be a better means of regulation, such as protecting working conditions via the International Labour Organisation conventions. But we should reject the principle that every existing job must be permanently protected, which seems to be the only concern of some – but not all – protestors against the WTO (their own jobs of course). Other non-governmental protestors will contribute to the development of more humane and ecologically sustainable ones.

(The logic of the evolution of a rules-based international trading regime does not apply to bilateral trading deals. We seem to be involved there because competitor countries, especially Australia, want them, and we fear being discriminated against if we dont join in. )

A common complaint against the WTO is that it reduces national autonomy. Sometimes it has tried to unnecessarily. But usually the loss of autonomy begins with the country getting involved in international trade. That is the point of the rule-of-law based societies. Once involved in social intercourse, we give up some autonomy. Rules and conventions in a civil society dont reduce autonomy, but enable it to be maximised. They limit tyrants, bullies, thugs, terrorists and other savages. We should pursue the rule of law in international trade: we should pursue the rule of law in international politics.

Mind Your I’s and Q’s

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

Book Review of Capitalism and Social Progress: the Future of Society in A Global Economy, by Phillip Brown & Hugh Lauder (Palgrave, $67.95)
Listener 16 February, 2002.

Keywords Political Economy & History; Labour Studies

The book recalls ‘in the aftermath of the Second World War the state emerged with a new mandate to create greater economic security and opportunity, where all would see their slice of the cake increase even if some were getting more than others.’ It was a ‘“Golden era” of western capitalism … built on “walled” economies of massed-produced goods and services which offered a decent family wage to low-skilled workers. … Much of the prosperity in this period depended on a political settlement between the state, employers and workers.’

The broad details of the era applied as much to New Zealand as to other Western economies, And as here, throughout the West it broke down in the 1970s. The authors suggest a couple of reasons. Partly there were inherent contradictions: the era spoke of equality but it treated genders unequally and barely recognised minorities. The authors note the structural change in the 1970s’ world economy, with lower true profitability and slower productivity growth. (I would add some critical technological changes and the social diversification arising from affluence.)

The breakdown led to an intensification of globalisation. There are many books which tell this story. This book’s interest derives from the two professors of education distinctive perceptions about future possibilities. The ‘Golden era’ cannot be recreated. Instead we need to harness the ‘forces of knowledge-driven capitalism’. They particularly emphasise ‘collective intelligence’, which is ‘integral to the reinvention of society’.

There is a fashion for combining two grandiose words to give the impression of a deeply significant concept which is as shallow as the writer. (Most purveyors of ‘social capital’ have little understanding of the meaning of ‘capital’.) ‘Collective intelligence’ would appear to be such a phrase, except the writers are expert, and earlier in the book set down much of the professional understandings on the underlying notions. They argue we must ‘reclaim “intelligence” from the grip of the eugenics movement and from its impoverished representation in the form of IQ tests. … The idea of intelligence in the Golden era is redundant in the world in which we live.’ It now has to encompass the artistic and emotional dimensions of human capability, the ability to solve problems, to think critically and systematically about the social and material worlds, to apply new skills and techniques, to empathize and to have personal skills needed to communicate and live along side one another.

The ‘collective’ comes from the author’s rejection of individualistic accounts of the human condition. ‘Private troubles felt by people require public solutions, which cannot be resolved without collaboration with family, friends, neighbour, co-workers or fellow citizens. In post-industrial societies it is the collective intelligence of families, communities, companies and society at large, which will determine the quality of life as well as competitiveness.’

This leads to a stimulating discussion of the learning state and the high-skills economy. What a pity that the authors were not asked to speak to last year’s Knowledge Wave Conference (especially Hugh Lauder, who was a New Zealand university teacher and also published poetry here). It would have had a more focussed outcome if they had.

Subjects Education, Growth & Innovation, Labour Studies

The Other Side Of the Ditch Cartoon Exhibition

This entry was posted in Globalisation & Trade, Literature and Culture on by .

Notes for Panel Discussion, National Library, 14 February, 2002.

Keywords: Globalisation & Trade; Literature and Culture;

The superficial relationship between Australia and New Zealand was captured by last night’s Evening Post article ‘Why do We Hate Australia?’. The short answer is, of course, if the ‘we’ refers to New Zealanders, that we dont hate Australians – we have a complicated relationship with them which is similar to a couple of siblings living with one another in the same unfashionable corner of a city.

However if you are a columnist or a journalist the cheap easy is to vigorously pretend that we hate one another – or that we ought to – blowing past incidences into eternal grievances. Of course we should laugh at, like siblings do, over events of the past, the other’s foibles and the interactions that occasionally go wrong, perhaps with a gentle affectionate chiding. But ths is not hate. And note – as curator Ian Grant observed the smaller less successful sibling jokes more than the other, for there are more New Zealand than Australian cartoons in the gallery.

Yes, in many ways the Australians have been more successful than New Zealand in recent years. There are exceptions – not all of which are contestable – but that shallow journalists can list those exceptions reminds us that they are uncommon. So let me talk about the largest failure in my own area of economics.

I first got into the systematic comparisons of the Australian and New Zealand economies about twenty years ago, when international data began becoming available. Reflecting this improving data base, the Australians then had a richer more robust debate on their relative place in the world economy and it was natural to look to it as an alternative to the thinness of the New Zealand discussion. By about ten years ago it became quite clear that the Australians had managed their economic transformation in the 1980s better than we had, despite on some measures having the more difficult task. That superior economic performance applied through the 1990s, as a recent paper by Paul Dalziel confirms.

It seems that the superior Australian economic performance reflects superior economic policy. Both sides of the Tasman had vigorous advocates of those neo-liberal polices we call Rogernomics. The difference was we implemented them, but the Australians were much more selective, so the extremism of Rogernomics was moderated.

Why did the Australians fail to adopt rogernomics? The answer seems to be in the different constitutional arrangements. Until recently it was possible in New Zealand for a small group of politicians – inside parliament and out – to seize power and implement policy without any public consultation or agreement. If those policies are effective, then the economy benefits, but if they are flawed – in the way that rogernomics has proved to be – there is no mechanism to weed out faulty policies. This the story of the decade after 1984. Australian political institutions, with their complicated set of formal and informal checks and balances, broadly prevented the seizure of power by bolsheviks – albeit in this case bolsheviks of the right – and required policies to be debated and evaluated, so that bad policies get eliminated, or if implemented reversed as their failure becomes apparent. I add that MMP means seizure of power by bolsheviks – of the right or left – is much less likely nowadays. It is now an interesting question whether as to whether New Zealand or Australia has a better political framework for economic management.

One test may be the question of a common currency – which really is about New Zealand adopting the Australian dollar as its underpinning currency, in a manner similar to the Argentinians who until recently had a full US dollar backed peso, except their whole system has collapsed in the last month or so, to great economic and political turmoil.

It would be easy to argue that the New Zealand advocates for the common currency are post-rogernomes, and suggest that, like Jubilation T. Cornpone, undeterred by their ongoing record of failure they march from defeat unto defeat, . One might also note the incredulity (and mirth) of the Australian economics profession when the proposal was first mooted. Hooking into the Australian dollar may be in some New Zealander’s interest. A fixed exchange rate between one’s two markets is clearly advantageous to the exporter whose one ambition is to sell to Australia. Unfortunately over 80 percent of exporters, and over 90 percent of the economy, have other ambitions..

But really to argue the case we need to go back to fundamentals. At issue is a fundamental weakness of the economic model which Rogernomics used. Basically it is a one price model – the price between money and aggregate production. If relative prices between the various components of production and expenditure do not change or do not change quickly, then the one price model works reasonably well. But the reality is that sometimes prices of the components change rapidly. For instance the Argentinian crisis was precipitated by the US dollar rising relative to other currencies, which impacted adversely on the exporters who operated outside the dollar zone, and the import substitutors who competed against imports from elsewhere.

For a number of reasons Argentina was not a well run economy and we could easily get bogged down in the details of its failure. So consider another example of a country which was in a common currency which slumped into economic and social turmoil when there was a significant relative price shift: New Zealand in the early 1930s, when the economy had a common currency with sterling, which had the merit that most of our exports went to sterling destinations. Even so, when the world depression crashed New Zealand export prices relative to import prices, much of the policy of the time was focussed on how to restructure the domestic price levels. A part of that restructuring was the devaluation of the New Zealand currency against sterling – in effect the busting of the common currency union we had with Britain. In the seventy years since, New Zealand has never entered a common currency.. Nothing has happened since to suggest it will work a second time, if we get a major relative price shock – which the Argentinian experience shows remains a real threat in the volatile international system.

Why then advocate a currency union with Australia? As I have said up to 10 percent of the economy may be beneficiaries. And of course, those who have only got up to speed on the exceptionally simple one-price model (the model used by monetarists) are not going to see the treacherous prospects for a real economy with many prices. But I think there is a deeper issue.

There exists a group of New Zealanders who suffer from the colonial cringe – an inferiority complex about the prospects for New Zealand. They do not have that sturdy faith in the country being a success which I portray in my recent book The Nationbuilders, and which is common in Australia today. Instead they believe that New Zealand cannot make a go of it on its own, but needs to hook up with some bigger economy.

Australia is an obvious economy to combine with, and so little brother – lacking confidence – suggests he rejoins big brother. But if New Zealand is too small to go it alone, then the likelihood is that Australia is too small too. Its economy is after all only six time bigger than New Zealand. The two countries combined would be but 2 percent of the OECD. So let me make a prediction if New Zealand adopts the Australian currency. The benefits – if any – would prove minuscule. In a very short time the Jubilation T. Cornpones would be advocating joining their cousin, the United States of America.

Dont Cry for Us Argentina

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

Listener 9 February 2002.

Keywords: Globalisation & Trade; Macroeconomics & Money

Street demonstrations and the fall of four presidents in a fortnight tell us something is desperately wrong with the Argentine economy (which, with 56 million people, is the world’s 17th largest economy on some measures). It is a century since the expression ‘as rich as an Argentinian’ was in vogue, and many things have gone wrong since. But the precipitant of the recent crisis was the ‘currency union’ with the United States. The Argentinians had abandoned an independent currency and locked their peso to the US dollar. This ‘dollarisation’ is much stronger than pegging the exchange rate, as occurred in New Zealand before 1984. In a currency union there is a common currency – in effect the US dollar was the Argentinian currency, although they used a ‘currency board’ so that while there was a local currency, the ‘peso’, all financial contracts were effectively written in US dollars. The arrangement has the advantage of price stability if prices in the primary currency (the US dollar) are stable.

When the US dollar appreciated relative to the rest of the world, the peso lock-stepped up too. Suddenly the Argentinian exporters found they could not afford to export, while their domestic industries were destroyed by a flood of cheap imports. (Brazil began selling meat to Argentina.) Unemployment doubled. The obvious solution was to devalue the peso, but that is impossible in a currency union. Those who had peso deposits in banks wanted to convert them into US dollars before the devaluation. The government slapped on financial controls which had bizarre impacts: small businesses which traded in cash rather than credit found they had no customers. At the same time, people’s debts – their home mortgages – were denominated in US dollars, so a devaluation increased their debt burden. Even if you had a job you might wake up one morning to find your debt servicing had increased by around 50 percent. People took to the street, governments fell, Argentina reneged on its international debt repayments, and the peso was clumsily devalued. (The banking system may even collapse.) The currency union was destroyed forever – or at least until the Argentinians forget.

Twelve countries of the European Union have recently formed a currency union. They took a further step at the beginning of the year when they introduced EU wide notes. Could they too have a similar crisis? It is much less likely. The European economies are far more dependent on each other’s markets. (Only about a tenth of Argentine exports go to the US). There is a common labour market, so the unemployed can move to areas of labour shortage. (Argentinians cannot move to the US.) There is an, admittedly weak, fiscal union, which means that transfers could be made to struggling regions. (At best the Argentinians could only get international loans, which have to be paid back.) The fault is not that of the US. Argentina unilaterally locked to the US dollar, without any encouragement from America (other than from its right-wing ideologists).

Could this happen in New Zealand? It has. Until 1933 New Zealand was in a currency union with Britain. A different shock – compounded by a world depression – led to similar economic stress, including the Queen Street Riot. Could it happen again? Yes, if we form another currency union.

This is the official policy of Business New Zealand, who want a common dollar with Australia. (About a fifth of our exports go there.) A 1998 report by Victoria University of Wellington’s Institute of Policy Studies vigorously championed an ANZAC dollar. (Others at the time favoured an ANZUS one.) This column did not review the report because its monetary theory seemed exceptionally muddled, and there was no reason to waste the reader’s patience. But even the most superficial reading then would have observed the report paying little attention to the lessons that could be learned from the 1930s, which would have flagged that the report’s uncritical support for the ANZAC dollar was unwise. Today’s reader might reflect that there is nary a hint in the report that the sort of crisis which hit Argentina was a possibility under a currency union. The report is not the deliberation of policy analysis, but the rhetoric of policy advocacy.

When an economy is going well there is a wide range of economic managements which appear to work, and it is straightforward to advocate any one of them. It is when the vicious external shock happens – typically about once a decade for New Zealand – that the management regime really matters. When the sea is calm, the captain and steering hardly count. In stormy seas differences in policy quality come into their own. As Keynes said ‘economists set themselves too easy a task if in tempestuous seas they can only tell us that when the storm is long past the ocean is flat again.’

Gambling in New Zealand: an Economic Overview

This entry was posted in Regulation & Taxation on by .

Draft Chapter in Bruce Curtis (ed), Gambling in New Zealand (Dunmore Press, 2002) Chapter 3, p.45-58.

Keywords Regulation & Taxation

While the practice in New Zealand is to define the gambling industry as that which the Department of Internal Affairs is involved with – including casinos, the TAB, gaming machines, the Lotteries Commission and a host of raffles and housie evenings – it is not immediately obvious why the share market or the insurance industry should be excluded.(1) Both involve the purchase of entitlements with uncertain outcomes, and each involves some of the regulatory problems of ensuring the purchase being honestly managed. Moreover, much of the gambling industry uses the terms such as ‘investment’ with the implication that, say, backing a geegee is not very different from investing in GG Corp. However this chapter focuses on the DIA defined industry, perhaps because it is seen as recreational compared to insurance and equity investment, although their regulatory lessons will not be ignored.

Another industry where there are some parallels is the alcoholic beverage industry, insofar as both gambling and drinking can generate socially damaging consequences. It would be foolish to waste the lessons learned from alcohol regulation.

The economic framework of this chapter arises from taking the price system as one of our social coordinating mechanisms. If the true social cost of any transaction is reflected in (proportion to) the price involved, then the coordination system generates self-policing beneficial voluntary transactions, because a transaction will not occur unless the transactors each think each will be better off. In practice, the assumption of price reflecting social cost appears to apply for most transactions, but there are exceptions – ‘externalities’ – where the transactors do not (or cannot) take into consideration all the costs. For instance a drinker may be unconcerned that driving in an inebriated state may cause death and destruction to others. Insofar as the price of the drinker’s alcohol does not reflect that cost there is an externality. Economic policy is often concerned with minimizing such externalities, although there are other tasks, such as ensuring the transactors know the true prices.

Gambling has been associated with sin. Secular economics is inclined to abjure such judgements, leaving them – in economist’s Denis Robertson’s famous retort – to the Archbishop of Canterbury.

A variation is that gambling is essentially an economically regressive, that is it increases the inequality of wealth by transferring it from the whole population to a few winners. This is something economists should be able to address, albeit without necessarily imposing their own personal judgements on what is an acceptable wealth distribution. Capitalism involves regressive processes, in that it depends upon, and creates opportunities for, people attempting to improve their lot. Thus, Bill Gates becoming the richest man in the world was economically regressive. However a central feature of this process is that in doing so, it involves new products or cheaper processes which benefit others – in Microsoft’s case the benefits may be spread over perhaps of others. Most defenders of capitalism would say that the benefits from the innovation outweigh any wealth regressivity. Many would say that the evidence is that most often the overall outcome is a reduction in inequality – for income anyway – as competition shares the benefits of the innovation through the entire economy.

While there may be some – probably minor – offsetting gains from workers obtaining jobs in the gambling industry, generally gambling has these wealth regressive effects, without the innovation that goes with the just described capitalist process. (We should not make too great a distinction though. Keynes likened stock exchanges to a casino and, noting that it is ‘usually agreed’ that the latter ‘should, in the public interest, be inaccessible and expensive’, thought ‘perhaps the same is true of Stock Exchanges.’(2) Ambrose Bierce commented that ‘the gambling known as business looks with austere disfavour upon the business known as gambling.’(3)) It is a matter of public policy whether the regressivity from gambling is a reason for prohibiting or restricting it. The chapter returns to this issue in regard to taxation.

In practice the economics discipline simply observes people gamble, usually for pleasure. Even so it acknowledges that insofar as there are unusual and large externalities, there may be a case for specific regulation, and wonders uneasily about the wealth regressivity of outcomes. Thus the approach is to examine the gambling industry, from an economist’s perspective, in much the same framework as for any other industry, although it will be necessary to look at the peculiarities arising from the regulatory interventions. It then looks at the externalities arising from ‘problem gamblers’, and finishes by exploring some of the regulatory issues which arise as a result, including that of tax.

The Gambling Industry

It may be useful for non-economists to begin with the distinction between ‘turnover’ and ‘expenditure’. This is necessary because some proportion of gamblers’ outlays are returned. There are no comprehensive figures but in the March 1998 year, turnover seems to have been around $7b of which around four fifths was returned to the punters. (Table 1) It is not logical to compare a turnover with the usual measure of economic activity, GDP, any more that it is sensible to make a similar comparison for the high turnovers of financial markets (many of whose transactions also cancel out), or to measure a supermarket’s performance in terms of the cash handed across the counter and ignore that which is it returned in change.

The convention is to describe the difference between the punters’ outlays and their prizes as expenditure. This corresponds sufficiently closely to the National Account’s measure of GDP to allow the comparison that in 1998/9 expenditure on gambling in New Zealand was around 1.2 percent of GDP, or around 2.0 percent of Consumer Expenditure. It is not a big industry. The standard national accounts ‘contribution to GDP by industry’ table lists 30 industries. Were gambling to be separated out – instead of being in the cultural and recreational services industry – it would have been 27th.

Industry growth seems to have largely been due to new products, typically in new establishments. The nominal expenditure on ‘racing’ betting has hardly changed over the last decade, despite the introduction of betting on other sports. Nor has the expenditure on the New Zealand Lottery Commission products grown much over the period (after a boom in the late 1980s following the introduction of lotto). Growth in gambling outlays has been on gaming machines introduced in 1990 and casinos introduced in 1994. At least some of that growth of outlays on the new products may have displaced the more traditional forms of gambling. However, some may have come from increased tourist outlays, or from New Zealanders using domestic outlets rather than going overseas. (There seems to be no information on internet gambling, which technically occurs offshore). But assuredly a major source of the growth has been the attraction of new products.

It is easy to argue that this growth represented an economic benefit, problem gambling aside, because of the jobs and economic activity created. Economics is cautious about the magnitude of the gain, because the additional expenditures on gambling usually reflect less spending elsewhere in the economy and hence fewer jobs and less economic activity there. Insofar as some of the additional gambling is by foreign tourists (and especially when gambling opportunities in New Zealand are a reason for their coming to New Zealand), or where it results in New Zealanders staying here rather than go overseas to gamble, there are net gains to the economy. However, almost certainly the main gain is the additional pleasure New Zealanders obtain from the opportunities that arise from the new products. The economics discipline tends to be relatively unreflective about the exact source of the pleasure. The gambling may be incidental, as when one goes out with one’s mates for a flutter at housie or a casino. It may enhance some the pleasure on another activity, such as following horse racing. Or the individual may obtain greater pleasure risking some money on a gaming machine than spending it, say, at McDonalds. Economics simply acknowledges that people generally deem themselves better off because they take advantage of the new gambling products.

The gambling industry operates under specific statutes (as well as the general law), the effect of which is often to create barriers to entry for new businesses and impediments to innovation. Economists have an a priori expectation that the barriers to entry would discourage efficiency and innovation, both of which would reduce consumer welfare. However that has to be proven, and the alternative of an unregulated industry might be more inefficient and less welfare inducing than one with appropriate regulation. The reasons, for and consequences of, this regulation is the central concern of this chapter. Were there not such regulation, or need for it, the gambling industry would be one of numerous small industries which make a contribution to economic welfare by employing workers, resources and savings, and providing people with activities they appreciate.

The Economics of Problem Gambling

According to the 1999 New Zealand Gambling Survey, around 1 percent of New Zealanders were then problem gamblers (and they accounted for 20 percent of reported gambling expenditure, so each spends about 25 times as much as the average for the rest of the public). Other chapters address the details of this addiction. This chapter merely accept that there is an economic problem, in the sense that some people’s gambling behaviour generates economic externalities. The problem of such externalities has been best explored in the case of alcohol misuse, where around 5 percent of the population are deemed problem drinkers (drinking about 40 percent of the total alcohol consumed, or about five times as much as the average for the rest of the public).

In drawing parallels between problem drinking and problem gambling, the intention is not to suggest they are identical, nor that gambling addicts cause the same level of social and health havoc as alcoholics. However it is useful to reflect on the various ways that the community has tried to deal with the drink problem. In particular until the late 1980s, industry control was seen as the main way of dealing with alcohol problems. Since then there has been a switch to great emphasis on the normalcy of drinking, while policy instruments have been increasingly targeted on prevention of pathological behaviour, of both individuals and social groups. In the jargon this is a shift from ‘supply-side’ controlling of the detrimental activity, to ‘demand-side’ controls.

Yet although alcohol industry regulation before 1990 focussed on prevention of pathological behaviour by restrictions on industry activities, there is little evidence that it was effective. Despite limiting access to alcohol by restricting outlets by location, and by hours of opening (not to mention a host of petty restrictions on what may be purchased from, or consumed at, an outlet) alcoholism was rife, and death and injury from heavy drinking evident.

Following the 1989 Sale of Liquor Act, which was largely aimed to regulate the liquor industry much like any other, and specifically states that the only reason for a specific restriction is to reduce liquor abuse, there has been no upsurge of drunkenness. (Indeed alcohol consumption has continued to fall, although this probably reflects long term trends in social behaviour and attitudes, changes in the tax regime, and successful public health promotion policies, rather than the legislative change per se. More recently there may have been a surge in teenage drunkenness, for reasons possibly attributable to wider liquor advertising or the lowering of the drinking age.) Of course the industry remains subject to the ordinary requirements of industry legislation (such as outlets requiring consents under the RMA) but generally the production and distribution side of the industry is as unregulated as any other. There are some requirements in regard to customers, including minimum drinking and purchasing ages, and that those who inebriated should not be served. There has also been a vigorous public education campaign targeting alcohol abuse (especially at prone groups), rigorous measures to curb drunk driving, while the taxation has been raised and rationalised.

The point here is not to argue that exactly the same policies should apply to gambling (and it is certainly not to imply that gambling addicts should be treated with alcohol and drug addicts). The point is that a shift similar to that which occurred in the alcoholic beverages industry is occurring in the gambling industry, although perhaps less coherently because there has been no community-industry based equivalent of the Alcohol Advisory Council of New Zealand. It seems likely this trend to increasingly treating the gambling industry much like any other will continue, although there are some production side issues peculiar to it.

In summary, while not denying there is a problem of pathological gambling, it is not obvious that this should be the sole focus of regulating the gambling industry. Excessive zeal at the expense of normal gambling will result in welfare losses to the population as a whole, through reduced opportunities and inefficient uses of resources.

Production Side Issues

There is an association between gambling outlets and criminals, which must come partly because of legal restrictions on an activity for which there is a popular demand. Even if these restrictions were minimized there would still be an attraction for criminal elements, in part because gambling provides an opportunity to launder illegal acquired funds, and also because of the opportunity to bias outcomes against the apparent odds.(4) New Zealand has dealt with criminal potential by a licensing regime which involves the licensees to not have a criminal record. This seems eminently sensible, for it is a form of quality licencing not a substantial barrier to entry. Similar provisions apply to the car hire industry, but there is no shortage of crime-free taxi drivers.

The issue of the possibility of a business organizing its gambling operation in order to make an ‘unfair’ profit by biassing outcomes to favour the business, is more complicated. It is an old problem. The life assurance industry required statutory regulation from the nineteenth century for a similar reason. It probably cannot be simply covered by existing legislation, such as the Fair Trading Act, because of the complexity of the transaction (although of course existing consumer legislation applies to gambling and there may be usefully extended). In recent years the general approach in financial markets has been to provide investors with as much information as seems reasonable and then leave them to judge. However requiring, say, a casino to provide each customer with a prospectus would seem clumsy, while the consumer information provisions of the Fair Trading Act may not be sufficiently robust. It is not always obvious what information a punter requires. In the case of fixed odds betting, the true odds may be all that punters need to know. But it is hard to identify a meaningful set of information for, say, a lotto transaction. The finance industry and government are currently struggling with the required information for consumer credit transactions. There is no single parameter which really reflects the ‘true cost of credit’, although it may be possible to legislate for one which gives the borrower a rough indication of the return they face. Much the same complexities apply to gambling where there are not fixed odds.

Were there a demand, there would be a case for providing the odds for other fixed odds transactions, such as in casinos or gaming machines and housie. The remainder of the industry would then be dependent upon the trust of the punters, as for racing and the lotteries commission activities, underpinned by an annual report and parliamentary scrutiny. Raffles would require some other provision. This suggests that consumer information is not a justification for restrictions or barriers to entry where there are clear fixed odds, although there may be a role for licensing operations to eliminate criminal activity, and perhaps a case for some prudential supervision to ensure that the offered odds are true, where the punter cannot verify them.

In which case what is the justification for restrictions such as on the number of casino outlets and the prohibition of private bookmaking? Undoubtedly some of the public opposition is exaggerated fears of problem gambling – a reversion to the past liquor strategy of attempting to control outlets as a resolution. One suspects some of the opposition comes from puritanism – H.L. Mencken described it as being haunted that someone, somewhere, at sometime may be having fun – an externality the economics profession tends to dismiss, but which remains politically important. There is also a widespread belief that a casino (in particular) damages local interest in ways that resource consents do not fully take into consideration – but that is an issue for reforming the RMA. (As also in the case of the liquor industry another source of litigation is incumbent competitors try to use the regulatory environment to restrict entry of competitors.)

Whatever the personal view an economist, the discipline draws attention to the consequences of the barriers to entry, which are likely to lower efficiency and slow product innovation. In addition, in the case of casinos those regions which have them may benefit from their presence via the attraction of New Zealand tourist from outside the regions the expense of other regions.

Where it is harder to provide the consumer with meaningful probabilities – such as the lotteries and totalisers – there may be a case for closer supervision of those activities. A government-owned monopoly is one such means of doing so (which also enables the government to appropriate any monopoly profits). Even so, the economist would worry about inefficiency and reluctance to innovate. A government monopoly would provide evidence to deny both worries, but the economist is likely to be happier with a market test.

Another issue is the gambling business which does not (or cannot) pay its debts – the myth includes the (illegal) bookmaker who skips when the long odds horse wins and the raffle whose prizes are eaten up in costs. These are but examples of business failure, as occurs in other industries, although the likelihood of it happening may be higher because of the gap between the payment (bet) and the return (winnings). It is not obvious that this should be managed in any other way than through the usual market arrangements of the supplier’s reputation, the criminal law, and caveat emptor. It may be, as in the case of the financial securities and insurance industries, some not overly restrictive requirements could add to the effectiveness of the market information flows in gambling transactions too.

In summary, there are peculiarities of (parts of) the production process of the gambling industry which may require regulation (outside the issue of problem gambling). However the oddities are not unique, for they are found in different combinations and to different extents in other industries. Their experience suggests that there may not be an ideal regulatory regime and the regulator ends up being faced with uncomfortable tradeoffs.

Taxing Gambling

It is not obvious why the gambling industry should be subject to an industry specific taxation regime. (Of course, where applicable, the agency will pay generic taxes such as GST.) Even so, much of it has been. The explanation may be the historical notion of gambling being sinful, with the payment of taxation as a penance. But there is also the practical difficulty that most of the institutions providing gambling activities are not corporations (excepting casinos), and therefore do not pay taxation on profits via corporate taxes. Some tax may be to offset this loophole.

Whatever, the result has been a series of ad hoc gaming duties:
Totaliser duty is 20 percent of the betting profits of a racing club or totaliser agency board;
Lottery duty is 5.5 percent on all tickets (and so on) sold on behalf of the Lottery Commission;
Gaming machine duty is 20 percent on the profits of dutiable games;
Casino duty is 4 percent on the ‘casino win’.

Most gambling activities also make a ‘community contribution’.
– The TAB contributes to the costs of the racing industry and makes grants to other sports. (It could be argued that without these transfers the racing industry would collapse, to the detriment of the punter. Those who follow sport without punting are also beneficiaries of these payments.)
– More than a fifth of the outlays to Lotteries Commission products are distributed by the New Zealand Grants Board to community causes such as arts, sports, charitable and community causes.
– A smaller proportion of turnover from the outlays to private gambling businesses is disbursed in a similar manner.

Since the punter has no control over these grants, and since they are not a cost of running the activity, they may be thought of as a ‘voluntary’ tax. (Economic analysis might suggest that if there was open entry to the gambling industry, these grants would be would be driven down to near zero, so they might be thought of as an element of monopoly profit.) But there also seems to be an acceptance by punters that they should make a community contribution. This may seem irrational – or a penance for the guilt of sinful gambling – but this public willingness to pay a voluntary taxation reduces the dependence on compulsory taxation.

Taxing Gambling Per Se

Insofar as the taxation is on gambling per se, rather than as a substitute for a tax on operator profits, consider the specific taxation on alcohol. Again the justification for special taxation because of a view of the sinfulness of alcohol has been a part of the story but, practically, excise duties have been relatively easy to collect, because of the restricted numbers of points of wholesaling (although that is less true for wine, and there are leakages such as smuggling and home brewing). In these secular days sinfulness is less attractive as a justification for taxation. Today there are two broad reasons for taxation on alcohol.

First, it remains relatively easy to collect. (There is the added attraction that the deadweight loss
from the additional tax is relatively small, so there is not a loss of efficiency although that may still be equity issues. I propose not to expand this orthodox economic argument.) Given that all tax revenue is difficult to raise while conversely it is easy to spend on worthwhile projects, there is some merit is taxing something where the task as simple as it is for alcohol.

Second, the taxation is justified on the basis of the externalities that are involved with alcohol misuse. Some drinking involves social costs which are not captured in the private market cost. These include mortality and morbidity, and associated treatment costs. Importantly, the costs are not all borne by the drinker but by others both from general taxation and in personal costs of injury, death and heartache as well (as private property damage).

Imposing a specific tax on alcohol consumption operates in two ways. By signalling to the purchaser that the costs to the community are higher than the private costs of the production of the drink, excessive drinking is discouraged. Where it does not, the excise revenue contributes to community funds to cover (some of) the social costs incurred.

One major difficulty is that it is not possible to signal precisely the additional costs of drinking since that varies with circumstances. (Not all drinking involves alcohol misuse, and the same drinking situation can generate different levels of social cost – e.g. a driver and non-driver in a bar.) Thus the excise duty on alcohol is only a crude approximation as to true social cost. (Indeed the policy advice tends to be to align all the other policy instruments as efficiently as one can in order to minimize alcohol misuse, and then use an excise duty in an attempt to reduce it further.)

A second major difficulty is that it is not clear what should be the appropriate level of excise duty. In practice the revenue exceeds the known fiscal costs of alcohol misuse, but is substantially less than the estimated total social costs, including non-government costs. (While the argument in the previous sentence is put in terms of average costs, optimal policy uses marginal costs, which in the case of alcohol misuse are higher than average costs, implying that tax rates should be higher than what the averages would suggest).

Applying these principles to gambling is helpful, but still leaves many gaps. If the purpose of the special tax is to reduce externalities, there are no estimates of the social costs of gambling, so there are not even orders of magnitude. If the ‘sinfulness of gambling’ argument still predominates, in which case economics analysis provides little guidance.

Gaming Duties as a Profits Tax

An alternative approach might be to see gaming duties are proxies for the business taxation that non-corporation operators would pay were they businesses. (But casinos pay corporation taxes and a gaming duty.) If this were a concern, then it might be easier to require the various operators holding licences to set themselves up as corporations and tax them accordingly or, where that is impractical, impute to impute a tax as if they were corporations.

Gaming Duties as a Tax on Monopoly Profits

Another justification for gaming duties is that because of licensing restrictions on entry some operators may make monopoly profit. A tax pulls that profit back to the community. This shifts the question to why the monopoly in the first place. Even if that were justified, it might be more economically efficient to auction the right to the monopoly. (Possibly a levy rate on turnover may be the tender variable, the franchise going to the highest offer.)

Gaming Duties because Gambling is Wealth Regressive.

Suppose the justification for specifically taxing of gambling is to reduce its impact on the wealth distribution. That, presumably, would involve a rate which progresses by the size of the winnings. As far as I know there has been no attempt to tune the tax rate for such a purpose (although it is noticeable that the highest effective tax rates apply to the Lotteries Commission, which offers the greatest prizes). In any case, it may be that it would be more efficient to moderate any redistributive effects via a comprehensive lifetime capital transfers tax which would also cover capital gains, gifts and inheritance. There is a gifts tax, apparently as a mechanism to reduce income tax avoidance, but since there is no public enthusiasm for such a tax regime, it is not obvious that gambling should be separated out for such taxation treatment.

In summary there are a number of reasons which might justify a gaming duty. In fact there are too many, and until that is clearer which are the reasons for intervention, it is not obvious what the duty rate if any should be. It is not even obvious what should be taxed: turnover, expenditure, business profits (perhaps defined by analogy as if the operator was a corporation), or punters’ winnings? (A parallel puzzle in the finance sector, means that GST is still not levied on its output.) The danger is the wrong tax regime could generate the deadweight costs of economic inefficiency. For instance the tax could be so high it could discourage some forms of gambling altogether without, say, reducing gambling addiction (if that is the purpose of the tax).

A particular issue is whether the levy on gambling should be at the same rate and on the same base for all activities. Excise duties on alcohol are on absolute alcohol content (although there is still no alignment between the rates on spirits on the one hand, and beer and wine on the other). Of all the available practical candidates for a levy, absolute alcohol is probably the closest to proportional with social costs. An analogue for gambling is far from obvious. The existing hybrid probably reflects a historical mixture of ad hoc decisions and practical reality, rather than any rational overview.

(An issue of concern to Treasury is whether the various ‘community contributions’ should be absorbed in the overall tax, and the revenues distributed via the public purse. A particular anxiety is that these are defacto taxes which are not subject to standard constitutional arrangements. The advantage of the current regime is that there is a decentralisation of the disbursement, a useful feature of any government decision making and especially valuable in a democracy. On the other hand some funds may go to projects not which are not considered appropriate – donations to a political party are an often cited example – although this may be resolved by tighter legislation.)

In summary, there may well be a case for rationalisation of specific taxation on gambling, but until the purpose of that taxation (other than to raise revenue for public and community spending) is clear, the implementation of any rationalisation is likely to be confused.

Direct Demand Management

Gambling is unlike alcohol consumption in that while both have addicts, alcohol misuse includes nonaddictive behaviour such as binge drinking with the potential to damage others by violence or accidents. There is not a comparable public generated externality in binge gambling. Its costs are largely internalised to the individual (and her or his family).

The issue of gambling addiction is considered much more thoroughly in other chapters, but the economists’ point is to ask to what extent it is any more of a problem than, say, eating too much or loving too much. The point is that these may be proper issues for the health services to treat, but they are hardly matters for economic measures targeting eating and loving. There may be, of course, a case for education on eating, loving and gambling, but it is not obvious in economic terms that there is a need for any further industry specific measures.

There would be some justice in levying the industry to fund treating problem gambling and the public promotion of prudent gambling. (The liquor industry with its specific levy to fund the Alcohol Liquor Advisory Council provides a model, but it might be thought inconsistent with the constitutional principles of taxation, insofar as it is a tagged tax.).

In summary, it is not obvious that there is a need for an active program of demand management as there has been for alcohol (and tobacco), other than health services for the problem gamblers and some public education.

Conclusion

While some parts of the gambling industry were established many years ago, the economic liberalisation of the late 1980s has created new gambling activities, which have not been integrated with the older ones. As the change in alcohol policy at the time indicates, there was also a change in the view of social regulation of activities which had previously been treated as ‘sinful’. But the logic of this has not yet been systematised in relation to the gambling activities, nor has the logic of market principles been applied to ensure that there is maximum welfare from the resources used.

Among the difficulties the policy analyst faces are that a country’s gambling industries and activities reflect the particularities of its history and culture. Given the rapid changes that have occurred in the last decade, it is difficult to predict what (quasi-)rational policies are practical in the public agenda and which are likely to be adopted. In the interim policy advocacy will dominate, often based on far from fully articulated views or analysis and, even more often, on self interest.

Table 1: Licensed Gaming Activity: Turnover and Utilisation
Estimates for March year 1998 ($m or %)
Gaming Activity – Turnover – Winnings – Winnings
(% of turnover) – Gaming Duties Revenue – Tax (% of turnover)
Casino 3060 2815 92.0 10 0.3
Clubs & Pubs /Trusts 2600 2140 82.3 58 2.2
Housie 45 30 66.7 0 0.0
Lotteries Commission 639 351 54.9 35
(+CC =135) 5.4
(21.1)
TAB-Racing 999 809 81.0 37 3.7
TAB -Sports 53 46 86.8 0? 0.0
Other (raffles etc) 20 10 50.0 0 0.0
TOTAL 6916 5969 86.3 140 2.0

Sources: First two columns B – Curtis estimates. Column 4 – Treasury. (CC community contribution).

Endnotes
1. I am grateful to Bruce Curtis and John Yeabsley for comments on an earlier draft.
2. J. M. Keynes, The General Theory of Employment Interest and Money, 1936, p.159
3. A. Bierce, The Devil’s Dictionary, 1911.
4. Criminals may also have a(n illegal) comparative advantage in collecting gamblers’ debts

 

Being and Doing

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

The Tricky Economics of Creating a Better Quality of Life
Listener 26 January, 2002.

Keywords History of Ideas, Methodology & Philosophy

The life expectancy of someone living in Western Europe or North America was about 45 years in 1900. Today it is closer to 80 years. The increased longevity reduces the material standard of living (measured by GDP* or consumption per capita), since people are now retiring for far longer. Is the increased life expectancy a good thing? If we were to execute everyone over 65 years of age, we would raise the GDP per capita figure by about the same as the increase since 1981. Why dont we?

Although we often treat material output as though it is an ultimate objective, in practice we have a more fundamental notion of the economic objectives of society, which might be summarised as the ‘quality of life’. I meet the paradox in some of my work. Eliminating alcohol misuse would increase both life expectancy and per capita incomes (because grog kills the young). However, if no one had started smoking tobacco, per capita GDP would fall, because people would live longer in retirement. (Would the ideal cigarette might be one which extinguishes past smoker’s lives on their 65th birthday?) In both cases the non-abuser would lead a better quality life while alive (no hangovers, no hacking coughs), as would their friends, relatives, and associates. But how to include all this in the economic assessment?

Rather than thinking about what we can be and what we can do, economics is founded on the utilitarian notion of what we can consume. The result is most economists find these paradoxes too complicated to think about. The outstanding exception is (Nobel prize winner) Amartya Sen, who starts with the notion of ‘functionings’ which summarise the life a person might lead. Some functionings are elementary: being well nourished and disease free. Some are more complex: having self respect, preserving human dignity, taking part in the life of the community. Sen then introduces the key notion of ‘capability’ which refers to the alternative functionings (‘life choices’) a person might have, indicating the freedom of choice a person has over their life. Material consumption is only a part of that totality.

The logic of Sen’s approach led to the World Bank’s ‘Human Development Index’ (HDI), which is intended to replace GDP per capita as an indicator of the state of progress of a nation. It combines per capita material output with measures of educational achievement and longevity. Thus a rise in life expectation increases the HDI even if GDP per capita goes down. Literacy is there, because the capability markedly affects our ability to flourish and enjoy life. The index has to be simple, because most countries do not have complicated statistical bases. Had it been practical, Sen would have wanted a measure of the differences between men and women, which can be grotesque (as it has been in Afghanistan).

New Zealand is 19th in the world on current HDI standings, three above our GDP per capita ranking. (If we bumped off the over 65s the ranking would go down.) However the index is not be very good at discriminating between rich countries, since the World Bank’s interests are poor countries. Sometimes the difference in rankings can be dramatic. The biggest divergence is for South Africa, whose HDI ranking is a whopping 44 places below its GDP per capita ranking, a terrible indictment on apartheid’s record on health and education. That will take generations to repair.

The HDI appeared in to New Zealand officials’ reports about the ‘inclusive society’ published last year. While they referred to Sen’s ideas, there was little attempt to master his challenge, their references being to his popular book rather scholarly papers. In part it is because it is very hard for an economist trained in one paradigm to see outside it. However, there is a deeper problem. Like the New Right, Sen talks of ‘freedom’ and ‘choice’. But unlike the New Right, Sen does not assume that if everybody has ‘freedom’ (in the New Right sense) in a ‘free’ market they will all be better off. This is partly because Sen is an expert on inequality, and he knows ‘free market’ outcomes will have some people worse off (as happened in New Zealand). But the capability approach also diverges markedly from the New Right when it concludes that government spending (on education, on health care, on other things such as the environment, culture and recreation facilities) can enable individuals to do and be so much more.

Today’s officials are reluctant to go down this path (especially in election year, when the fisc will be under awful pressure). Yet the notion that the government can spend public funds to create a better quality of life is deep among New Zealanders’ beliefs, if not in today’s public policy. Sen’s extraordinary insights shows there is a sense they are right and that narrow economics is wrong. They offer the opportunity to create an inclusive society built around a high quality of life.

* A reminder: Gross Domestic Product (GDP) is all of a country’s market production of material goods and services, valued at market prices and, usually, measured in a year.

Subjects Quality of Life

Government Spending and Growth Rates: a Methodological Debate

This entry was posted in Growth & Innovation, Social Policy on by .

The following is a sequence of letters in “The Independent” in early 2002. I have not got the letters being criticised, but the readers should be able to infer much of what was in them. I have tried to bring my text in line with “The Independent’s” (sensitive) subbing.
Keywords: Social Policy; Growth & Innovation;

Govt spending and growth rates: A matter of values

The Independent January 23, 2002.

Roger Kerr uses some extraordinary logic in his letter on growth and government spending. ( 19 December) John Stuart Mill for one, would be bemused.

But let us follow the ‘no country has sustained per-capita income growth of 4 percent [per annum – sic] or more with a government sector share of the economy as high a New Zealand’s level of around 40 percent.’

As it happens in the 1990s some OECD economies have had a ‘government sector share’ of below that 40 percent and have not sustained that growth rate either: United States, Japan, Australia, and Iceland. Two have had low government spending and high per capita GDP growth: Ireland and South Korea. However those two economies have had vigorous industries assistance policies. On the Kerr logic, I take it he joins with Jim Anderton and Peter Hodgson in advocating a more active industries assistance regime.

Of course one can torture the data until it confesses. I leave that task to the sadists, and report that un-tortured data shows no meaningful correlation between the level of government spending and the economic growth rate. This seems to suggest that either the theory which predicts the relationship is wrong or that the effect is so small it is drowned out by other more significant effects.

The policy import appears to be that within quite wide limits a country can chose the size of public sector without affecting aggregate economic performance (providing it is fiscally responsible and manages the sector efficiently, and so on).

Thus the best balance between the public and private sectors is a matter of political values, of which I, Kerr, Susan St John, the editor of The Independent, and each of the paper’s readers may have a view. We may disagree, but it would be torturous misuse of economics to try to buttress our political views by alleging that the balance somehow affects the overall growth rate of the economy.

Ideology selects the facts in GDP analysis

The Independent 13 February, 2002.

Roger Kerr is struggling with his logic. (The Independent 30 Jan)

He said a certain set of countries with high growth rates had “property A” (low government spending) and this demonstrated that property A was necessary for high growth.

I pointed out that those countries also had property B (industry policy), so Kerr’s logic was that property B was needed for high growth.

Kerr responded that property B was not needed because he disapproved of it.

It seems to be that the countries with high growth rates happened to have property A which Kerr approves of, at which point he draws an illogical inference to strengthen his approval. But he is not willing to do this in regard to property B, if he disapproves of it.

Bryce Wilkinson tries to defend Kerr by improving his logic. (The Independent 30 Jan) I am sure all readers will wish him well in this challenging task. Wilkinson’s problem is an empirical one. Certainly there is a problem of government failure, so not all its spending is as effective as it can be. But some of the spending is very effective, so the problem is in practice (not logic) the two effects trade off.

Is the net effect positive or negative? The empirical investigations suggest they seem to cancel out as far as the impact on output and growth is concerned. The policy implication is that carefully designed government spending should not damage output, and can enhance community welfare in ways that GDP does not measure.

Wilkinson cites Winston Bates’ study for the Roundtable. May I say I was disappointed by its quality, but no more than I am frequently so by Roundtable commissioned work.

It is a pity that Bates has not even tried to take in to consideration some of Susan St John’s points, which would tighten up its empirical quality. Sadly much of Bates’ contribution is written in the language of ideological rhetoric rather than independent research, and his bibliography indicates how ideologically selective he has been. Still, unlike Wilkinson, he does not descend into anecdote.

Ambiguous, conflicting research on GDP

The Independent 27 February, 2002.

Bryce Wilkinson has still not grasped the point. (The Independent 20 February)

The entirety of the research on the impact of government spending on economic performance is equivocal.

Anybody can select some of the research to give the conclusion their ideology prefers, but they have to be carefully selective by ignoring research that contradicts it.

Readers will be aware that an article published in December by a Treasury official comes to a quite different conclusion from Wilkinson, for instance.

On the basis of the totality of that ambiguous and conflicting research I conclude that levels of government spending, with in reason, do not affect economic performance. Wilkinson concludes otherwise. From reading her letters and other writings I believe Susan St John is closer to my view, and of course Roger Kerr is closer to Wilkinson’s.

However Wilkinson is misleading himself if he thinks I have no account of the New Zealand growth process, or how we can improve it. I have written general articles, learned articles, and books on the topic. I can only take it that since they do not fit Wilkinson’s preconceptions, he has not turned his mind to them yet.

He also makes a grave analytical error when he says the government’s declared goal is ‘lifting New Zealander’s incomes back into the top half of the OECD’ The government’s goal is in terms of production (GDP per capita) not income (Say, GNI per capita). Every first year economics student knows the difference between the definitions of ‘domestic’ and ‘national’, important because some of the income from production goes to non-national factor owners offshore.

This is an important distinction where a country is running a large current account deficit or planning to rely heavily on foreign direct investment.

For instance Irish National Income has risen somewhat less than Irish GDP.

Desperately seeking definition of standards

The Independent 27 March, 2002.

Roger Kerr The Independent has asked Susan St John and myself to ‘cite any body of reputable research that suggests New Zealand can achieve 4 percent income growth on a sustained basis with a government spending ratio as high as 40%.’

Perhaps Kerr could cite some which demonstrates the opposite first. Then we would know what his standards of ‘reputable research’ are.

The work commissioned by the Business Roundtable is certainly not.

Eminent economist omitted from government spending argument

The Independent 8 May, 2002.

Roger Kerr’s whiskey winning letter ( 10 April) mentions the Bates’ report ‘has six-and-a half pages of references’. He did not mention that most of them are not learned research articles, and even fewer are on the topic which is in dispute: the extent to which there is overwhelming evidence that moderately high government spending inhibits economic performance. Nor does he mention that the most cited author in the list is R. Kerr.

What alerted me to the inadequacy of the Bates’ report is there is not a single reference to Tony (A.B.) Atkinson, an economist so eminent that he does not need to be introduced to the profession. Writing on the welfare state and economic performance Atkinson said ‘Countries with higher spending, it is alleged, have poorer economic performance. However, not only is the evidence mixed, but also such an argument is more difficult to establish than may first appear.’

Atkinson looks at nine research studies and concludes ‘two find an insignificant effect of the welfare state variable on annual growth rates, four find that transfers are negatively associated with average growth, and three studies find a positive sign to the coefficient of the welfare state.’ Not a single one of these studies is cited in the Bates’ report. I suggest Kerr drink his whiskey before readers demand he return it.

Bryce Wilkinson accuses me of having a mote in my eye. (The Independent10 April) I accept the finding of a speck of dust clouding my vision. Every honest scientist knows that he or she makes mistakes, which will be corrected by future research, and so thereby there will be progress. That is the difference from ideology.

Wilkinson may recall that he is quoting from the biblical injunction ‘Why beholdest thou the mote in thy brother’s eye, but consider not the beam that is in thine own eye?’ He may contemplate whether a bottle of whiskey is enough to float a beam.

This letter won “The Independent’s” weekly prize for the best letter of a bottle of Dewar’s whiskey.

‘Theology ‘not science, dominates debate

The Independent 29 May, 2002.

Bryce Wilkinson (The Independent 15 May) seems unable to recall the content of some of my letters to The Independent . I acknowledged that there would be behavioural responses to tax, government spending and other interventions, so why does he repeat the argument?

Wilkinson should address the evidence that their effects on the GDP growth rate do not seem to be great, perhaps because some are negative and some are positive (as Tony Atkinson discusses).

Wilkinson changes his argument. I said that the Bates report omitted a number of studies, especially ones which contradicted his conclusion. I was asked to nominate one. I nominated a group of studies, plus the judgement on them by an eminent economist who comes to quite a different conclusion to the Bates report, arguing that the evidence for an impact on GDP is ambiguous, and the channels through which government taxation and spending impacted on economic performance were complicated, but both positive and negative.

Wilkinson acknowledges that much of the evidence is inconclusive, and now begins to count the number of studies in the Bates report in comparison to that which I mentioned.

Recall my point was that the Bates report was not comprehensive and the totality of the evidence was inconclusive, which suggested that insofar as there was an effect it could be in either direction and was probably small.

I am also astonished about Wilkinson’s claim that ‘test of statistical significance are not tests of economic plausibility.’

What is a test of economic plausibility if economics is a science which aims to describe an empirical world? And in the light of this stunning new methodology, why does he waste time trying to defend the unsatisfactory empirical conclusions that the Bates report and Roger Kerr derive?

Having apparently satisfied himself of the smallness of the mote which he said was in my eye, Wilkinson changes his criticism to that I am concerned with ideology. Since one of my interests is in scientific methodology, again I plead guilty.

‘Ideological’ is a useful shorthand to describe the approach which Chicago professor Melvin Reder called the ‘tight prior’, a Bayesian expression to describe the situation where the theory is invulnerable to evidence which contradicts it.

One can observe such ideologists relying on anecdote, shifting the tests for their theory when the evidence is unfavourable, deploring well respected methodologies when they undermine the argument, stumbling over their logic, using extravagant expressions when standard language would suffice, attacking the critic rather than the argument, and so on.

In a recent review on a book on Science and Religion, the well known physicist Freeman Dyson wrote ‘[Polkinghorne’s] argument makes sense if you accept the rules of theological argument, rules which are different from the rules of scientific argument.

‘The way scientific argument goes is typically as follows: We have a number of theories to explain what we have observed.

‘Most of the theories are probably wrong or irrelevant. Then somebody does a new experiment or a new calculation that proves Theory A is wrong. As a result Theory B now has a better chance of being right. The way a theological argument goes is the other way around. We have a number of theories to explain what we believe. Different theologians have different theories. Then, somebody, in this case Polkinghorne, declares Theory A is right. As a result, Theory B now has a better chance of being wrong.’

Too often, I am afraid, economic debates in New Zealand are dominated by theological rather than scientific approaches.

So I would be happy to accept Bryce Wilkinson’s accolade of my being a serious methodologist, and promise that any bottle of whiskey that goes with it will not turn me into a tight prior.

This letter won “The Independent’s” weekly prize for the best letter of a bottle of Dewar’s whiskey.

Economic Directions: What Does the Government Think It’s Doing?

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

Listener 12 January, 2002.

Keywords Growth & Innovation; Macroeconomics & Money; Social Policy

A government needs a policy framework to coordinate its various decisions, and give it, its supporters and commentators a sense where it is going. The Labour-Alliance government has not announced one. If it did, what would it look like?

The best starting point may be the policy on which the Lange Labour government (which in those days included members of the Alliance party) campaigned in the 1987 election. It favoured an open market-oriented economy with a commitment to public spending in education, and health and the like. After the election this liberal vision was hijacked by the rogernomes (who remained after Labour lost power). Since 1999, this government has rolled back some of the extremist measures. It raised the top tax rate (to 39 percent, still lower than the 48 percent of the 1987 election) spending more on health and education, and pulled back their commercialisation. It stopped privatising public assets (although there were few possibilities left) and even renationalised some (Air New Zealand and public rail transport). In electricity and telecommunications it has tried to shore up the mistakes made during privatisation by a tougher regulatory framework. It replaced the extreme individualistic Employment Contracts Act with the more balanced Employment Relations Act.

It has reversed even some policies of the 1984 to 1987 Labour government. Today’s industrial policy reflects more the 1984 manifesto, which did not support substantial external protection but wanted government assistance for research and development, regional development, marketing and so on. It has also started to address the quality of the mix of output, with better public provision of arts, broadcasting, the environment, heritage and recreation, but latterly it seems to have lost its way. The rhetoric of the ‘innovative society’ or whatever is not a substitute.

The biggest reversal has been macro-economic policy, where this government has proved much more fiscally conservative than its rogernomic predecessor. That has meant spending restraint – a strategy which may get intolerable in election year when those out of government make wild promises. The benefits have been the lower exchange rate, which stimulated the export sector – probably the best form of industrial assistance. To be fair, the exchange rate fell in 1999 under the National government, and they can claim some of the credit for the resulting strong growth. But their successors have held it down. The miracle is that we have not had an inflationary blow-out.

There are some areas where the government has not reversed rogernomics. Competition policy is still weak. Its regulatory regime assumes that there are numerous businesses in a market, whereas in New Zealand there are often only one or two. The failure to address the inadequacies of the public sector reforms may ultimately be the more damaging. The government does not know what to do, and its advisers, being beneficiaries of the reforms, are unlikely to tell it. One only has to recall the damage the previous government took in 1999 (or the Christine Rankin circus) to see the potential political danger, but thus far the responses have been largely cosmetic. The fundamental problem – the tension between accountability and responsibility (between managerialism and professionalism) – will have to be addressed. If it were only a matter of cabinet ministers and senior servants making public fools of themselves, then we get our money’s worth in entertainment. But the indications are that, for instance, the strain pervades the health sector. We pour in money to ease them.

Most surprising has been the uncritical free trade stance which the government seems to have taken. The prime minister must have known she would put intolerable strain on the Alliance wing of the coalition when she committed troops to Afghanistan. But the free trade deals will compound that stress, especially as at least one of the ministers involved presents himself as an unreconstructed rogernome. The Labour Party could still be committed to an open economy stance, as it was in 1984, without the extremism of its current position.

The government has asked officials to generate a policy framework in two major areas. As the prime minister said of ‘the inclusive society’ reports, there is still a long way to go. The ‘economic transformation’ reports are yet to be released, but may have similar problems. Often behind the pieties is a continued commitment to the rogernomics framework, with its unwillingness to consider seriously alternative paradigms, and its failure to look at history and the empirical evidence. This is understandable given they provide such a powerful critique of the policies which the rogernomes hold, but they are also inherent in the rogernomics methodology. I do not know if the desire of this government is to continue the domination of rogernomics in its policy advice. When it loaded its tax review committee with people of that persuasion, the inevitable outcome was to blow the chance of a useful review.

In the end it is all about ‘the vision thing’. As we move towards the election the government (and the opposition) will have to find a rhetoric with an underpinning policy framework, which will attract the support and the mandate it needs.

Singing ‘Jerusalem’ in New Zealand

This entry was posted in Literature and Culture, Political Economy & History on by .

Music in the Air Summer 2002, p.13-14.

Keywords Literature; Political Economy & History.

I loved singing ‘Jerusalem’ in the full voice of my school assembly – especially the militancy and optimism of the last two verses – so much so that on the day I left I asked that it be sung for a last time.

Unbeknown to me, another boy in the school, Bruce Jesson, took a very different view. Years later, he wrote “state schools…were even more English in their tone than their curriculum. ‘Jerusalem’ was sung in school assemblies”. Bruce is the subject of the envoy in my book, The Nationbuilders, which quotes this as a part of a longer passage setting down his view of how English Christchurch was. Attending the funeral of another good friend, Bryan Philpott, I was struck by the appropriateness of some of the final lines we sang, ‘I shall not cease from mental fight/nor shall my sword sleep in my hand’. Bryan was a battler right to the end of his 79 years – as Bruce was to his 56.
So I was forced to confront the hymn.

I noticed I had also used it at the end of the chapter on Peter Fraser, who modified the last line, as I do, to: ‘Till we have built Jerusalem/In this our green and pleasant land’. Moreover, I discovered I had used the image of Jerusalem in the opening page of the book, talking about the aspirations of our ancestors coming to New Zealand:

“For them, New Zealand was a land to be transformed into an Arcadia where the wrongs and mistakes of the Old World could be left behind, and a new society built. This vision of a new Jerusalem was a part of the rhetoric of this new colony, as it is for many others. It goes back to Revelations, 21:1, ‘And I John, saw the holy city, the new Jerusalem, coming from God out of heaven prepared as a bride for a bridegroom’, but perhaps Thomas More’s 16th century classic, ‘On the Best Form of the State, and the New Island of Utopia’, began to concentrate the mind on the building of one in this world (especially the New World which was being discovered about that time) .”

There was no getting away from it. I could not leave the bits of ‘Jerusalem’ hanging loosely around in the book.

I began reading around the history of the poem. Oddly, it does not come from Blake’s long poem, ‘Jerusalem’, but is part of the prologue of his as-long ‘Milton’ written about 1802. Suddenly, the prose bursts into an untitled poem of two verses, which is usually anthologised under the title ‘And did those feet in ancient times’. We use ‘Jerusalem’ as title for the hymn with Herbert Parry’s score, which when done with full organ has an Elgarian pomp and circumstance which Blake may not have approved of, and I certainly don’t. All very confusing, because that means Blake’s ‘Jerusalem’ is not Blake’s hymn of that name.

Even more confusing is that Bruce would have agreed with William Blake’s general sentiment. The prose prologue preceding the poem has Blake rejecting ‘Greek (and) Roman Models if we are true to our own Imaginations’, in favour of a local one – precisely Bruce’s concern, to create an authentic local culture, albeit two hundred years later and twelve hundred miles away.

The poem’s Englishness is further compromised by a note in an American anthology of English language poems which remarks:

“Blake’s words are very likely the most inspiring ever written by an Englishman for Englishmen. A grand tradition of rugged struggle in politics and religion extends from John Milton and John Bunyan in the seventeenth century, through Blake and Wordsworth in the eighteenth and nineteenth, down to our own times in writers as diverse as W.B. Yeats and Joyce Carey”(1).

Yeats and Carey were Irish. But then again Fraser was a Scottish Celt. No doubt some at the school Bruce and I attended believed they were singing about ‘England’. But others were singing about their ambitions for New Zealand. For them, England was as much a geographical reality, as Jerusalem was for Blake, who never travelled outside Britain.
‘Jerusalem’ was not the only puzzle in the writing of The Nationbuilders, and it interacted with another.

One biography in the book is that of Colin McCahon –one of the two creative workers, the other being Denis Glover. I included him, partly because whenever I write I am overwhelmed with strong visual images, and McCahon’s works vividly convey the interaction between the environment and the nationbuilding which was always transforming – and often destroying – the environment.

One of the enormous jumps McCahon made was the introduction of biblical scenes into his New Zealand landscapes. In one sense he was doing no more than the practice of Renaissance Italian painters, but they put the bible in Italy because they had no way of knowing what Palestine looked like. But what led McCahon to his vision?

At this point the story is a wild goose chase, of the sort researchers are familiar with. I conceived the possibility that McCahon was inspired by Blake. Surely, I thought, the mystical McCahon must have known the mystical Blake? While I found no evidence that McCahon knew of Blake in 1946 when he began his biblical paintings, I conjectured that when he first met James (Hemi) K Baxter in 1943, as reported by Gordon Brown in the standard McCahon biography (2), Baxter introduced him to Blake. However, some intricate scholarship by Peter Simpson (3), has demonstrated that the meeting was actually in 1947, as Brown thought, and so too late to inspire the innovation.
My current conjecture is that if there was a local inspiration, it was the poet Charles Brash, who had been in Palestine and likened its hills to those of Central Otago. Brash returned to New Zealand in early 1946, and it is possible (a personal meeting, or a letter, perhaps?) he might casually have mentioned the parallel.

Diligently chasing the goose, I had asked Jacqueline Sturm, Baxter’s wife, if Hemi knew Blake. Her answer was ‘of course’. I asked if he did when he was an adolescent – I was still thinking the meeting was in 1943 – and she said that she was not sure, but he would have sung ‘Jerusalem’ at school. And then she added that Baxter would refuse to stand up in the cinema for ‘God Save the Queen’, but in a room when the radio played ‘Jerusalem’, he would spring to attention, sometimes so choked with emotion that he could not sing the words.

Of course he sang ‘Jerusalem’ at school in Dunedin. So did Sonja Davies, another who appears in my book. We all sang ‘Jerusalem’ at school: me, Bruce, Bryan, Peter, Hemi, Jacqueline, Sonja, you…And so must have Colin McCahon. So it is plausible that ‘Jerusalem’ inspired this new direction in his painting, perhaps reinforcing any stimulus from Brash.

And there the book leaves the matter of ‘Jerusalem’, or the final sentence does, as it commends the commitment of the nationbuilders to building ‘a Jerusalem in this our green and pleasant land’. But I need to add a little more about where ‘Jerusalem’ is in the canon of being a New Zealander.

Like Bruce, and many other New Zealanders, I am uncomfortable with that first verse. But should we rewrite it to maintain the marvellous force of the second? Probably not. The Nationbuilders discusses our cultural origins, and our relation with today’s England (or Britain if we include the Celtic nations). There has been a tendency to see England as ‘the mother country’. That is wrong and misleading. The England of Blake and of Shakespeare is the land of many our ancestors, and one of the most important cultural sources for all New Zealanders. We may call that England a ‘mother’ although in the whakapapa she is more a grandmother, perhaps with a few ‘greats’ thrown in. But the England of today is a descendant too, and so is not our mother, but a sibling or cousin. In genealogical terms we are the same generation as today’s Britain. Getting this right is fundamental to our moving from colonial status to nationhood. My book summarises it by saying, ‘Shakespeare is a New Zealander – and an Australian and an American – Phillip Larkin is not’. It could have bracketed Blake with Shakespeare.

We might change the last line as I do, but there is no need to rewrite the last verse. We interpret the first verse of ‘Jerusalem’ in the way that Blake would have wanted us to. The ‘England’ of the hymn is not today’s England, but an ancestral one.

And did Jesus walk in Aotearoa? McCahon thought so. And if Jesus did, so did Shakespeare and Blake and a whole lot of others. Every time we walk through our land, with a quiet pride of being a New Zealander, we walk with the ancestors we honour and who still mean so much to us today.

Endnotes

(1) 1. W. Harmon (ed) (1990) The Classic Hundred: All-time Favorite Poems, New York, p.105

(2) Gordon H. Brown, Colin McCahhon: Artist, revised edition, Reed, Auckland, 1993.

(3) Peter Simpson, ‘McCahon in 1947-48′, Art New Zealand, Spring 2001.

****************
The following was a footnote to a Listener column on 5 June 1999.

ARTISTS AS PROPHETS

The painting “Storm Warning”, gifted to Victoria University of Wellington by the artist, Colin McCahon in 1981 and recently sold by them, paints the words:

YOU MUST FACE THE FACT

the final age of this world
is to be a time of troubles.
men will love nothing but
money and self they will be
arrogant, boastful and abusive;
with no respect for parents
gratitude, no piety, no natural affection
they will be implacable in their hatreds.
Paul to Timothy

Perhaps it is understandable that the most pro-rogernomics of our universities privatised this prophetic work.

Great artists prophesy. Maurice Gee’s 1982 novel The Sole Survivor is about the grandchildren of George Plumb, a contemporary of the first Labour government. Duggie Plumb is an unprincipled thug; Raymond Sole an ineffectual liberal. Ian Wedde’s 1975 “Pathway to the Sea” was so insightful about development and the environment, I asked him if he revised it in the light of “Think Big”. He did not have to.

Some Auld Acquaintances

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

Adam Smith, Robbie Burns and Enlightenment
Listener 29 December, 2001.

Keywords History of Ideas, Methodology & Philosophy

Adam Smith (1723-1790) was the first great economist. The political right promenades him as one of their own, but in a recent book Economic Sentiments, Emma Rothschild argues that he was originally a radical. However, shortly after his death censorious decisions in the courts led his followers to reinterpret him in a more conservative manner. (Rothschild dedicates the book to her husband, Nobel prize-winning economist Amartya Sen, who is obviously influenced by her work.)

Such is Smith’s breadth, that one can usually find something in his works to suit one’s politics. The Business Roundtable is want to quote that ‘By pursuing his own interest he frequently promotes that of society more effectually than he really intends to promote it,’ (although on occasions they leave out the ‘frequently’). Those who dont like the Roundtable can quote back ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public,’ (although they might prefer to change ‘seldom’ to ‘always’). Americans like him because he supported American Independence (The Wealth of Nations came out in 1776 the year of their revolution), free traders because he opposed mercantilism, protectionists because he spent much of his life as an excise officer.

Even his much cited ‘invisible hand’ begins with support for domestic over foreign investment. ‘By preferring the support of domestic to that of foreign industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases led by an invisible hand to promote an end which is not part of his intention.’ Rothschild observes he mentions the invisible hand only three times in all his writings, and suggests he was being ironical. Even so, it led economists to wonder to what extent the market promotes a common good. The theoretical conclusion is that it frequently does not, even using a loose definition of the interests of society. However, frequently the invisible hand of the market is the best way we have of making resource allocation decisions.

Smith was a polymath, in an age in which economists were not confined to proving obscure theorems, also writing on philosophy, history, sociology and jurisprudence. He subscribed to the publishing of the poetry of Robbie Burns (1759-1796). They almost met on one occasion, but Smith’s ill health aborted the event. (Smith was trying to arrange a job for Burns in the Excise Service.) One wonders what would have happened had the contemplative bachelor met the rumbustious drinker, who sired ex-nuptial children.

They were a part of the Scottish enlightenment. (The great philosopher David Hume (1711-1776), who also contributed to economics, was a friend of Smith’s.) The Enlightenment, which began in France, was a key passage in European development. It argued people’s habits of thinking were based on irrationality, polluted by religious dogma, and over-conformed to historical precedent and irrelevant tradition. The way to escape was to seek true knowledge in every sphere of life, to establish the truth and build on it. Its premises were liberal, pro-science, anti-superstition, and that the state was a proper vehicle for the improvement of the human condition.

The Wealth of Nations is a part of this program, but so is Smith’s earlier book, The Theory of Moral Sentiment, in which he constructs a psychology of moral judgement originating in, and working through the emotion of ‘sympathy’, the imaginative capacity to project oneself into another person’s place, and then evaluate their actions both in the light of the situation in which they occurred as well as with respect to their social propriety. Smith would be very perplexed by how his broad humane conception of humankind has been whittled down to the rational economic man which underpins so much of today’s economics.

New Zealand economist, Nancy Devlin, currently working in London, has drawn attention to The Theory of Moral Sentiment influencing some of Burns’ poems. For instance “To a Louse” echoes Smith’s ‘If we saw ourselves in the light in which others see us, or in which they would see us if they knew all, a reformation would generally be unavoidable.’

O wad some Power the giftie gie us
To see oursels as ithers see us!
It wad frae monie a blunder free us
An’ foolish notion
What airs of dress an’ gait would lea’e us
An ev’n devotion!

More speculatively Burns’ poem ‘The Twa Dogs”, one owned by a wealthy man, the other by a poor man, discussing the life of their masters, covers the same theme.

This is not to argue that Burns was enamoured with all of Smith’s economics. But there is a sense in which Burn’s poems (the ribald ones aside) capture the vision of humanity which underpinned Smith’s economics. We might be wiser to read (and sing) Burns, than some of the ideologues who have misrepresented the first great economist. Auld acquaintances should never be forgot.

(I was telling a friend of Scottish descent about planning to use this material for my Christmas column. ‘Och, mon’, he said, ‘y’mean Hogmanay.’)

Letter The Listener 26 January, 2002.

Roger Kerr, executive director of the Business Roundtable, asks about those occasions when his organization leaves out the ‘frequently’ from Adam Smith’s well known sentiment, ‘By pursuing his own interest he frequently promotes that of society more effectually than he really intends to promote it.’ (January 12, 2002) The replacement of Smith’s caution with an uncritical confidence is a common feature of Kerr’s paraphrase of the quote. For example he wrote that ‘Smith’s famous metaphor of the invisible hand, … holds that business people promote the general interest more effectively by pursuing their own interests than by directly trying to “do good”.’ (3 December, 1996) I discussed this example in greater detail in my column of March 15, 1997. Kerr did not object at the time.

Brian Easton.

P.S. Keith Rankin pulled me up on an invisible hand quote, in which left some key phrases out – as do many economists. His correction and my explanatory response are at What Adam Smith really said about the “Invisible Hand, 26 October 1998.