Children Of the Poor: How Poverty Could Destroy New Zealand’s Future

New Zealand Books March 1997, p.14-16.

Keywords: Distributional Economics; Social Policy;

In 1980 the National Government withdrew the government subsidy to CORSO, nominally because it had produced a film which said that there was poverty in New Zealand. Sixteen years later a National Prime Minister was arguing what kind of poverty and how extensive it is, while the Treasury Briefing to the Incoming Government 1996 even tried to measure the extent of poverty (they called it “hardship”) although, as we shall see, not very well.

Mike Moore’s latest book (his seventh), thus has to be seen in a context in which politicians are beginning to grapple with the issue of poverty in a way they have not for half a century. Given the timing of publication, one may wonder to what extent Moore’s book is intended to be an alternative election manifesto to the official one of his Labour Party, perhaps to push it more towards making a more explicit commitment to the poor.

The book is a polemic rather than a careful study of what we know, and dont know, about poverty in New Zealand. It uses some of the available research material to link loosely its theme that the nation is not concerned enough about the state of its children. Just how little material Moore has used to is hard to judge, for despite it being published by a university press the book has no references, no bibliography, and the index is erratic. Moore has an enormous heart, which generates both energy and compassion, but what he needs – what Labour needs – is a think tank to enable the use of the available research material to shape its policy thinking.

In government Labour manifestly failed to do this. Its 1988 Royal Commission on Social Policy (RCSP) turned its back on poverty, despite poverty providing historically and intellectually the foundation for social policy. Without this grounding the fragile structures the RCSP built have sunk into a swamp, and left Labour Party in opposition bereft of any basis to proceed.

Regrettably, Moore’s book is unlikely to offer much direction either. The discussion on child poverty drifts into chapters on political correctness and civil society, finishing with a chapter on policy which veers between some general principles (with which I usually agree) but little on their implications, platitudes, and a wish list (involving massive increases in government spending). For instance one may not have problems with “accept with confidence the reality of the global market place”, but it is not clear how this relates to “raise the minimum youth wage”, and “keep interest rates down”. Most readers would favour the injunction to “stop truancy”, but how? And what is one to make of advising the government to set up “an ethical and moral commission” to report on “slowing down and reversing the hijacking of our cultural values, our language and our institutions by those who are seeking to impose an extreme brand of political correctness on the rest of us”?

Modern poverty research begins in the early 1970s with the report of the 1972 Royal Commission on Social Security (RCSS) which, unlike the 1988 RCSP, devoted considerable space and thought to poverty issues. A number of studies followed, beginning with Peter Cuttance’s study of large families in Hamilton. This research program was characterized by quantitative studies with a strong theoretical perspective, rather than being dominated by ideology and prejudged policy conclusions.

Poverty writing before the 1970s, such that it was, was largely ethnographic, describing the individual situations of the poor. The best known is John A Lee’s novel, also called Children of the Poor. Moore acknowledges the borrowing “because it is appropriate, real and makes the point that for too many, the last 70 years have not seen much progress.” Lee’s partly autobiographical book has precipitated at least four other literary works. Erik Olsen has written a Lee biography, while Mervyn Thompson turned Lee’s novel into a play. The novel also provoked a response Not So Poor, from Lee’s mother, Isabella. Her editor, Annabel Cooper gives yet another account of the events in the preface. (Isabella’s memoirs were also turned into a play produced in Dunedin.)

While there are disagreements over the facts of Lee’s childhood, the fascination is the contextual interpretation of those facts. Isabella wrote in response to Lee’s portrayal of a children trapped into grinding poverty for which there was no escape. Her account is that the poor had a dignity and respectability. Ironically Lee was able to escape, whereas his mother never did, even if she maintained her dignity.

Such questions about the consequences of poverty has been largely unaddressed in more recent poverty writing. It has been more concerned with identify, measuring, and – to a lesser extent – describing the poor.

At an early stage the issue was how to define poverty. The 1972 RCSS had stated that the aims of the welfare system, should be
“(i) First, to enable everyone to sustain life and health;
“(ii) Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community.” (original’s italics).
In terms of the evolving international literature, the first aim was equivalent to absolute poverty and the second relative poverty. Individuals may have enough to sustain life and health, and thus be out of absolute poverty, but insufficient to be able to participate in and belong to their community, and hence be in relative poverty.

Having conceptually defined poverty the next step was to identify some income level which would quantify it. The eventual answer was obvious enough, but some thought was given to alternatives. For instance in Britain at the time the commonly used poverty level was based on their social security benefit levels. This had the merit of reflecting the practical experiences of people living on low incomes, derived from the reports of social workers interacting with the poor. But it had the disadvantage that the supplementary assistance regime was administratively determined, so it can be changed by political fiat.

Instead the chosen poverty line was the income recommended by the RCSS as the basic benefit level, now known as the BDL or benefit datum level, noting that the government was not obliged to follow the Royal Commission (and in 1991 indeed slashed benefits far below its recommendations). From the above principles the RCSS would not have recommended a benefit level below that which they judged was required to enable the participation in and belonging to objective. However given their fiscal prudence, they were unlikely to set a benefit much above their assessment of the poverty line.

Had they chosen the right level? The RCSS had been deluged with evidence about community living standards. Their judgement was likely to be as good, if not better, as any panel of four wise men and one women. In subsequent years ethnographic surveys were used to test the validity of the conclusion, although they involve the converting of qualitative judgements into quantitative ones. There were only a few useful quantitative studies, most notably those by David Ferguson on the elderly in 1974, and his longitudinal Christchurch Child Development Study from 1976. In the end the BDL seemed to be about right. (Incidentally it is frequently stated there is no official poverty level in New Zealand. In fact various Department of Social Welfare reports in the late 1970s were tiptoeing around the notion, by implicitly using the BDL as though it were an official poverty line.)

But how to update the BDL for economic change after 1972? There has been little dispute that adjustments for inflation should use the Consumer Price Index. The theoretical conclusion in regard to real (i.e. inflation adjusted) changes in standards of living was that the BDL should be adjusted for long term changes in real incomes, but not for the stage in the business cycle. However the practical issue of how to do this proved irrelevant. There has been hardly any change in average real household incomes since the RCSS deliberates in the early 1970s.

The Household Economic Survey, available from the mid 1970s, gave a distribution of household incomes, although initially the data was not of good quality. But any conclusion could be checked against other data sources – specific surveys, income tax data, synthetic data, and census data. They supported its general conclusions – there were a lot of people below the poverty line. CORSO got into trouble partly because they used the figure of 18 percent of the population were below the BDL. What the politicians did not know is that while this was a “gee-whiz figure” to emphasize that the level of poverty was significant, the research had identified an important issue, which had already been imported into policy. In the early 1970s the conventional wisdom thought the majority of the poor were beneficiaries. By the middle of the 1970s it was known that the bulk of the poor were families with children, and the majority of these depended on wages. In 1976 a tax credit for parents with young children was introduced partly in response to the poverty research’s findings.

However the consequences of poverty was only weakly addressed. Do low family incomes damage children’s health, inhibit their learning, induce family violence, and/or cause family breakdown? If the answer to such questions is “yes” (to a significant degree), this raises major issues for social policy. It is not merely that poverty would be socially unjust, and lead to misery and early death (if, say, the elderly had insufficient to eat, keep warm, and obtain health services). Poverty among children would compromise the long term sustainability of a society, if it meant that as adults they were less healthy, less productive, and more prone to violence.

As his subtitle indicates, Moore thinks this. So would many people, and there are anecdotes to support their beliefs. But there is little research, for it involves an ethnographic approach combined with quantitative methods, typically with large enough samples to identify the pathology. Such studies hardly exist in New Zealand (and foreign ones do not readily translate because of difficulties with income comparisons and cultural differences). Sadly Ferguson’s Christchurch longitudinal study, and a similar one in Dunedin run by Phil Silva, found that collecting economic data on the family was considered unacceptably intrusive by the respondents.

Yet the end of the 1970s New Zealand could be well pleased with the progress. The basic quantitative paradigm had been developed, the data base was increasing, and there were an gaggle of ethnographic studies in support. About then both British and Australian academics commented to me that New Zealand was a world leader in poverty research. They would not say the same today. What went wrong?

Partly it was the momentum from the RCSS had run its course, partly that the sharp rise in unemployment in the late 1970s redirected concerns to labour market pressures. But we have also seen that the RCSP failed to tackle the issue. (Nor did the Planning Council, another consultative body not noted for innovative thinking.)

There were however two further complications. The early research had, on the whole been cheap. The next stage involved greater resources, which could only come from the public purse. Second, the research required some access to the unit records of the household survey, which was only available to private researchers in a clumsy and expensive manner. (Our legislation is very protective of the security of personal statistical records, more so than most other OECD countries.)

There was one general exception. The government is well funded, even if it is unwilling to fund independent research. Moreover a quirk of the legislation means that public servants have access to the unit records, which private researchers do not. This gave the government monopoly control over the next stage of the poverty research program, a monopoly it chose to exercise by doing very little.

The research monopoly has some uneasy implications. When last year the impact of the government tax cuts were debated, the public and commentators had to rely upon calculations done by Treasury using their TAXMOD model (the basic model for poverty research). Since Treasury officials, like everyone else, can make mistakes or use critical assumptions which are not robust to reality, we are absolutely dependent upon the quality of the model. Yet there is no independent verification.

It was possible for private researchers to do some work via the government models, but they were severely constrained by the government monopoly (even were there adequate funding, which there has not been). For instance the above description on how to calculate a poverty level did not explain how to deal with the various household compositions (say a couple with two children). This involves using a “household equivalence scale”. The one which has dominated use is that set down by the Department of Social Welfare, which is based entirely on some a priori theorizing, and has no significant empirical content. Compared to the available empirically based ones it has very strong household economies of scale, making the unlikely assumption that it is very much cheaper (almost 40 percent) for four people to live together than separately. The advantage to fiscal policy of this assumption is that it downplays the cost of children in a household. Thus there is probably more children below the true poverty level than the estimates using this distorted scale conclude, with the consequence that there has been even less attention to addressing the needs of children. The government monopoly control on poverty research has saved the government billions of dollars in family assistance – at the expense of children and their parents.

I found an ingenious procedure (synthetic quasi-unit records) to get around the problem of limited access to unit records, without threatening their personal security. Last year I applied to the Foundation on Research Science and Technology (FRST) for a grant to process them. I did not really expect the government appointed funding committee to be enthusiastic about a project which undermined the government’s research monopoly, but I was astonished by their excuse. They approached six referees. Five – including the international ones – were enthusiastic.The sixth was less so, but his credibility and argument was undermined because he could not distinguish between the household survey and the population census. Neither, apparently, could the FRST committee, because they quoted the sixth’s spurious criticisms based on the wrong data base as the reason they could not fund the project. In the hands of such expertise is the destiny of social science research – and the poor.

Towards the end of the 1980s government agencies began to do some research. A couple of Treasury officials created their own poverty line, based upon a procedure which was considered outdated when the RCSS looked at it twenty years earlier. It involved valuing a minimum food requirement and then multiplying it by a number arbitrarily chosen by the officials (on salaries beyond the ken of the poor). The food allowance was less than with which prisoners are provided (leading to the comment: if you are poor steal food. If you get away with it you will be better fed, if you get caught and jailed you will also be better fed). The multiplier was over a fifth below the one implicitly used by the RCSS, so the Treasury poverty line was extremely low by the standards of any other studies. (The officials also misrepresented research which contradicted them.) This could be put down to a Treasury not being empirically skilled in the poverty research area. But alas such research, even though it was not externally refereed, appears to have been used for policy purposes, for in 1991 the unemployment benefit was cut to the exact level the research set as its poverty level.

Ignoring the research that has gone before is not confined to Treasury. An Overview of Recent Research on Poverty in New Zealand, by the New Zealand Poverty Measurement Research Group (PMRG – Paul Frater, Bob Stephens, and Charles Waldegrave) is nominally a review of New Zealand research. It cites only 69 local references in its bibliography. But the bibliography, provided for the New Zealand Statistical Association by professional statistician Stephen Haslett, on the somewhat narrower topic of The Statistical Adequacy of Current Monitoring of Social Welfare Benefit Levels cites double that number. There is a habit in New Zealand of ignoring past research, treating it as a pamplist in which the underlying text can be ignored and overwritten. Unfortunately such practical men and women use the previous work of defunct researchers, but without a thorough understanding, and end up in a methodological muddle. Newton remarked that he could see further because he stood on the shoulders of giants. Standing on their toes, all he would have seen was their shins.

The problem is well illustrated by the PMRG’s attempt to set a new poverty level, by asking carefully selected “focus” groups what they think is an appropriate minimum standard of living. The research does not attempt to relate to earlier research, and like the Treasury has the oddity of calling the relative poverty line “absolute”. Its methodology is the use of an ethnographic approach to derive quantitative estimates, but its statistical methods, are crude. The work seems deeply methodologically flawed, in ways too numerous – and sometimes too technical – to detail here. A few illustrations will have to suffice.

The PMRG makes no attempt to calculate the accuracy of estimates. but eyeballs the data and tells us that the various estimates seem in agreement. Statistically they are not. Each group provides separate minimum standard of living estimates for a household of one adult and two children, and one of two adults and three children. It is not difficult (using fourth form algebra) to show that the proposed poverty lines are inconsistent.

Another flaw is the PMRG uses income after deducting housing expenditure. That it is a hybrid of income and expenditure is a warning that something is theoretically wrong. Having excluded housing expenditure the mixed measure is then adjusted by a Household Equivalence Scale which includes housing. The resulting estimate is not only a conceptual muddle, but it biases up the numbers of poor, enabling the PMRG to state that housing the major cause of poverty. It may be, but their analysis offers no support for the proposition.

In any case the conclusion probably detracts from the central point that by far the largest group of the poor are children. What we really need to know are answers to questions like “if one had an extra $100 million, how could it be best deployed to reduce poverty?” In principle we know how to answer such questions, but practically private researchers cannot answer them while the government maintains its stranglehold over funding and modelling access.

The PMRG’s analysis has been most challenged is because they define their poverty line in terms of a proportion (usually 60 percent) of median income. Any statistician knows that a statistical median (the middle income) is inelegant, clumsy to calculate, and its estimators are inferior to the statistical mean (the average). Aesthetics aside (although they are not a bad test of the integrity of a theory), using a proportion of the median has a very grave defect. Like the British benefit measure rejected in the 1970s, it can be affected by policy and administrative change. For instance suppose the government were to take income from those in the middle of the income distribution and give it to the rich. Then the median income would fall. Thus any poverty level which was a proportion of that median would fall, and so the numbers below the level would fall. Using a median based measure the government could appear to reduce poverty by making the rich better off and doing nothing for the poor.

This possibility is not a figment of a theoretical imagination. It has been actually happening since the early 1980s – as far back as we can go. (This incidentally, is one of the reasons why the rich have been so enamoured with the reforms of recent years, despite the economy stagnating. Reductions in their income taxes, funded by higher taxes on everyone else, has been making them better off.) The fall in the median income through time (especially relative to the mean) has been so great that the numbers below 60 percent of the median has been falling (despite poverty, by any sensible definition, rising). Thus a median based poverty level can be used to establish the claim that poverty has been falling over the last 15 years.

It may not surprise readers that Roger Kerr of the Business Roundtable seized on this result, making the absurd claim that poverty has been falling during the reforms. Treasury supports Kerr by presenting the nonsense in their Briefing to the Incoming Government: 1990, as though it were an intellectually coherent approach. (Treasury also published a measure based on constant price basis. This is the more conventional approach and is equivalent to a poverty line which is a proportion of the BDL. However its claim that poverty rose sharply in 1989/90 – to levels comparable to 1991/2 after the benefit cuts. Not only is this result out of line with other studies, but does not accord with any anecdote or other evidence. Given the Treasury record of poor empirical standards, their conclusion is probably an error, but given their monopoly there is no way private analysts can check.

The PMRG have denied their median calibrated poverty line is intended for such uses, but they themselves published a table which does exactly the same thing as the Treasury. Why they bothered to use a median, and get in such a muddle, is a mystery. Anyone familiar with the basic paradigm would have checked their original estimate and observed that, within its margins of error, their focus groups were recommending a poverty line equal to the BDL – the benefit level for a couple recommended by the RCSS in 1972. The PMRG could have made the modest but justified claim that their exercise has been another ethnographic contribution to the improved calibration of the BDL and supports the view it is a good estimate of a poverty line (and our respect for the wisdom and competence of the RCSS). Instead, when they (rarely) refer to the earlier work they misrepresent it.

Using data based on the work of Mary Mowbray of the Social Policy Agency (more reliable than most because she does not have a policy axe to grind), we can trace numbers below the BDL over the last 15 years. The proportion of households rose slowly through the 1980s from 10.2 in 1981/82 to 11.5 percent in 1988/89. In the early 1990s poverty levels jumped to nearer 15 percent of all households. (Proportions of people will be higher, because large households tend to be poorer.)

This pattern (which also broadly applies if some other constant price poverty level is used) tells the following not implausible story. In the 1980s the constant real value of the benefit, together with the introduction of family support, moderated the effects of the deteriorating market incomes (including rising unemployment), so that poverty numbers only rose modestly. However when benefit levels and entitlements were savaged in 1991, poverty numbers rose abruptly, with a widespread increase in hardship, evidenced by enormous pressures on social welfare agencies, food banks, and a host of anecdotes. Poverty levels do seem to have since come back a little since 1992/93 although they remain markedly higher than they were in the 1980s. The Treasury attributes this small reduction to the economic recovery, although their data series is behaving oddly.

I can report here some preliminary research which suggests that the fall in unemployment in the mid 1990s did lead to distributional benefits, but mainly to those just above the BDL. My tentative judgement is that the fall at lower incomes is due to an easing up of the stringency of benefit entitlement and the special needs benefit. What is undisputable, is that the benefit cuts and other general measures have lifted poverty to a higher level in the 1990s compared to the 1980s. (There is a direct way of assessing these issues, but the government agencies with their monopoly on funding and modelling access have ben unwilling to investigate, and no one else can.)

Note the new potentially powerful development heralded in the previous few paragraphs. It is now possible to trace changes in poverty on a year by year basis, and we so we are able to improve out understanding of the dynamics of poverty. Treasury official George Barker has gone further to proclaim a “new view of the income distribution”. Unfortunately his argument is long on rhetoric but short on results. The data base is simply not there. Indeed his so-called new insights, insofar as they are valid, were well known to past researchers, who knew they were limited by the data shortages in the way Barker is. Where they could they explored the issues: for instance the RCSS report discusses the income pattern over a family life cycle (written by Angela Seers, a researcher whose early contribution is often overlooked).

Barker makes considerable emphasis on some results using the income tax data base. They purport to demonstrate there is considerable mobility within the income distribution, quoting, that over a quarter of the those in the bottom quintile (fifth) of tax filers are in a higher quintile a year later. (No information is provided as to what the proportion in higher quintiles who drop into lower ones.) A tax data base is a administrative one, and therefore subject to a number of serious problems (such as what happens to people who file in some years but not others). Incredibly Barker does not discuss these issues, so it is difficult to make any sense of his results at all. The work is written up in a booklet Income Distribution in New Zealand (which has nothing to do with a book I wrote with the same title). It does not meet even the most elementary academic criteria of defining its data bases or discussing data problems, despite the publisher being the Victoria University of Wellington based Institute of Policy Studies. One result is mentioned in the Treasury 1996 briefing, as though it would be helpful to an incoming minister, but it even manages to misquote the statistic. (One despairs over Treasury empirical standards.)

More professional work by Harry Smith and Robert Templeton of Statistics New Zealand is more enlightening. It is evident that the lowest quintiles represent low quality income – part time earnings, benefits, low wage earning and the like. The conclusion is there is considerable “churning” in the lowest incomes of tax filers, as people move through different income states such as low wages, out of work, on benefit, part-time work, self employed and so on. At the top of the distribution there is considerable stability.

What is being argued over is the nature of the experience of individuals. Are people in poverty trapped in poverty through most of their life? Or is it a temporary transitional phase? Barker appears to favour the second option. There is not a lot of data to go on.

Consider the following hypothetical situation. Suppose we knew the location of a family, consisting of a number of generations at all stages of the life cycle, and that it was near the bottom (on average) of the income distribution, in 1951. Forty years (or two generations) on we might look at the same family (that is its descendants of the 1951 people). Would it still be near the bottom, or would it now be evenly scattered through the distribution (or somewhere between)? If the former, the family would be trapped into a cycle of poverty, hardship, and deprivation, churning through the lower income levels, but never really escaping. If the latter the experience would have been a temporary one, which many go through, perhaps once a generation.

This is not just a thought experiment. There exists sufficiently detailed income records of one family group which we can trace over the postwar era. It was near the bottom of the income distribution in 1951, and it was still near the bottom of the distribution in 1991, two generations on. This seems to support the hypothesis of households being trapped into cycles of poverty and hardship, unto the third generation.

The “family” for whom I have these good records are those who report themselves as Maori in the population census. They were poor in 1951, they were still largely poor in 1991. Admittedly this is a family with a particular genetic and cultural heritage, but all families have their own such heritages. The Maori historical experience is basically very damning to the Barker thesis. He could fall back that under the new economic regime they will soon be evenly scattered through the income distribution. We shall see. (The numbers of Maori households which appear in the household survey are small, so a statistician has to be careful to draw conclusions. The evidence points however, that Maori real and relative incomes deteriorated between 1981/82 and 1994/95.)

Income dynamics are important but typically we do not have the data to explore them. The data that we have may be boringly static, but we have far from fully exploited its use. Haring off after a new untestable fashion, and ignoring past solid research, means that golden research opportunities have been lost, and all that is seen is hairy shins.

What do we know about poverty that we did not know a decade ago? There is not much new I am afraid. We have one or two tentative research hypotheses, and some broad confirmation of earlier research, but generally we have not made a lot of progress, except we are no able to track poverty better through time. The access to quasi-unit records remains the most promising approach for new insights, although the lack of resources to use them means new understandings will be delayed. One might also hope that in the future the ethnographic work will integrate better with the quantitative work, and begin to explore issues of the causes and consequences of poverty, which are beyond the power of the existing data base.

Nor have we made much progress with new policy implications, although we can absolutely confirm that if the government cuts benefit levels and entitlements (as it did in 1991) poverty will increase. I confess amusement to a response of Roger Kerr. He had published an article using Barker’s work in The Evening Post, but the editor had rejected further serious comment, so the venue of the debate had moved to The City Voice, a lively give-away Wellington paper. There I pointed out various defects in Barker’s data. Kerr’s reply largely accepted my analysis, but asked plaintively what did I think about the policy conclusions he drew. The attitude is not untypical of much policy debate: never mind about the facts, never mind about the theory, never mind about the research – what matters is the policy.

Sure we need to be passionate and polemical about poverty in New Zealand, but no doubt Kerr and Barker would claim to be just as concerned about the interests of children as Mike Moore. But all of us need to be more informed. And if we are not, almost inevitably we will pursue policies detrimental to the interests of the poor and of children (as has happened over the faulty household equivalence scale, and may happen if the PMRG work on housing is adopted as casually as it has been constructed). The outbreak of interest in poverty in recent years reflects the consequences of ignoring poverty in the 1980s. Ignorant of, and insensitive to, the poor we introduced policies which exacerbated their hardship.

Unlike the 1970s, poverty research over the last decade has not been one of New Zealand social science’s great achievements. If it made any claim, albeit a modest one, it has clumsily responded to the rise in poverty on the early 1990s, precipitated by policies which were only possible by the research neglect of the 1980s. Although they may be unaware of it, Bolger, Shipley, and Moore in this book interpret the rise through the framework largely developed by poverty research.

At a seminar on health and inequality in December 1996 Peter Saunders, an Australian – indeed world – expert on poverty and income distribution research, commented that there has been a “failure of the social policy community to be sufficiently professional in much of its work.” His point is that if analysts are unprofessional (even though they may be passionate), they leave policy open to other unprofessional mavericks. The resulting social policy will be dominated by the ideology and objectives of the rich (as indeed has happened in New Zealand in recent years). The interests of the poor, and our children, will be – and, as Moore points out, are being – neglected.

Twist and Shrink:

Australia’s Experience of A High External Deficit Has Relevance Here.
Listener: 1 March, 1997.

Keywords: Macroeconomics & Money;

John Edwards, adviser to the Paul Keating when he was Australian Treasurer and Prime Minister, is far too uncritical of his former boss to make his Keating: The Inside Story a great biography. But if the book lacks insight into Keating’s persona, Edwards – an economist and currently Chief Economist for Société Générale in Sydney – provides a fascinating account of the economic policy making.

Especially instructive is the story of the attempt to deal with the large external deficit. Also known as the “current account deficit” (or sometimes wrongly as the “balance of payments deficit”), the external deficit is the excess of imports of good and services plus foreign interest and dividends over exports of goods and services. Although the sustainable deficit is larger for Australia than New Zealand, it became a worry for them in the late 1980s.

Keating’s Treasury advisers favoured the “twin deficit” theory based on the external deficit being equal to the gap between domestic investment and savings. The theory says that increasing domestic savings will therefore reduce the external deficit. A means of increasing savings is the government reducing its spending. So Keating tried to bring the external deficit down by cutting public expenditure. But the deficit resolutely remained above at what was considered a sustainable level. Edwards describes the bewilderment of Keating and his advisers. Why did the theory go wrong?

Economics readers might expect me at this point to go into an account of the complicated interactions, which blunt the policy effectiveness. I want to skip over these and go to what I think is the heart of the issue.

For the twin deficit theory to work, at least one of two conditions have to occur. The first is that the economy shrinks, so there is less economic activity, less spending, and less purchasing of imports. The Australian economy did not, at first, contract. The reasons are complicated, but in the end no politician is going to deliberately shrink the economy unless forced to by a crisis. In any case government spending does not use a lot of imports, so that the spending cut, and the contraction, has to be vicious to work.

The alternative is that economy “twists”, that is the balance between productive sectors change. In particular the tradeable sector of exporting and import substitution has to grow faster than the non-tradeable sector which supplies only domestic markets. Sometimes the non-tradeable sector has to shrink, while the tradeable sector expands.

This twisting, in contrast to a simple shrinking, requires that sectoral profitability changes, signalling increased production of tradeables over non-tradeables. The exchange rate controls the relative profitability. A high exchange rate reduces the profitability of the exporters and import substitutors (who find it harder to compete against overseas suppliers). Thus the twisting alternative involves a fall in the exchange rate.

Such a fall would have compromised the Australian anti-inflation strategy, for their Reserve Bank, rather like New Zealand’s, was consciously managing the monetary system to reduce inflation. But this prevents the twisting of the economy, since some prices, especially for exports and imports, have to rise. Without recognizing the conflict, the Australian Treasuring was pursuing two objectives which clashed in the short run. Edwards reports Keating’s bewilderment. He thought he was following all the right policies, but the desired outcomes were not happening. The mystification is all the more amusing because Keating can be very arrogant. Just a few months earlier he had been skiting how he had the economy under control. Hubris is the fate of politician and adviser.

The Australian lessons will be lost on those New Zealand commentators who have constantly believed the New Zealand economy can defy the laws of economics. Claiming that cutting government spending will bring down the exchange rate is a nonsense, unless the monetary stance is consistent with that outcome. And to be compatible, the monetary authorities will have to tolerate a temporary rise in prices, which could take them outside the current target range. Otherwise the twist cannot occur.

What eventually happened to the Australian economy? After a number of years of good growth the economy collapsed into Keating’s “recession we had to have” of the early 1990s. It shrank, but there has been insufficient twist, so the external deficit remains large (although currently it is probably not as unsustainable as the New Zealand one). Their inflation rate is also higher than New Zealand’s, but like ours it is much lower than it was in the late 1980s. (Australia has a better recent economic growth record, and its growth potential appears to be higher too.)

Unfortunately New Zealand has no such interesting policy insider accounts as Edwards (although we have books which are as hagiographic or, in the case of autobiographies, as auto-hagiographic). We can turn to Keating to get the flavour of just how complicated policy making is, and how different it is from that portrayed at the time by politicians and commentators. The Australian policy experience may also provide guidance to the future path of the New Zealand economy.

Ignoring the Critics:

One Recent Economics Publication Offers Diversity, Another Ideology.
Listener: 15 February, 1997.

Keywords: Macroeconomics & Money;

Over the years I have collected a bibliography of about 500 books and article on the economic reforms since 1984, reflecting numerous accounts of what happened. It is not comprehensive – simply the items I have referred to in my writings. By a judicious selection one can select a subset of these references which demonstrates the muldoonist analysis of the reforms was correct, or a marxist one, or a crude keynesian, or a social credit one, or whatever. You would not have to do that for a new right account of the reforms. Instead you would go to a recent article “Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency” by Lewis Evans, Arthur Grimes, David Teece, and Bryce Wilkinson, published in the Journal of Economic Literature.

The technique is simple. Quote only the material that supports your case, and do not address the critics. Do not even mention them, because the reader might look up the critic and see the strength of the argument, even if you have misrepresented it.

It leads to odd accounts. The article discusses an issue called “the sequencing problem”. It is not an easy one to deal with, as anyone who has read the exchange between Alan Walters (who use to advise Mrs Thatcher) and myself. (I thought I got the better of the argument, but I am sure Walters thought he did.) The difficulty the new right faces is that the main contributors on sequencing in New Zealand were critics of the reform. (The pro-reformers came very late to this party.) So the article does not mention any New Zealand debate, just use foreign literature.

By contrast is just published A Study of Economic Reform: the Case of New Zealand, with 14 chapters written by 22 contributors. (I was one, but I was not involved in the editing or selection.) The three editors, Brian Silverstone, Alan Bollard, and Ralph Lattimore, who between themselves reflect a diversity of views, went to writers they thought would offer competent and interesting contributions. Inevitably there is a assortment of viewpoints and approaches, but the book is not dominated by any one vision. No attempt was made to require the contributors to maintain a particular ideology, and some even disagree with each other.

Almost all the economic writers I have thus far mentioned are not involved in policy, and so their personal political preferences are not so important. But the same problem exists in some government economic advice agencies. They can be so ideological that alternative approaches are completely ignored.

An exception is the Reserve Bank. If one criticizes monetary policy, they are likely to send an article in response, or to write a private letter, or even phone the commentator. Their economists are courteous, firm, but not arrogant about the Bank’s monetary policy. They engage positively. The public and outside economists have some confidence that there is a debate going on inside the Reserve Bank. Over the years the Bank’s theory has evolved, as it has taken aboard some points made by the critics. While one may disagree with their policy stance (or be impatient as to how long it takes the Bank to get the point of some of the criticisms), one respects the Bank’s approach.

Unfortunately, this is not true for all policy areas and advisers. Too frequently, the government agencies use their privileged position to monopolize advice, and ignore criticism, with the result that policy suffers.

Yet their failure to engage with their critics leaves the following thought. Perhaps the unwilling are unable to reply. They think they know the truth. They believe there is a reply to their critics. But they do not know what it is. Better for them to ignore those with whom they disagree, than indicate they are unable to engage in debate.

Indicative of the muddled thinking in the Journal of Economic Literature article, is the failure to offer any rigorous evaluation of the reform’s outcome. It ends with the expression “the success of the reforms to date”. but it is a litany not a methodical assessment. Rather than a systematic account of the economic performance, the article emphasizes the institutional reforms. Its “logic” is that commercialization was required, there was commercialization, therefore the commercialization was successful, and so must be the economic performance. Because the argument is circular, anecdote is sufficient confirmation. (It even cites Richard Prebble’s I’ve Been Thinking. One cannot get more anecdotal than that.)

It is well to recall that the original objective of the reforms was, we were told, to increase the economic growth rate. The authors emphasize the two good years in the last decade, but do not update their account with recent changes, which show that it was a temporary burst, rather than sustainable. Everyone else probably knows it, but I offer the accompanying graph, which shows that real GDP was going at about the same rate as the rest of the OECD up to the time of the reforms. According to the forecasts, the economy is back on the old growth track, but at a lower level. Thus we are poorer as a result of the reforms, and appear likely to remain so.

Engineers and Nation Builders

Keynote Address to the 1997 “Engineering Our Nation’s Future” Conference of the Institution of Professional Engineers of New Zealand, Wellington, February 5th.

Keywords: Political Economy & History

Today’s lecture is work in progress, which will one day become a book called something like “The Nation Building State”. It is concerned with one of the dominant themes of New Zealand’s economic and social development, the use of the state to build the nation, and the curiosity that in the mid 1980s that theme suddenly disappeared. Engineers had a central role in this nation building, so it is good to have an opportunity to talk to you about it. After all if we do not have an understanding of our past – from whence we came from, why we are where we are – then engineers will have little influence over the nation’s future, and where we are going.

I want to start off with an Australasian contrast in roadworks signs. In New Zealand it states in large letters “TRANSIT”, and then underneath in smaller letters “New Zealand”. The sign goes onto describe the particular project, and ends with a statement as to how much it costs. A comparable sign in Australia says “FEDERAL GOVERNMENT OF AUSTRALIA”, gives the project title, and at the bottom has a slogan “Uniting the Nation”.

Part of the difference between the two signs reflects different political situations. In Australia there is a federal government in Canberra and a set of state governments which are very much more powerful than any local authority in New Zealand. Often the Australian federal government cannot do things of importance without consulting the State government, while there are even occasional threats for some of the states to become independent countries in their own right. This imposes a continual pressure on the federal government to prove itself to the public, a pressure which hardly exists in New Zealand. That is the underlying message in their road construction signs – the federal government doing something for you, the public.

But there is another difference between the two signs. In the Transit New Zealand signs, you can hardly see the “New Zealand”, almost as if the project has got nothing to do with the country. In contrast the Australians make certain you know their project is about Australia, and about the government of Australia that is building its roads. Moreover while the New Zealand project emphasizes how much it costs, in Australia they tell you about its overall purpose: uniting the country, building a part of the nation’s grid, the network which brings Australians together. Thus the two signs represent two very different visions. On the east side of the Tasman there is organisation which seems to be not very proud of being a New Zealand one or of contributing to the development of the nation, but is mainly concerned about spending money. To the west there is a country which is committed in some sense to building the nation.

The expression, “the nation building state” was in a the subtitle of a very influential book by Australian sociologist Michael Pusey. Its title is Economic Rationalism in Canberra, which describes how the theory, which is called “Rogernomics” in New Zealand, took over the federal government of Australia in the 1980s. Its subtitle is A Nation Building State Changes Its Mind.[1] Pusey argues that as the theory of economic rationalism came to dominate thinking in Canberra, Australia changed its economic strategy from being a nation building state to one which is more passive. Yet if we look at the road signs in the two countries we see that Australians still have this notion of the state as a nation builder, even if it is not as strong as it once was. For New Zealanders a nation building state has been all but disappeared.

The tradition of the nation building state in New Zealand is a long one, beginning with the ambitions of the first settlers committed to New Zealand. It includes the politician Julius Vogel who was involved in the founding the Public Works Department (PWD) in 1870, which for over 100 years was the major engineering instrument of the state’s nation building strategy.

In the government centre in Wellington there is the Vogel Building named after him. Ten years ago it housed the Ministry of Works and Development (MWD), the successor to the PWD. For over hundred years it, and its precursors, had been the country’s biggest employer of engineers, and some of the most technically accomplished ones. The MWD was involved in building the nation so, for instance, the old National Roads Board, the precursor of Transit New Zealand, was a part of it. Many other engineering activities involved in the building of New Zealand were originally in the Ministry of Works, its predecessor, or in related government departments such as the Forest Service, the Post Office, the Mines Department, New Zealand Railways, or the state electricity system. Yet today the Ministry of Works has been abolished, most of its activities have been privatized, and there are hardly any engineers directly employed by the government.

How did the vision of the role of the government of New Zealand change? How did we shift from this vision of building a nation and uniting the country, to one in which New Zealand is demoted and the costs of each project highlighted? To answer that we go back sixty odd years.

In the 1930s New Zealand, like the rest of the world, experienced a devastating depression. What was the response of the leaders of New Zealand? Almost all of them were men, so I shall be using the masculine pronouns to describe them.

Virtually all those significant in the developments after 1930s were public servants (or politicians) at some time. I happened to be working on a biographical essay of one of them, Bernard Ashwin, who was an economist and was Secretary of the Treasury from 1939 to 1955.[2] He was, according to Keith Sinclair, one of the most powerful men in New Zealand in the 1940s, so one can tell much of the story of the nation building state through his life.

Ashwin, born in 1896, entered the public service in 1912, fought in France in the First World War where he twice diced with death, and came back to graduate in economics. Transferring to the Treasury, he became one of New Zealand’s most important public servants and, indeed, economists. Reflecting in his early memoir, before his distinguished career was to be evident, the 30 year old economist wrote that in early adolescence “I acquired a desire which I did not entirely abandon for many years to be an engineer and build bridges and tall buildings.” Instead Bernard Ashwin became a social engineer, and built the mid-century New Zealand economy.

In those days there was a synergy between economists and engineers. Ashwin is not the only example. During the war New Zealand was faced with a grave shortage of physical infrastructure, so James Fletcher, founder of the Fletcher Construction company, a precursor of today’s Fletcher Challenge, was for a while Commissioner of Works in the public sector. Meanwhile his son, Jim Fletcher, ran the family firm and was an active economic nationalist, including on the Tasman project. Both worked closely with Ashwin.

Other major nation builders included politicians like Gordon Coates and Peter Fraser; other economists like Bill Sutch; Pat Entrican an engineer who ran the New Zealand Forest Service; Alister MacIntosh, the secretary for external affairs; Clarence Beeby (“Beeb”) the Director General of Education; Joe Heenan, the Secretary of Internal Affairs; and James Shelly who led the development of national radio. Each of them was involved in using the state to shape the nation.

The late 1930s was a time of many social reforms – perhaps social security is the most memorable. Ashwin was closely involved in the creation of the Reserve Bank of New Zealand. But it was also a period of the physical building of the nation’s infrastructure – roads, railways, ports, telegraph, and new facilities such as hospitals, government office buildings, airports and electric power. It was not just a matter of housing people and providing them with education and health and social security. The productive capacity of the economy had to be enhanced to provide the goods and services that raised standards of living. Infrastructure and industrialization were key concerns, so was irrigation.

The war redirected the nation builders, changing their priorities. A major concern now was building airfields, while the hydro-electricity construction program was delayed, resulting in the power blackouts of the 1950s.

After the war there was the problem of demobilisation, of finding jobs for servicemen. That led to the longer term issue of industrial strategy. The war had favoured New Zealand production, because many goods could not be imported, so they were produced here. The decision had to be made whether to wind down these factories – in which case where would their existing and new workers be employed. And how would the imports be paid for? In those days exporting was almost solely meat, wool and dairy products – pastoral exports. Would there be sufficient of them – at a sufficient price – to pay for all the imports, and provide jobs? This issue was and is central to economic policy throughout the postwar era.

A key influence on the nation builders’ thinking was the unimportance of New Zealand in the international arena. It is small, whether measured by population of economic size, and on the international margins. One might joke we are behind the filing cabinets of the world. If in an office there is a map of the world on the wall, then as like as not there will be a filing cabinet pushed against it, and behind that cabinet is where on the map is New Zealand. In truth we are basically a very unimportant country.

Nation building had a vision of making us important. Admittedly we were important suppliers of pastoral products to the international market, but they are hardly products of key international significance. Moreover they were (and are) very vulnerable if there was another international downturn, like that in the 1930s, while the farseeing predicted there would be competitive pressures from highly subsidized pastoral producers in the actual and potential export market. So the nation builders looked for new industries, which offered the opportunity for diversification, for reduced dependence upon pastoral exporting.

In the late 1940s Ashwin becomes interested in very specific developments, especially the Tasman Pulp and Paper industrial complex at Kawerau which processes the vast Kaingaroa forest, the result of providing work for unemployed New Zealanders in the interwar years. In this context there are a couple of features of Ashwin which need highlighting. First of all he was the Secretary of the Treasury – he was the first great Secretary of the Treasury – and yet as the Secretary he was intimately involved in actually building of an industrial plant. He was so committed, his son Barry Ashwin tells me, that he decided to retire early from the Treasury so he could be involved in the Tasman project as a director.

The second interesting feature was that Ashwin was a conservative. We are not talking here of about a person who was a Marxist or a socialist or even mildly on the left. Not only was Ashwin a fiscal conservative concerned with limiting government spending – the inevitable fate of a Treasury official – but he was a political conservative. Despite being the key economic adviser to the Labour Government in the 1940s, Ashwin probably voted National.

What interests me is that it has been usual to present economic nationalism as a policy of the political left. Certainly our most articulate economic nationalist, Sutch, was of that political suasion, but economic nationalism – even the nation building state – was not a preserve of the left, as Ashwin well illustrates. For here is a man who is in power in the Treasury and who is a conservative, at least by the measures of New Zealand at the time, and nevertheless he supported direct intervention to build industry.

He was not alone in doing this. Entrican had a key role as head of the Forest Service, and James Fletcher had returned to private practice and became chairman of the Tasman Board. The industrial plant – New Zealand’s largest factory – was built not by private enterprise, but by the Ministry of Works, whose new Commissioner of Works, Ed McKillop was also Tasman’s board.

Ashwin retired in 1955 and leaves this story. But the story does not stop there. There continued a constant seeking to create by the New Zealand government industries which were alternative, or complementary to, pastoral industry and which would make the country of greater significance in the world, while supporting the rest of the economy.

The greatest advocate of these developments was Bill Sutch, whose collection of his essays, Colony or Nation?, argued New Zealand had to choose between these options.[3] The choice was not peculiar to New Zealand. The notion of using the State to build the nation was an international phenomenon, popular in the recently decolonisation of many parts of Africa and Asia in the 1940s and 1950s. These newly politically independent states wanted to be economically independent, wanted to build their nation and not just be a “neo-colony” – as they described it. They saw the building of great industries as a part of this independence, of their acquiring genuine nationhood.

This strategy of industrialisation, of course required engineers, as when the nation built an oil refinery at Marsden Point, as when it continued the electricity generation construction program (which shifted from just building hydro and geothermal stations to include building thermal stations like the ones at Huntly and New Plymouth), or as when the nation built an aluminium smelter at Te Wai Point, or as when it built a steel mill at Glenbrook. In each case the government was intimately involved.

The last great stage of the story of the nation building state starts in 1968 when what was then the world’s fourth biggest gas field – the Maui field – was found off the Taranaki coast. The find had a number of fundamental implications. First in most countries such natural gas is used for industrial processing, but New Zealand did not have the industrial base that could use all the gas. How then was it to be used? Second, the government signed with the consortium which found the gas, a “take-or-pay” contract. This meant the New Zealand government would guarantee to pay for it even if the nation did not use the natural gas. The consortium needed such an agreement to secure the finance to construct the Maui platforms, which were huge engineering projects in their own right.

Thus the last great nation building state activity, what became called “Think Big”. Today, the projects are looked upon unfavourably, despite them being engineering successes. The synthetic gasoline plant at Motunui was a superb piece of chemical engineering, using state of the art catalysts to convert methane into petroleum products, and was constructed at below the forecast cost. On all measures it was a success except one, the commercial one. It was designed on the assumption that the price of oil would be at least $US25 a barrel. That was a perfectly reasonable forecast at the time. Modest predictions were for a price of $US35 a barrel, while Texans were talking about the price of oil being $US75 a barrel in 1975. When the syngas plant started the price of oil was $US12 a barrel so the plant operated at a loss, which was carried by the New Zealand government and taxpayer.

This experience, or worse where there were construction cost overruns, was typical of almost every one of the Think Big projects. The financing of each project had been arranged so that if there was a loss, the taxpayer or consumer carried the burden. When oil prices fell in the mid 1980s, virtually all the projects went commercially wrong.

Meanwhile the public servants were already losing their faith at being able to identify and promote successful industrial projects, and national independence.[4] The failure of the Think Big projects was the clincher. And so in the 1980s, the nation building state changed its mind, becoming passive towards promoting industry. This loss of faith percolated through the whole political and government system. The MWD and agencies with a similar mission were closed down, corporatized, or privatized. And, as we saw with Transit New Zealand, those which were left redefined their role from nation building to spending money.

The original concept of my study was the abandoning of the nation building state. But the nation building state is not going to disappear so easily from the political agenda. While one can explain why many economists enthusiastically abandoned the nation building state strategy, and why many engineers did so reluctantly, I am puzzled by the abandonment by the politicians. The political parties seemed to have largely given up the strategy. Labour, the nation builders of the 1930s and 1940s, who renamed the Ministry of Works and Development in 1973, became the vehicle for disbanding the instruments of state nation building in the 1980s. National’s stance is neatly captured by Bill Birch who drove the Think Big projects while Minister of Energy from 1978 to 1984, and pursued the opposite strategy as Minister of Finance from 1993 to 1996. There was the odd politician who touched the rhetoric of the nation building state, but it was pallid in comparison to their predecessors, and typically their role was marginal and ineffective.

Yet the New Zealand public has never abandoned the vision of the nation building state. Indeed their widespread resistance to privatization, despite the enthusiasm for it of the politicians, is evidence that the vision of nation building is still a powerful political notion.

It is not accidental then, that there are elements of nation building in the rhetoric of Winston Peters with his aim to reflect his public. As Treasurer and deputy prime-minister in the coalition cabinet after the 1996 election, he has the opportunity to pursue his vision. How he will do that, whether he will do it, we have yet to see. But whatever the governing elite may think the public vision will not go away. Perhaps the book I plan to write may not be a requiem for the nation building state after all.

The nation building strategy we return to will be different in execution from that we did in the immediate past. Suppose Ashwin were alive and active today. We may take it he would still be a nation builder, but the likelihood is that he would pursue the strategy in a different way from that we did in the seventies, relying more on private enterprise. The PWD hired private firms to carry out the tasks given to it in the 1870s. In the foreseeable future some return to great use of the private sector to build the nation seems likely.

Perhaps Ashwin would see the government as facilitative, rather than interventionist.[5] It is a horses for courses issue. The sort of interventionism Ashwin practised when he was Secretary of the Treasury does not work to the same extent today. The globalized world economy limits the effectiveness of the interventions of the past. We need to think of new strategies which are facilitative, and give the nation some control over its destiny. Otherwise we will end up a neo-colony of the globalized economy.

It was not only the economists who lost confidence in the nation building state, less confident of its traditional role – to help build a nation through industrial and infrastructural projects. The engineering profession has to revise its vision too.

There are three main reasons. First there are fewer of the traditional constructed: the roads have been built, the rivers straightened, and railways – that key network the PWD created – is shrinking. Second there are new technologies, most notably in information technology, but it is not clear how they fit into the heroics of nation building. And third, increasingly there is a concern for “sustainable development”, which in some ways is conflict with economic development.[6] After all economics, like engineering, is fundamentally based on the second law of thermodynamics. Without it there would be no production functions, no decreasing returns from additional inputs. Without it most of the central economic problem of scarcity would disappear.

In a fundamental way economic development has been about extracting energy and resources from the environment in an unsustainable way. Although the classic Maori managed the economy and environment in a reasonably sustainable way, the first European settlers “quarried” the environment – for seals, whales, fish, timber, gold and other minerals, and kauri gum.[7] Subsequent economic activity may have been less exploitive, but even pastoral farming cleared bush, degraded soil and water, used oil and phosphate mined overseas, and chemicals which will take generations to clean up. Other post-quarry industrial activities have as equally uncomfortable records, while carbon emissions are proving to be a global sustainability issue.

Nevertheless there is an increasing recognition that some ways are less sustainable than others. Even if engineers were uninterested in their impact on the environment – and they are not – there is a strong environmentalist sentiment throughout the nation, which will shape and limit what engineers (and economists) can do. We are going to have to organize the economy so the impact of economic development on the environment is minimized. Perhaps economic growth – as we have known it over the last two centuries – must come to an end. What role then for engineers? What will replace it is less clear. As long as there is technological innovation, there will not be pure stagnation.

Facing this challenge will involve a reinterpretation of sustainability and economic development, and what the nation building state means. Ideally the new strategy will involve economists and engineers working closely together, as they did once in the past, but in different ways. Recall Ashwin’s desire to be an engineer and build structures, and how instead he became a social engineer and built an economy – an economy in which those engineering structures are not only central to its practical development, but provide some of the most central images of its success. Those aspirations still exist among the people of New Zealand. They must be harnessed, or we fail as a nation.

Endnotes
1. M. Pusey, Economic Rationalism in Canberra: A Nation Building State Changes Its Mind (Cambridge University Press, 1991)
2. B.H. Easton, “Bernard Ashwin: Secretary to the Nation Building State.”, New Zealand Studies, November 1997, p.13-21
3. W.B. Sutch, Colony or Nation (Sydney University Press, 1966).
4. B.H. Easton, The Commercialisation of New Zealand (AUP, 1997).
5. B.H. Easton,Getting the Supply-side to Work, (New Zealand Engineering Union, 1994).
6. See R.M.Sharp (ed) Sustainability Through Engineering( IPENZ) for an example of a thoughtful discussion on the issue
7. The “quarry” and later stages of economic development are described in B.H. Easton Towards a Political Economy of New Zealand (1994 Hocken Lecture, Hocken Library, 1996).

How Accurate Are the Incomes Reported in the Household Economic Survey?

This paper was preliminary, and circulated for discussion in 1997 (This version revised in 2000). The issues it raises were taken up by Statistics New Zealand and have been largely dealt with. (A major revision has been to the household weightings.) It is placed here on the website, because occassionally researchers using the earlier data ask for it. But it illustrates the universal rule of always checking one the quality of one’s data before using it

Keywords: Statistics;

Introduction

As the result of a generous grant for then Prince Albert College Trust, it has been possible to place in the public domain for research purposes, quasi-unit records (QURs) from the household economic survey (HES),[1] one of the regular surveys administered by Statistics New Zealand.

Each QUR is an average of three household unit records from the HES. This ensurers the privacy protection that the law requires for Statistics New Zealand respondents. Yet in many ways a QUR behaves like a single unit record, especially where the analysis is linear. Moreover, rather than randomly choosing the three households for each quasi-unit record, the three households belong to the same household type, so they have a common household structure, and are combined to preserve the total household income structure.[2] Thus the income characteristics of the households in the HES are preserved in the QURs more precisely than were there to be simple (or simple stratification by household type) random sampling.

Thus far only the 1994/5 data year is available, but quasi-unit records will be obtained for all years back to 1981/2. The current state of the research project is an exploration of the 1994/5 data, to obtain an understanding of its significance and robustness. Lessons learned form this study are likely to influence the structure of the QURs for other years.

This paper explores the aggregate income implied by the data. With each QUR is Statistics New Zealand’s estimate of the number of households that the QUR represents, based upon the sampling weights of the HES. Thus by aggregating up the QUR we obtain an estimate of income totals for all households. Since all the procedures used here are linear, they will give the same estimates as if the figures had been based upon the unit records. By comparing those estimates with known official estimates we can gain some notion of the income coverage ratio of the HES.

The Income Data

While the data is said to apply for the year to March 1995, it represents the information collected by households surveyed in that period. Each household is asked to report their income for the previous 12 months. Thus while a household surveyed in March 1995 would report their estimate for incomes for the year to March 1994/5, a household surveyed in April 1994 (a part of the same data year) would report its income for the year to April 1994, some 11 months earlier.

It follows that the income data from the HES for the year 1994/5 (i.e. to March 1995) corresponds more closely on average to income for the year to September 1994. Since most other income data are collected on a March year basis, this complicates the comparison. To calculate the September 1994 data, the March year 1995 and the March year 1994 data is averaged (which is not very different from what in effect the HES is doing).

Incomes of households are collected by the following components: Wages & Salaries; Self Employed Income; Public Superannuation; Government Benefits; Investment Income; Private Superannuation; Other Income; TOTAL INCOME.

Household Income for the September 1994 year.

The conceptual framework chosen for the comparison of the aggregate income of the QUR is for incomes derived for System of National Accounts (SNA) purposes. The tabulation which seems most relevant is the estimates of household income for the household institutional sector.[1]

Two SNA items, the imputed rent on owner occupied housing and the imputed interest on pension funds, are omitted because they are not requested for the HES, nor are they relevant for our purposes. Estimates for National Superannuation and Government Benefits were derived separately because the SNA concept for “Social Assistance Grants” includes health and pharmaceutical benefits (reflecting international definitions.

Note that the last component “other income including private superannuation payments” may not correspond to the aggregate derived from the institutional sector accounts. Further work is necessary. (A particular issue is where the ACC benefits should best go.)

The Table below gives the comparison.

COMPARISON OF HES AND SNA ESTIMATES OF INCOME AGGREGATES. September 1994 Year

  HES (QUR) National Column 2 Notes
    Accounts Column 3  
Wages &
Salaries
$32,667m $26,056m 90.6% Compensation
of Employees
Self
Employed
$4885m $9139m 53.3% Entrepreneurial
Income
National
Superannuation
$4137m $5091m 81.3% NZOYB
Government
Benefits
$3433m $28029m 72.6% NZOYB
         
Investment
Income
$2433m $2809m 86.6% Received Interst
& Dividends
Other Income inc
Private Superannuation
$838m $3273m 25.7% Other Income
inc ACC benefits
TOTAL INCOME $49,650m $61,095m 81.3%  

Sources of National Account Estimates: NZIER estimates for March Year, unless notes indicate NZOYB.

It is evident that there is not a very good match between the two sets of aggregates. In summary the HES covers the following proportions of the SNA estimates:
Wages & Salaries – 90.6%
Self Employed Income – 53.5%
National Superannuation – 81.3%
Government Benefits – 72.6%
Investment Income – 86.6%
Other Income (including Private Superannuation) – 25.7%
TOTAL INCOME – 81.3%

Assuming the SNA estimates are reasonably accurate the reasons for the divergence may include
(i) conceptual differences (especially for “other income” and between categories)
(ii) omissions from the HES of the income of those not living in households (but, for example, in rest homes and hostels). It may be possible to allow for this;
(iii) poor recall by the respondent
(iv) confusion between before and after tax incomes (and the complication in government transfers of abatements and surcharges;
(v) deliberate deceit.

It should be emphasized that Statistics New Zealand are aware of problems which arise from the survey (i.e. iii, iv, v), and have taken steps to minimize them.

The most serious gaps are the underestimates for other incomes (probably explanation (i) and possibly (iii)), and self employed incomes (probably a mix of (iii) and (v)). But all the differences are uncomfortably large.

What is to be done? The short answer is – more work refining this note.

At some stage we may want to adjust the HES data for the under-reporting. A quick solution would be to increase proportionally each component, but this may not be particularly reliable, especially where very large increases are required.

In any case this involves two assumptions which do not seem especially plausible. First that would be to assume there is no failure to report any income (actual income reported as zero would still be zero after the adjustment). And second it assumes that misreporting (for whatever reason) is proportional, where other work shows that it is not.[1] Note that because different income components have different reportage errors, distributional inferences could be wildly wrong unless some adjustment is made.

In the interim we need to be cautious about drawing any conclusions where income levels are important. Unless some adjustment is made, no matter how crude, the conclusions will almost certainly be wrong.

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Endnotes
[1] The HES and the QURs is documented in Statistics New Zealand 1994/95 Household Economic Survey: Background Notes, Wellington, 1996 and Statistics New Zealand Quasi Unit Record Data From the 1994/95 HES, Wellington, 1996.
[2] For each household type, the households are ranked from largest to smallest income, and then combined in groups of three.
[3] Statistics New Zealand, New Zealand Institutional Sector Accounts: Issues and Experimental Accounts, 1987-1995, Wellington, 1996.
[4] B.H. Easton, Income Distribution in New Zealand, NZIER Research Paper No 28, Wellington, 1983.

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Dispirited News:

A World-leading Academic Found Not All is Well in the Public Sector
Listener: 1 February, 1997.

Keywords: Governance;

The last minute decision to make Jenny Shipley Minister of State Services may reflect looming problems in the state sector. The underlying issues are set out in a recently published report, The Spirit of Reform.

Written by Allen Schick, “a world leading public sector academic” (so the Treasury tells us), the report might have been expected to laud uncritically the reforms of core government, given it was written under conditions which would be expected to give a favourable outcome: terms of reference set by the State Service Commission and the Treasury who have a self-interest in the report concluding in favour of their reforms; the report writer an overseas visitor on fleeting visits; the confining of those consulted to insiders, largely excluding academics, dissenters, and those outside Wellington; and a reliance upon anecdote. But Schick was able to overcome these handicaps, and produce a report critical of many aspects of the reforms of government administration.

He described the reform’s concepts as “avant garde” and “novel” while the Treasury 1987 Post Election Briefing, Government Management, which provided the intellectual foundation for the reforms was “extraordinary”. Such adjectives belie the report’s measured tone, and its careful argument. Schick points out the central theme of the reforms “influenced by two overlapping but distinctive sets of ideas, one derived from the vast literature on managerialism, the other from the frontiers of economics. Managerial reform is grounded on a simple principle: managers cannot be held responsible for results unless they have freedom to act. The new institutional economics is grounded on a very old idea: people act in their own self-interest.” It was the latter that the 1987 Treasury PEB emphasized, but “clearly different conclusions might be drawn if the brief were argued from different premises.”

Schick is sympathetic to managerialism, although his vision is of a distinctive public sector approach. Thus while he faintly praises the private sector approach of accountability – “an impersonal quality, dependent … on contractual duties and informational flows” – Schick gives greater importance to responsibility “a personal quality that comes from one’s professional ethic, a commitment to do one’s best, a sense of public service”, which have been downgraded by the reforms. Contractualism undermines public managerialism, for it “may diminish public-regarding values and behaviour in government,” including values such as “the trust that comes from serving others, the sense of obligation that overrides personal interest, the professional commitment to do one’s best, the pride associated with working in an esteemed organisation, and the stake one acquires from making a career in the Public Service.”

Contractualism also weakens the collective interest, for a third party is difficult to fit into a bilateral deal between a purchaser and a provider. Schick reminds us of Edmund Burke’s challenge to his local electorate that his obligation was to the public good as he saw it, not just to serve as their agent. The reader is left wondering – as Schick intends – as where does the public good belong in the narrowly defined bilateral contracts which pervade the reformed public sector. The report also wonders whether the claimed efficiency gains of some processes have been swallowed up in the costs of contracting. Its doubts are based on anecdote – hardly anyone measures the transaction costs generated by the reforms – but numerous public servants (probably those Schick did not meet) would say “hear, hear”.

Schick also writes he is “troubled by the concept of split-personality government that has influenced financial and other reform practices.” The report expresses doubts about the efficacy of such key notions in the reforms as the outcome/output distinction, the ownership/purchaser distinction, the policy/operations distinction, and the completely ignoring of inputs in the assessment of an agency’s performance. Worryingly the report says that today “there is more pressures for conformity and group-think” in the public service. Apparently criticism is even less tolerated than in the past.

There may be two Schick reports, for there is no hint of the one I have been quoting in the 1996 Treasury Briefing to the Incoming Government, which claims it “concludes that the reforms were successful, but that there were areas that needed attention.” Undoubtedly Schick recognizes there were some successes, especially where the managerialist philosophy has been implemented. But my version of his report is riddled with doubts about the extremism of the contractualism which Treasury promoted.

Perhaps the prime minister gave Shipley the herculean task of trying to resolve the oncoming public sector difficulties, because the health sector from when she came is one of the areas where the reform strategy which Schick criticizes has gone most wrong. (Schick was largely kept away from the health sector. He also mentions he did not take the Cave Creek disaster into account, even though the Noble report was published over nine months before his.)

Do not expect numerous sudden and massive disasters in the public sector. Rather there will be an ongoing deterioration of performance (Treasury included). As T.S. Eliot reminds us the world ends not with a bang but a whimper.

The Political Economy Of Fish

Dr Sutch Looked At Our Fishing Industry 35 Years Ago. What Would He Think Today?
Listener 18 January, 1997

Keywords: Business & Finance; Political Economy & History;

The fishing industry may not seem a likely paradigm for New Zealand’s economic history. Yet in January 1962, Dr Bill Sutch, public servant, economist, historian, writer, and New Zealand nationalist, persuaded a Nelson WEA summer school it was. Sadly, however, there is no written record of the speech. The challenge is to try to reconstruct it.

Sutch would have started with the classical (pre-contact) Maori. Fish was a major part of their diet; they conserved the fish stock; many were skilled fisherman; according to Captain Cook, they were in some ways superior to the fishermen of Europe.

That changed with the arrival of the European. As the Maori lost their population and their rangatiratanga their fishing became marginalized too. Fish stocks began to be run down.
Initially fishing was important to the early settlers too. Fish supplemented their diet, while recent work by Brad Patterson shows that whaling was the foundation of much of the commercial enterprise of Wellington. Other east coast settlements may have been as equally dependent. Once the whales were exhausted, the exports of the fishing industry stopped too.
Sutch would have drawn attention to the oddity that New Zealand was surrounded by sea rich in fish. (Later we were to acquire one of the largest Exclusive Economic Zones in the world.) Yet our fishing industry was primitive 35 years ago. Certainly we still ate fish – mainly battered with chips. But at the time, excluding crayfish which were being depleted like the whales, New Zealand imported more fish than it exported. All fish exports came to less than 1 percent of total exports.

Fishing was then a “stunted industry”, a term we know that Sutch would have used, because it is in a report on his Department of Industries and Commerce later that year. The official report tiptoes around Sutch’s explanation. Fishing has “good possibilities and it is regrettable there has been insufficient impetus and encouragement.”

He would have been franker to the WEA. Sutch both commended the enormous government contribution to the development of the pastoral industry, but also thought that the government interventions had favoured the farmers at the expense of everyone else. While today’s Federated Farmers may flagellate themselves over that assistance – cheap loans, subsidies, infrastructure, producer boards, preferential treatment, and so on – Sutch’s message was not a popular to the farmer government of the day, for farming had built itself on this government assistance. Farming was the great success. But because had emphasized assistance to farming, other industries had suffered. Sutch described the New Zealand’s economy as “over-specialised and over-sensitive” (a euphemism of the day for over-vulnerable), calling the New Zealand economy “immature”.

The last part of the Sutch lecture would have been to advocate the development of a robust fishing industry, as “a major export industry”. The audience would have been enthused, not just by much more historical detail than can be given here, but because of the vision of New Zealand as a mature diversified economy. That was what those who remembered told me.
Sutch died in 1975. What might he think today? He would certainly have been intrigued by the subsequent history, critical of our initially allowing foreigners to fish so much of the New Zealand waters, and astonished that the government was not more supporting to the industry. Sutch came from that tradition of the nation building state, where active government involvement developed New Zealand, as it had the pastoral industry. Having been told of the complex story of the reactivation of Maori involvement in fishing, he would have commended their plans to reindigenize the industry. The Maori are nation builders, and Sutch had little time for those with a colonial mentality who depend on foreigners for their technology, their capital, their initiative, and their ideas. (He would have been fascinated by the methods to conserve the fish stock, and proud of our world leadership in this area, plus our not insignificant efforts in protecting whales.) Most of all Sutch would have been delighted that fish exports were over 5 percent of commodity exports, with a the diversity of products and destinations. He would have add in the fish we export by feeding quality meals to tourists.

Yet, he would have said we were still not a mature economy. Diversified, yes, but we were still an exporter of primary products, albeit usually with further processing. I imagine he would have reminded his audience that primary products are often relatively easy to make, so that the markets of efficient producers like New Zealand may nonetheless be under pressure from inefficient but assisted foreign producers. In all probability Sutch would tell a contemporary audience, that we had not gone far enough. We should be exporting fishing boats – he would cite our success in building racing yachts – and fishing equipment, even fishing technology and services. Excluding primary processing, manufacturing remained immature. Dr Bill Sutch would have argued our economic structure was still largely colonial, and finished his 1997 lecture by reaffirm his faith in the nation building state.

Quardle Oodle Ardle: What Happens when an Economist Writes a Poem?

Listener: 28 December, 1996.

Keywords: Literature and Culture;

I’m rewriting New Zealand’s best known poem. We’ve redesigned just about everything else, so now it’s poetry turn.
So you are starting with “The Magpies”. Sounds right. They are black and white. Simple, no subtlety. What did you do to the poem?
We started with the chorus. It keeps repeating itself. Quite inefficient. We’ve eliminated this sort of waste of time and space everywhere else. Poetry can’t be privileged.
So there is only one refrain.
We had to delete its first line too. Everyone thinks the “Quardle oodle ardle wardle doodle” is from our “Post Election Briefing”. It is too melodic for that.
Is that all you did?
We had to cut out the verse about the beautiful crops ending up with mortgage corporation.
I thought that was current policy, or at least that seems how monetary policy is operating.
Yes, but we cant have any aspersions against the financial sector. If Glover were around today there would probably be a reference to the Business Roundtable.
It wouldn’t scan.
Rhythm has not been a major concern of the reforms. We also had to cut out the bit about how when the farm went bust the finance company took it over but could not give it away. The theoretical framework requires the price of everything is non-negative. Glover knew nothing about economics. Perhaps that is why the poem is so popular. But under the new enlightenment, only theoretically correct analysis is permitted.
So you are left with four verses?
We had a bit of trouble with some of them too. The bit about Elizabeth being dead was almost acceptable, although a bit downbeat for a poem that is meant to be celebrating the New Zealand experience. The theory says that in the near future New Zealand will be an economic miracle, with high growth, low unemployment, and prosperity, not that everything is dying.
We patiently await the day.
But the bit about Old Tom being light in the head, might be used to undermine our health policies of deinstitutionalizing as many as we can, and stripping the assets away from the rest.
But the poem says that they lost all their assets.
Exactly, we cant have it implied that the indigent have recourse to the state. Elizabeth does the right thing, by going off the books. The national poem cant end up with Tom dependent on the state.
So the verse about how they worked hard stays.
That was the most difficult decision we made. We were deeply split. They say that there is no dissent within the place. But I tell you that in this case we could not get agreement, and in the end had to get the boss to make our minds up for us.
It seems straight forward to me.
The point is that the poem says they worked hard and yet they got no benefit from it. It was the mortgage corporation that got the crops, and the farm too. Glover knew nothing. It is obvious that they were a couple of slackers. I should not be surprised if she was on the domestic purposes benefit and he on an unemployment benefit.
They didn’t have those benefits in the depths of the depression.
They wont have them in the next depression either, if we get our way.
So you left the trees growing.
Certainly not. The implication is they were growing with out any effort on Tom and Elizabeth’s part. Can’t have the workers thinking that.
But we approve of people getting interest and profits on their savings, dont we?
That’s different. They’re not workers.
Still, you would have left in the bit about Elizabeth’s lips. I sometimes try to imagine what she looked like.
Well that is the first reason why we had to delete that reference. The new regime is not one about fantasies, but about real hard work. Of course, if you can turn a fantasy into a commercial transaction and make a profit, that’s OK. Anyway, any mention of a women’s looks is sexist, so away went the line.
And Tom’s hand?
Sexist too.
So there is only one verse left?
It starts off that they “took” the farm. Sounds like they stole it. No wonder the whole venture was a bit of a disaster. They should have acquired it through a proper commercial transaction.
And the bracken?
We thought bracken beds might be a good way of stopping DPBs procreating, but it was pointed out that they would have been gathering the bracken from the road side, and not paying Transit New Zealand for it. It is that sort of failure to seize commercial opportunities which is causing the road congestion. Sent a note to Transit telling them to be more assiduous.
So what is left of the poem?
“The magpies said”.

The End Of the Golden Wether

The economic earthquake, thirty years ago this week, continues to shape New Zealand.

Listener: 14 December, 1996.

Keywords: Growth & Innovation; Macroeconomics & Money;

On 14 December 1966 the Wool Commission found itself buying in bales of wool offered for auction. This arrangement had been devised in the early 1950s to provide a floor price for wool, evening out the troughs in the fluctuations for the commodity whose price was set mainly on the auction floor. Each year a floor price was set. When offers were below this level the Commission would bid – on occasions even make small purchases – to push up the price to above the set floor level. But typically their involvement was minuscule.

In the 1966/67 season the floor price had been set at 36 pence a pound, 5.5 pence below the average for the previous season. The 36 pence level must have seemed safe, since it had been exceeded in nominal terms in every year since 1948. The last time it was at that level relative to the overall price level was back in the depressed 1930s.

Prices were weaker in the early part of the new season compared to the last, and continued to deteriorate. At the Auckland auction the average price was 35.3 pence, with the Commission buying in furiously. By the end of the season it had bought a total of 645,786 bales, over a third of the clip – fourteen times more than the previous peak of 1958/9.

It was the end of the golden wether, for with the exception of the 1972 and 1973 world commodity boom, wool prices were never to recover to the real levels that had been taken as normal in the first twenty years after the war. In those days wool was so important in exports, that the collapse its revenue, while meat and dairy price export prices continued to weaken, meant that the New Zealand economy had to undergo a major restructuring if it were to survive. Not surprisingly, whereas up to 1966 New Zealand GDP had grown at a rate similar to the rest of the OECD, with full employment and low inflation, for the following decade, the economy grew more slowly than the OECD, while unemployment became evident and inflation was rife.

New Zealanders once had a blind confidence in themselves. Any thoughtful analysis would have said that since the economy, dependent for almost 80 years on pastoral exporting, was ruined the best strategy was to leave. Some did – the first net out-migration since the 1930s. But most stayed. Some prayed that the downward trend in pastoral prices would reverse – it did not. The rest of us got on to diversifying the economy. Today you are told that farming provides over half our exports. But that involves including non-farm exports such as forestry in the half, ignoring tourist exports (our single biggest revenue earner), and treating the processing after the farm gate by the manufacturing sector as farming. (Moreover the farm effort is no longer just pastoral products, for there are thriving horticulture exports.) Even so, nobody claims that 90 percent plus of export revenue is from wool, meat, and dairy products, which was the proportion in the 1950s.

It was a magnificent economic achievement – perhaps the greatest in the post-war economy. Economic historian John Gould reports that New Zealand experienced a greater export diversification than any other OECD country in the 1970s. Whereas we had been very concentrated with few products and few destinations before 1966, by 1980 New Zealand exporting looked normal.

Like an earthquake which changed the course of rivers, of where people live, and what they thought about the land, the 1966 wool price collapse, and the associated meat and dairy price falls in relative terms, have changed the way we think about the economy and New Zealand society. Sure there is the nostalgic brigade, those strange bedfellows of farmers who still think they are the key to New Zealand’s economic growth and protectionists who want to return to the pre-1966 economic mechanism too. But the rest of us have had to adapted to the new diversified economy.

One of the oddest roles was played by Robert Muldoon, who as Minister of Finance presided over all but three years of the massive diversification of the external economy. Yet he was paralysed facing the next step of the internal liberalization of the economic mechanisms – of “more-market” – which the external diversification required. That was the task of his successor Labour Government. But just as Muldoon had pursued extremist repression, his successors went to the other of extreme.

It is not accidental that it took the hung parliament of 1993 to 1996 to finally give New Zealand tempered rationality. That is what the public sought when they voted for MMP. The old FPP system was a residual of the pre-1966 society which could be rigidly organized on the simple dichotomy of pastoral farm exporting and domestic protection. The two party FPP parliament worked in such simplistic circumstances. As economic and social complexity grew it gave power to extremism, although the public wanted moderation. We are still struggling with the aftershocks of the great economic earthquake of thirty years ago.

Institutional Economics and the Theory Of Value: Essays in Honor Of M. Tool

Edited by Charles M.A. Clark (Kluwer Academic Publishers, Boston,1995)
Review published in Prometheus, Vol 14, No 2, December 1996, p 291-293.

Keywords: History of Ideas, Methodology & Philosophy;

According to the Palgrave Dictionary of Economics institutional economics has been the principle school of heterodox economic thought, apart from Marxism. Some of its practitioners are extremely well known – Thorstein Veblen, Wesley Mitchell, Gunnar Myrdal, J.K. Galbraith, and Ken Boulding (perhaps Joseph Schumpter) – but it is rare for the school to impinge on the central economics paradigm of neo-classical economics. The two seem like distant cousins, who are still not talking after a feud over the family inheritance.

Robert Heilbroner in his The Worldly Philosophers nicely captures the difference when writing of Thorstein Veblen, perhaps the founder of institutional economics, that “his inquiry began not with the economic play, but with the player; not with the plot, but with the whole system and customs and mores which resulted in a particular kind of play called `the business system’.” (6ed, p.221) Of course neo-classical economics has a player of sorts, although rational economic man is a severely limited notion in comparison to the complexity and subtlety of Veblen’s individual. Similarly the institutions described in orthodox theory are much flimsier, transparent arrangements than they are in Veblen and institutional economics. Institutionalists eschew physics as the appropriate model for economic science, and look towards biology – or even anthropology. Inevitably they look at different issues: power – the organization and control of the economic system – comes to the forefront.

Like all successful paradigms, albeit in this case not the dominant one, institutional economics has a history of development, internal disagreement, and its own major thinkers. Marc Tool was one such person, and this book is a festschrift of 15 essays by 17 authors. Tool is certainly a worthy candidate for such a venture. Born in 1921, his career was troubled by the McCarthyism of the early 1950s, which he faced and survived to become a respected academic, the first president of the Association for Institutionalist Thought (AFIT), and a long term editor of the Journal of Economic Issues, the premier forum for institutionalists economists. His doctoral thesis, eventually published as The Discretionary Economy: A Normative Theory of Political Economy, was at the forefront of the revival of institutionalist – or, as he called it, “neo-institutionalist” – economics in the 1960s.

Whether this festschrift does him justice is another matter. The essays are loosely centred around the institutionalist account of value theory, but this reader found them difficult to follow, perhaps because I come from a neo-classical perspective (although a sceptical one). Many of the contributors do not attempt to engage with that perspective. None of the modern greats – say Kenneth Arrow or Gerard Debreu – are mentioned, and it is unclear whether value theory is addressing the same issues in the two paradigms. For the neoclassical economist, value theory is about the determination of the price of commodities transacted in the market. Nominally this is a positive theory about what the world “is”, although a normative account about “ought” sneaks in, especially that a competitive market clearing gives “just” prices. Institutionalist value theory starts off with the view it is about a normative theory, but it is unclear whether they disagree with, say, the Marshallian or Walrasian accounts of the positive determination of prices. It is clear that institutionalists consider the real determinant of resource allocation is not the market – as it is in neo-classical economics – but the structure of society, especially organizational and institutional power. Somebody like Joan Robinson, from the Marshallian tradition, would have agreed with the sentiments in the previous sentence.

I fear that by now I will have lost many of the readers in the arcane mysteries of the history of economic thought. But they will be even more lost in the essays in the book – with one exception. Fortunately for readers of this journal, the exception is an essay on telecommunications by Harry Trebing whose notable career includes having been chief of the Economic Studies Division of the US Federal Communications Commission. (That an institutionalist has risen to this rank reminds us that they may be a small part of the totality of the US economics profession, but they need not be marginal.)

As a background to his essay entitled “Market Failure and Regulatory Reform: Energy and Telecommunication Networks as a Case Study”, (p.221-240) it should be noted that, since Veblen himself, institutionalists have had a deep interest and distinctive view of technological change and its role in economic development. As Heilbroner says “Veblen did put his finger on a central process that loomed larger than any other in his time and that had been strangely overlooked in all the investigations of contemporary economists. That process was the emergence of technology and science as the leading forces of historic change in the twentieth century.” (p.246: original’s italics) It is a little uncertain whether Heilbroner intends to imply this is still true, but in my view technology remains largely a mechanist force in neoclassical economics, whereas it is a vital one in institutionalist economics (and befitting an evolutionary science “vital” is used here in its biological meaning). It seems likely that in a static competitive market neo-classical and institutional economics give largely similar accounts of events, except they may focus on different issues. However for a market under acute technological innovation, the accounts are likely to be different. Thus Trebling’s essay is a test as to whether institutional economics provides a genuinely useful perspective to the neoclassical account.

The essay opens arguing that “much of the intellectual support for the deregulation movement [in network industries] has come from neoclassical economists who believe that utilities industries are inherently competitive and cases of market failure are either isolated phenomena or incidental spillover effects associated with an otherwise smoothly functioning system of markets.” (p.221-222). Instead he argues the networks are infrastructure in which there has been a failure of pervasive competition to emerge. There are five significant effects: the persistence of high levels of concentration; the persistence of continuously high levels of profitability; the persistence of price discrimination, cross subsidization and risk/cost sharing; the emergence of substantial market power exercised by monopsonistic buyers; and the merging pattern of pricing for core/basic service sales on the one hand, and large industrial sales on the other. The essay argues that as a result there is a potential impairment of the network as an integrated fully functioning entity.

Few of these notions will be unfamiliar to those who study the telecommunications industry, although the identification of the parallels with electricity and gas reticulation is a valuable one. Where then is the particular institutionalist insight?

Trebling goes on to argue for what Marc Tool called “progressive regulation” but which might also be called government regulation and planning. (“Progressive” means here “advancing social conditions”, rather than “increasing scope”.) He argues for five tasks: the determination of the proper size and scope of the network relative to the market to be covered; greater surveillance of network accessibility and adequacy of service; regulatory oversight of modernization and maintenance of the network; examination of the distributional consequences of regulatory intervention and imperfect markets; and developing adequate guidelines for constraining various forms of exploitative pricing.

This is a far cry from “light handed” (or as it is sometimes called by its critics “light fingered”) regulation, popular today. However it does not seem to me to be entirely outside standard neoclassical economics, unless one takes the extremist Chicago School version with its tight prior policy conclusions of minimal government intervention as being the centre of the paradigm. One gets the impression that there is a much greater overlap between institutional economics and the neoclassical paradigm than either side admits. It may be because of the dominance of economic rationalism in the US that institutionalism has been a sort of bunker to which dissenters retreat, rather than being on another planet altogether. Economics is a very broad church. Perhaps the Chicago Cowboys are in the right hand pews up the front, the institutionalists down the back on the left. Because until recently Australasian economics has not been so hostage economic rationalism, institutional economics has not been so explicitly differentiated here, and its insights have been more readily incorporated into economic analysis and policy.

But the bunker mentality is there in the US, and in these essays. Some contributors uncritically repeat a comment Marc Tool made in his 1981 presidential address to AFIT that “[t]he economists’ abiding commitment to develop and apply theory which is relevant, directly or indirectly, to the great issues and problems of the day, is the driving economists out of orthodoxy to positions similar to or comparable with positions institutional economists have been evolving over this century.” (p.1). I wish the first sentiment were true. In that it is not, we may have an explanation why the Tool’s prediction seems weak a decade and a half after it was made. Perhaps institutionalist economists should turn to explaining why many economists do not seem to have a commitment to investigate the great issues of the day. Marc Tool’s contribution to economics deserves constructive engagement, rather than the repetitive mantra on the one side, or the ignoring of him by the other.

Future Shocks

Some Private Forecasters Are Predicting A Major Energy Shortage in Less Than A Decade
Listener: 30 November, 1996.

Keywords: Environment & Resources;

Forecasting electricity is far from easy, as Electricity Supply and Demand to 2015 from the University of Canterbury Centre for Advanced Engineering makes clear. There are so many uncertainties: economic growth, the degree of energy conservation, the weather which affects the hydro lakes, what capacity will be built, the size of the Maui field supply of gas, and so on. Yet it seems there may well be a major energy shortfall after 2003 (and possibly earlier if there is a dry year which fails to fill the lakes). This is not just a one-off year of power cuts in a cold winter. The forecasters expect an ongoing shortage.

The shortage arises from three main sources. First there is the remorseless rise in the demand for electricity. The forecasting team, Leyland Consultants, think it will grow 3 percent a year, which implies slow growth or substantial energy conservation compared to past trends. Then there is the fall in the generation capacity as gas from the Maui field runs out, not all of which can be covered by increasing the burning of coal and oil. Third, insufficient new generating capacity is being built. (A fourth complication is that the hydro-power system’s right to divert water may be substantially reduced, as a result of water right hearings. If that does not happen, the energy gap will be put off a couple of years.)

The gap opens dramatically after 2003, but that will be covered in part by new power stations yet to be announced. The worry is that the lead times to put the works into place mean the window for plant construction is closing. This is not just the engineering of building the various stations (which may include new forms of energy such as wind farms). Environmental pressures and protests may delay planning consents.

The report, the third in a series, reflects a major change in economic policy over the last decade. The government administered Annual Energy Plan was abandoned in 1986, when the supplying of electricity was left to market forces. Since then the government has been trying to make the energy market more competitive, in a belief that such a market will meet consumer needs. However, even overlooking the power cuts because of the 1992 dry year, it is not obvious that the market provides security of supply at reasonable cost.

But what is the alternative? The report argues that there is a need to define the overall accountability for providing a reliable electricity supply. “At the moment, no-one has the responsibility for ensuring that New Zealand has a reliable and adequate supply of electricity.” Historically the state electricity supplier and the minister of energy had statutory duties to secure electricity supply. This has been abandoned. In some ways the provision was a bit fatuous. When there was a shortage, the current minister could not really be held accountable, since with long construction lead times any ministerial errors had been made years earlier.

We have not had – at least since the war – any minister with a statutory responsibility for ensuring the security of food supply. Food is as important as electricity. Should the engineers’ recommendation be extended to the security of all vital commodities? But consider the situation where security of food supply in New Zealand was threatened. Certainly the government would take responsibility, which might include organizing the air-freighting and shipping of emergency supplies to New Zealand. (As an aside, it’s interventions would mainly involve market methods – purchasing food, hiring transport, perhaps even selling the food – although there could be some non-market direction, such as using military transport.) There would be difficulties, but hopefully they would be short lived, although a grumbling memory would linger on (as occurs with the 1992 electricity shortage).

In any case if we all knew there was going to be a food shortage next year, we could plant vegetable gardens and stack up the freezer. It takes much longer to build power stations (not least because of environmental consents), and it is much more difficult to store electricity (except in limited capacity hydrolakes). Where the product cannot be imported, cannot be stored, and there is a long lead time to increase production capacity, the market cannot guarantee a security of supply.

So the report suggests that the energy reforms went too far, and left us over-reliant on the market. Even so, by alerting the possibility of the post 2003 shortage, the report will stimulate the market to reduce it. There will be suppliers planning new capacity, and consumers – industrialists and households – thinking about more energy conservation measures. Will they respond fast enough?

Because of the peculiarities of energy supply, I would be more comfortable if the government were to be more actively involved in long term energy planning – or at least thinking about the issues. In the interim the private sector, including privately commissioned reports such as this one, will have to carry the burden.

BRENDAN THOMPSON’S NEW ZEALAND WORKFORCE SERIES

Abstract

Economic historian Brendan Thompson died earlier this year. His life’s scholarship involved calculating a series oft he New Zealand workforce. The paper reports on this work, and provides some of the aggregate data which Brendan had produced.

Brendan James George Thompson, senior lecture in eco-nomic history at the University of Waikato, died in January 1996, at the age of 52. He is affectionately remembered by his family, his friends, and his colleagues and students for his enthusiasm and commitment, his loyalty and integrity, to individuals, to his discipline, to the academy, and to the wider public. But for even longer he will be remembered by the scholarly community for his life ‘ s work of the construction of a long run series of the New Zealand labour force. This paper provides an overview of his painstaking work.

Following his completion of a Masters degree at the Uni versity of Canterbury, Brendan was a student at the University of Pennsylvania from 1970 to 1972, where he graduated at the top of the masters class in economic history in 197 1 and was awarded a Pennsylvania Scholarship. He registered for a doctorate on the topic of the industrial structure of the New Zealand work force. He wanted to create data series which would be internationally comparable, and originally in-tended to do some international comparisons, for Brendan was very interested in c ross national comparisons. Indeed he did some such comparisons in the 1990s, but it was the task of compiling the data upon which he most worked. A brief record of his life appears in appendix I, while his publications list in Appendix ll. He planned a monograph out of this work, which he described in a curriculum vitae prepared in 1994 as follows:

Industrial Structure of the New Zealand Work Force

“I also plan to continue the years of work that I have done on the industrial structure of the New Zealand work force. My chapter in the ESCAP monograph on New Zealand is a preliminary study. To be really useful the subdivisions need to be finer. The potential contribution of this work to General History is enormous ….

“The final series will also be used to provide better historical GDP estimates than we have at present. An-other series that could be derived from it could be used to help illuminate regional variations within New Zealand history.

“This project has involved an immense amount of work so far. Three previous researchers have already attempted it and given up, defeated by the complexities. I have progressed further than any of my predecessors and am convinced that all that is required are time and, above all, persistence. Much more tedious, detailed work needs to be done, the major stumbling block being the interwar years. The figures for that period need to be revised because the censuses on which they are based are so inaccurate. They can be improved using alternative sources. “

Thus Brendan left only a partially completed manuscript of Industrial Structure in New Zealand (hereafter ISNZ). A brief summary of its contents is provided in Appendix Ill. Yet ironically, the work up to 1921 was close to completion. Perhaps by the time Brendan realized that it could be completed the final illness had exhausted the strength he had. But perhaps the perfectionist in him meant that he always wanted to do a little more work-” polishing” he liked to call it.

There is a rather special feature of the Thompson work force series compared to most of the quantitative historical series academics have constructed. Usually series (I include my own), are constructed for a particular purpose, which deter-mines the effort that is put into them. If there was time the quality of the series could have been improved, but there never is, for there is always another task to be tackled, another series needed for it. Brendan ‘s series was con-structed with a more general purpose in mind -not for a particular task-but a s a series in its own right which would be used by any scholar knowing that it was the very best available.

The full paper is here.

Maori Melting Pot

Wira Gardiner’s Return to Sender and some other books about the Maori
Listener 16 November, 1996.

Keywords: Maori

Hey, Pakeha. Ever been to a hui? You probably walked onto the marae at the back of the manuhiri. You were welcome, the Maori always make you very welcome on their marae, and they will feed you well. Later you sat quietly at the back.

The debate was a bit difficult to follow. It was not just that some of it was in Maori. Even the bits in English did not seem to be connect properly. It was as if you came in late to various of discussions that had been going on for generations.

Then the man next to you began to comment. That speaker, who seemed to be hardly anyone, was a man of great mana, who would be listened to carefully. That one, despite the rhetoric, would be hardly listened to. Her, she is young, but has a good whakapapa, is very well educated, knows the tikanga, and will go far. “You see.”

As the kaumatua whispers in your ear, the debate begins to take shape. It seemed a straightforward enough proposition, but other matters cut across. A couple of hapu were quarrelling. There is an alliance with this iwi, and antagonism with that. Hone and Tama are contending for leadership in the next generation. You guess the kaumatua has his own perspective, but you are damned lucky to be given it. You begin to relax, and laugh with everyone when one of the young men, brings in a ladder, climbs up it, and berates the government, as he looks down on their representatives. There is a lot of theatre on the marae.

Perhaps you have never had the privilege of such an experience. But you almost can. Read Wira Gardiner’s Return to Sender, which is an account of the thirteen hui the government and Maori in 1995 held to discuss the fiscal envelope proposal to settle the past Maori grievances within a fixed sum of one billion dollars. It was inevitable that the Maori would turn it down. Hirini Meade of Ngati Awa caught the Maori mood precisely when he said his iwi would “accept all down payments”.

Gardiner, as chief executive of Te Puni Kokiri the government’s Maori advisers, is a far from independent observer. His vast knowledge was backed by those in the department, while the account seems based on departmental records as well as his memory. One interest is his descriptions of the government organization of the hui. But the privilege is to be there, as if you on the marae, listening to the debate, with such an admirable guide. My one grumble is there is no index. The Maori often relies on memory for personal detail, this pakeha needs a hard copy prompt.

For me the chief lesson of the book was not so much about the envelope proposal, but the enormous diversity within Maoridom. The Pakeha tend to treat Maori as united, and are astonished when cleavages surface. In fact the Maori are as divided on most issues as a similar sized group of Pakeha – perhaps more, for they have more history. Sure they tend to be united when confronting the government over a grievance, the situation we are most likely to observe them in public. But your hui experience, or the book, tells another story.

And while I recommend the book if you want to understand more about Maori politics, Gardiner has his own agenda, which includes a robust defence of his staff against some of the sillier criticisms of them. For a different perspective read Ranginui Walker’s Nga Pepe a Ranganui: The Walker Papers. Of course Ranginui and Wira dont agree on everything – they are Maori.

Like the rest of us, the Maori live in families. Again you may never share life with a Maori whanau, but if you want some glimpses, Read Dame Joan Metge’s New Growth From Old: The Whanau in the Modern World. Joan – every one calls her “Joan” – is not a Maori, but she has been studying Maoridom over five decades as an anthropologist with considerable empathy for her subjects. Her latest books takes you through the research literature on Maori families, in a sensitive and informed – and wise – way. There are numerous insights. One I cherish was the Maori approach to child rearing is that the whole village brings up its children. When a pakeha advises the Maori parents that they saw their children up to mischief, the reaction is “why didn’t you tell the kids off?”

The portrait of the family in the book may be a little out of date. With urbanization and under economic pressures, Maori families are in transition (as are Pakeha ones). But if you want to understand what is happening to the whanau reading this book is a good place to start.

This is a book oriented for an academic/specialist audience. Inside there is a super book for the general reader. Another version, edited to about half the length (with photographs by Ans Westra), would be valued reading by New Zealanders with a Maori family in their village or on their street.

Going to the Wall

The Cook Islands is in Crisis – its Economy Awaits Major Structural Change
Listener 2 November, 1996.

Keywords: Macroeconomics & Money

While “hitting the wall” is a phrase beloved by politicians and journalists, it is not a rigorous notion. If it means a crisis which is so drastic that there had to be major policy change, New Zealand did not hit the wall in 1984. There was a currency crisis, in which some people panicked, while others magnified it out of proportion to justify their policies and their grab for power. However the Cook Islands has not just had a currency crisis. It is facing the need for major structural change. Their economy might be said to be hitting the wall. In comparison, New Zealand’s was the bump of a dogem.

The Cook’s problem arose because while its economy continued to grow in the 1980s, it could not create enough jobs in the private sector. Indeed there was some private sector contraction, as a result of the New Zealand stagnation (fewer opportunities for exports), and the change in our border protection which reduced the privileged access for Cooks exports.

The government responded by increasing the size of the public sector. The Cooks had four to five times as many government employees relative as other South Pacific nations. On Raratonga there were almost as many public servants as households, so the typical house had someone on the public payroll. On some job-scarce outer islands the Department of Agriculture employed fifty doing the work of five. If New Zealand had their proportion we would have 650,000 public servants.

But how is the government to pay its workers? At best tax revenue is only as strong as the private sector can pay, but the Cook’s tax system is not very efficient either. Short of revenue the government turned to deficit financing. Inconveniently for the government, the workers did not want to keep their Cook Island money, but spent it. Much of that spending was on imports, so the local money got converted into New Zealand dollars, until the banks ran out of foreign exchange. Unlike New Zealand in 1984 this was not a temporary inconvenience, with the money flowing back shortly after. As long as the government continued to employ the workers, with cash not covered by other revenue sources, the drain would continue. Since it could not so indefinitely, public expenditure had to be cut: wages were slashed, and government employees laid off.

Fortress Cooks was not a solution. The economy is too dependent on imports for import controls to work. The Cook Island dollar is not strong enough for it to be isolated from the world financial system. Tourists and migrant remittances would make ineffective foreign exchange controls. Deficit financed public sector job creation only puts off the day when structural adjustment has to be tackled, and the created debt added to the overhang. Structurally the Cook Island economy was more like those of East-Central Europe before the Berlin Wall fell, and it is going through the same agonies (with perhaps as little understanding by the people of the process). Together with some weakening in tourism, economic forecasters think the economy will contract by about 25 percent over three years.

In addition the New Zealand government has decided to address its supplementary assistance to the Cook government budget. It would seem that this is not a reduction in overall aid, although it could be in the future (and balance requires the recording of a 10 percent increase in the general aid budget this year). The intention is to move the funding away from unspecified grants to specific projects. Ironically the first project is to assist the redundant officials by giving them courses (on full pay) to help their transition into the private sector.

For the Cooks needs a stronger vibrant private sector. To this end the government is privatizing its businesses, and hoping that its ex-civil servants will go into business. Recently much fallow ground has been put into crops, but there is not a lot of future in subsistence farming. Other than tourism there does not seem to be many opportunities for private initiative.

This makes migration to New Zealand very attractive. The GDP contraction of 25 percent may be associated with a 10 percent plus population fall, as Cook Islanders with their New Zealand citizenship seek better opportunity here. Those who suggest that their New Zealand citizenship should be withdrawn are not only unethical (one does not lightly withdraw citizenship from a racial minority), but also stupid, because it will encourage waverers to come here earlier so they are inside if the drawbridge is raised. In any case the 2,000 or so Cook Island Maoris, over the next year, will be absorbed into their well established communities and families already living here. But can the Cooks afford to lose these people?

Hitting the wall is painful, but it is a consequence of not addressing the earlier structural problems, hiding behind deficit financing. The consequential debt shifted the burden from the current generation to a future one. In the case of the Cooks the future has arrived, and its people are feeling the impact of the past measures to delay its arrival.

In Dire Straights

In a World that Favours Large Industrial Economies, are the Cook Islands Viable
Listener 19 October, 1996

Keywords Globalisation & Trade

Take the 18,000 odd population of one of the smaller New Zealand district councils. Scatter them across an ocean larger than the New Zealand landmass in 18 islands and atolls, and add the responsibilities of national governance. Except for location – they are three flying hours north of New Zealand – you have the Cook Islands.

Cook Islanders are proud of their independence. But political independence since 1965 is one thing. What about economic viability? This has been a preoccupation since the 1950s of the few New Zealand economists who have thought about it. Ultimately the answer is that the Islands must produce enough for sale to the world to pay for the imports that they require to maintain an adequate standard of living. Not that the inhabitants are poor by the standards of other Pacific Islands. Their estimated per capita GDP is double that of those in Fiji, treble that of Tongans and Vanuatans, four times that Papua New Guineans, and seven times that of Western Samoans and those on the Solomon Islands. Yet the Cook Islanders produce only between a quarter and a fifth of the New Zealand per capita GDP. (Their standard of living measured by what they spend is probably higher because of aid and emigrant remittances.)

Since the 1950s there has been a constant seeking of viable industries. Many have failed. Your “raro” orange juice is unlikely to have come from Raratonga, although it did once. The Cooks had a nice line supplying clothing to New Zealand in the 1980s, but when we dismantled our border protection they too were overwhelmed by Asian imports – with the following key difference. When a factory closes here, the redundant became eligible for social security benefits and other central government support. The Cook Island redundant had no such protection.

More successful have been selling stamp and coins, nice earners but not big ones. The biggest physical export is black pearls, but total commodity exports amount to less than 5 percent of GDP, while commodity imports are 105 percent. The gap is covered by aid, remittances, and service exports. Tourism is the big one, but it has been under pressure, in part because the Cooks are tied to the New Zealand dollar and our over-valued exchange rate makes them seem expensive.

Some of the nutty things which happen in the Cooks reflect a desperation to find other sources of funds or economic activities. The tax haven and letters of credit come to mind, but in the same category was Milan Brych’s cancer therapy. Sheer desperation committed the government to activities for which it has not the necessary expertise.

A sad story is the incomplete Sheraton hotel, to be built and financed by an Italian consortium. Work stopped three years ago, and it stands there half built, employing but a groundsman. Its debt, after capitalizing interest, comes to 60 percent of GDP, making our think big projects look minuscule in comparison. It seems likely that the costs will not be charged to the government, although there is much litigation to go. The real cost is the loss of jobs and foreign exchange earnings, for an economy which desperately needs both.

New industries are being sought. I am told their pawpaw are world class. Another export earner may be bananas. Perhaps more value can be added to tourism, offering visitors more to get them to buy more. Deep sea commercial fishing appears underdeveloped. There are valuable manganese nodules on the sea bed. Given the climate, one wonders whether there might be opportunities in retirement villas for the New Zealand elderly (although that would take a more relaxed immigration law, which has just been tightened, and some agreement from the New Zealand government over residential rules for National Superannuitants).

And yet the uneasy message that the economics suggests is the Cook economy may not be viable at its current population size. Indeed numbers have been almost stagnant since the late 1950s. No, this is nothing to do with a handful of economists getting interested about that time. Rather there has been major outmigration. For every Cook Island Maori living at home there are three overseas, mainly in New Zealand. Perhaps the diaspora is telling us something about the viability of the economy.

Perhaps the Cooks’ problem is no different in principle from one of our small local authorities, who have many of their folk living outside their region. But they attract others, and get central government support to assist adjustment, whereas the Cooks has to fund a national government too, while being in an inferior location.

There is no natural law which says that a region must retain its population. The Cooks outer islands have experienced substantial depopulation, as their people have moved on to Raratonga, and thence to New Zealand. Perhaps the Cook Island Maori will become a people with a land, but with hardly anyone living there. And if the Cook Islands are not viable in a world which seems to favour large industrial economies, is Samoa? Is New Zealand?

Treasury Man: Bernard Carl Ashwin, Secretary to the Nation Building State

Listener: 5 October, 1996.

Keywords: Political Economy & History;

Bernard Ashwin was born on the banks of the Waikato, just a hundred years ago. He became one of the most powerful men in New Zealand. Keith Sinclair bracketed him with Prime Minister Peter Fraser, Minister of Finance Walter Nash, and the Federation of Labour (F.P. Walsh) in the 1940s. Ashwin’s influence continued for a quarter of a century after he retired. Yet he is hardly remembered in comparison to the other three.

Bernie, the eldest of seven, left school early, and squeaked into a cadetship in the Ministry of Education in 1912. By his own account – we are fortunate he left some memoirs – his adolescence was a time of sport rather than earnest endeavour, ended by the First World War, where as a sapper in the Signals Company in France, he twice diced with death. Coming back “older than my years as a result of my experiences” he decided he “wanted to be more than an ordinary clerk”. Initially he studies to qualify as a professional accountant “but accounting was becoming so popular … it was clearly advisable to go further”, to degrees in economics. The transfer to Treasury shortly after led to rapid promotion, becoming Secretary to the Treasury in 1939, at the age of 45.

I was asked to write a biographical essay on Sir Bernard – he was knighted in 1956 shortly after his retirement – for the fourth volume of The Dictionary of New Zealand Biography, due out in 1998. Fortunately there was enough information to do this, but there are some gaps in the record. What was he doing in the late 1920s, other than getting married and playing tennis? By the early 1930s, he appears as a historical figure in the memoirs of some key men of the time, in the official records, and in some taped recollections. He tells, for instance, how he was with Minister of Finance Gordon Coates when he was humiliated by the privately owned Bank of New Zealand, and how as they drove back he advised the minister to establish a reserve bank in order to control the banking system. Later Justice Tyndall was to describe him as “the father and mother and everything else of the [Reserve Bank] Act.” (Ashwin demurred “that may be going a little too far.”) It was he who turned the Treasury from a bunch of bookkeepers to the powerful institution we know today.

Previously I had been aware of Ashwin as the “Treasury man” who got in the way of the social security legislation of 1938. Indeed as probably the only competent economist in Treasury in those days he seemed to be everywhere.

He was a fiscal conservative, reluctant to spend government monies, a very understandable stance for someone who went through the horrors of the early 1930s, when the government finances were in chaos, like everything else. He was also a political conservative too, but loyally served the Labour government – and wrote most of the budget speeches, with Nash adding a few theatrical flourishes. Ashwin worked with Prime Minister Fraser, whom he saw “almost every day during the war. For some reason he liked me and often asked me to call to see him. On my way home from work – usually around midnight – we would sit and talk through the early hours of the morning. He would give me an idea of some of his new proposals and seek my opinion of then.”

Ashwin was an economic nationalist, like politicians Coates, Fraser, Nash, and public servants such as Clarence Beeby, James Fletcher, Joe Heenan, Alistair McIntosh, and Bill Sutch. They had gone through the depression and resolved not to let it happen again, creating the Reserve Bank, the marketing boards, the infrastructure, the manufacturing which gave New Zealand so much prosperity in the first half of the post-war era.

I am especially intrigued by Ashwin’s role in the development of the pulp mill at Kawerau, based on the huge Kaiangaroa forest as a depression relief work. The first record on it I have seen bearing his signature turns down the project because the government could not afford it. (It also turned down a proposal for an Auckland harbour bridge.) Later he became a key advocate of the first, and surely most successful, “Think Big” project, resigning early to take up a directorship with the Tasman company. Such diversification was seen as a way of avoiding the over-dependence on farming which had been one of the causes of the severity of the depression downturn. In those days one could be an interventionist, a conservative, and even the Secretary of the Treasury, and be successful as each.

Reflecting shortly after he was married, but before his distinguished career was to be evident, the 30 year old economist wrote that in early adolescence “I acquired a desire which I did not entirely abandon for many years to be an engineer and build bridges and tall buildings.” Instead Bernard Ashwin became a social engineer, and built the mid-century New Zealand economy.

Governing the Governor

Should the Governor of the Reserve Bank Be Elected, Or is the Bank Just A Tool of Parliament?
Listener: 21 September, 1996.

Keywords: Macroeconomics & Money;

Would you rather be voting for the Governor of the Reserve Bank than the parliament? A yes probably rests on the belief that the governor is more powerful than the prime minister. Irrespective of whether he is, his power comes from parliament, and he or she is but a eunuch without parliament’s command.

There are two stages of that command. The first is the Reserve Bank Act which states the purpose of monetary policy is to maintain price stability, which is not defined. The second is the Policy Targets Agreement (PTA), a contract between the Minister of Finance and the Governor, which sets down how a definition of price stability. So the governor’s discretion is very limited in the medium run. (Of course he can put off till tomorrow a change needed today, but he cannot do that for ever.)

To put the same point the other way around, suppose someone else was the governor of the Reserve Bank. Would the Bank’s monetary stance be markedly different, assuming the new governor were to pursue as vigorously the law and PTA? The answer is probably not very different. However judgements have to be made about the state and future of the economy and the effectiveness of the various measures which might be taken. So perhaps there would be some differences. And there is also the presentation. On occasions the governor sounds as bullying as Rob Muldoon use to be, and sometimes he seems to stray outside his mandate and pursue a line closer to that of the Business Roundtable than good political judgement or economic commonsense would recommend. Perhaps a different man or woman would present a different face.

The Reserve Bank Act was passed in 1989 at the height of ideological monetarist fervour, apparently without a lot of thought as to how it would operate. or whether it could be effective. The fall in the rate of inflation in the early 1990s probably had little to do with the Act, but seemed to confirm its effectiveness.

The ideologists appear to have had a vision of New Zealand without an export sector. So the Reserve Bank has had to go into the most extraordinary contortions to explain its position. Its most recent attempt has been the booklet on The Impact of Monetary Policy on Farming, in which it tries to calm farmer worries. It does this by avoiding entirely the question of the impact of monetary policy and the exchange rate on farm profitability. I am reminded of a Victorian account of procreation: “when Mummy and Daddy love each other very much, they have a baby”. Similarly the intervening steps of – if we have high interests rates and a high exchange rate, then there will be prosperity – are as a complete mystery.

The other major omission in the theory was the question of timing. Monetary interventions do not react immediately on the economy, but take months and years. Thus the current monetary stance is not simply set for the current state of the economy, but involves an assessment of the economy for some years in the future. To understand the state of the economy today, we need to recall the Reserve Bank was tightening its monetary stance a couple of years ago. One is not surprised given that (and the current fiscal stance) the economy is slowing down (and may even be contracting by the end of the year).

Undoubtedly the Bank’s management of the monetary policy is more sophisticated than the vision which set up the Reserve Bank Act. It involves some assessment of the long term sustainable growth rate of the economy, and a general strategy of managing the monetary stance to keep the economy tracking along that growth path in the medium run. If so, it involves making judgements (like what is the sustainable growth rate), and far from precise forecasts. Ultimately it is an art rather than a science. A different governor might make different decisions – but they may not be better ones.

One is curious to know how the bank’s economists think their monetary policies – high interest rates and a high exchange rate – impacted on the sustainable growth rate. Because the immediate effect is to cut back export sector profitability and investment, it seems likely that the short term monetary measures are reducing the medium term growth rate. (In my view this effect is far more powerful than the benefits of price stability). This has the makings of a vicious cycle resulting in low economic growth and stagnation.

But what is the alternative? There are a group, the most prominent of whom is Bob Jones with his book Prosperity Denied, who argue that there should be no Reserve Bank. But how do they expect the currency system to work? Others, including three of the four main parties, argue that the Reserve Bank Act and/or the PTA should be changed. No doubt they have a more sophisticated account of monetary behaviour than those who advocated the Act (it could not be more simplistic could it?). But what is their underlying theory?

A Tale Of Two Cities

Christchurch’s Economic Success is Associated with A Tradition of Civic Community. Wellington, Take Note.
Listener: 7 September, 1996.

Keywords: Governance;

The church hall was packed, and the audience angry. In a few days the Wellington city Council was going to decide what to do with its majority share in Capital Power, its local electricity supply authority (ESA). Everyone expected them to divest their control, despite the populace supporting the maintenance of the asset in public hands. A citizens’ jury had favoured public ownership, an opinion poll had supported them, everybody seemed against the divestment of control. Yet the decision seemed destined to go against the majority wishes. Just as a few years earlier the Council had agreed to sell a minority share to a private investor.

Various speakers argued against the proposed sell-off. I contributed too, pointing out that the promised financial and price gains came with the caveat that the consultants would not stand by the accuracy of their predictions. (Even so Councillors were happy to quote these figures when it suited them.) I also pointed out the main argument in favour of the amalgamation with the Power Direct the neighbouring ESA in the Hutt because of the fear of competition, was contradicted by the Commerce Commission. It approved the merger because it judged that the two ESAs were not able to compete effectively against one another.

The last speaker was David Close a Christchurch City Councillor, who had been flown in funded by donations from people concerned with the Wellington Council’s attitude. David is a small dark man, far from prepossessing, and by no means a great orator. But within a few electric sentences the audience went silent.

For the speaker was also the chairman of Christchurch City Holdings Ltd, a Christchurch City Council company which held substantial ownership in three major city assets: 65 percent of Port Lyttelton, 75 percent of Christchurch Airport, and 87 percent of Southpower, their equivalent of Capital Power. (The remaining shares reflect the interests of other local authorities.) Thus the local ESA is a public asset and, so David Close told us, that was the way it was going to remain. The trading enterprises are, he said, “efficient, socially responsible, and profitable,” a conclusion he supported with a table which showed that of the large urban ESAs, Southpower offered lowest residential charges, with the exception of the Dunedin ESA summer time rate, perhaps because it has own power station. (Energy Direct was near highest, and Capital Power in the middle.) The chairman of Southpower thinks their electricity prices would be 10 percent higher had the company been privatized.

Perhaps the audience was even more impressed by Close’s description of how Christchurch managed their assets. They had seen coming the sort of pressures Wellington was under, and planned an alternative. The trading enterprises operated commercially subject to a annual contract with the holding company which set down the financial, community, and energy conservation objectives it required. You could see the audience thinking “why, oh why, was Wellington not as far sighted?” (Some must have wondered why the central government had not made a similar arrangement in the 1980s when the state owned enterprises were corporatized. The explanation is that the central government corporatization was designed as a step to privatization, not as a means of retaining public ownership.)

My thoughts strayed to a book published a couple of years back, Making Democracy Work: Civic Traditions in Modern Italy (by Robert Putnam with Robert Leonardi and Raffaella Nanetti) which although hardly touching the New Zealand public policy debate thus far, is a major centre of attention elsewhere. It asks why some parts of Italy developed more successfully than others. The book concludes that economic success was associated with a long tradition of civic community. The careful argument explores other possible explanations but finds them to have insufficient explanatory power. Nor can successful economic performance explain the superior civic virtue. The patterns of social cooperation based on tolerance, trust, and widespread norms of active citizen participation go back to the 13th Century, preceding the economic development.

The implication is that, after allowing for differences in resources, those regions with greater civic virtue will perform better than those which have less. At which point one might wonder to what extent New Zealand once had a culture of civic community, and to what extent it has been undermined in the last decade. And one might also wonder about differences in civic virtue among the different New Zealand regions, and whether this affects economic performance.

The outcome of the meeting was that a few days later the citizens’ desires were over-ruled, and Capital Power was sold off. I was not surprised because the Wellington City Council, unlike its Christchurch counterpart, had no strategy of public ownership of key assets, such as local natural monopolies, and had been trapped into an invidious situation by the earlier sale of the minority holding.

A recent survey by Consumer found the Christchurch City Council the most popular of local authorities, and Wellington City Council the least popular. Robert Putnam can probably tell us why.

The Wild Bunch?: an Inquiry Is Needed to Restore Treasury’s Integrity

Listener: 24 August, 1996. (Published as Editorial)

Keywords: Governance;

The New Zealand public has just lost $328.4 million because of bad Treasury advice on the 1987 sale of New Zealand Steel to Equiticorp. The public lost that money because, during the sale process, the deal between the Crown and Equiticorp broke company law – section 62 of the Companies Act makes it illegal for a company to buy its own shares.

Justice Smellie ruled that the Crown, or, more precisely, some of those acting for the Crown, knew the law was being broken and that the Crown was benefiting from the illegality.

The judge found that five people, who were either agents for the Crown during the negotiation leading up to the sale, or Treasury officials, knew that the transaction was illegal. The list includes two people who held senior Treasury positions Doug Andrew, an economist, and Ivan Kwok, assistant solicitor, and who now hold even more scnior positions. Andrew is deputy secretary of Treasury and Kwok is Treasury solicitor.

The judge has exonerated Roger Douglas and David Caygill, the two former Labour Government ministers involved, because there was no evidence that they knew of any illegality. But the judge did not comment on the extraordinary constitutional implications of the case. To effect the ministers’ policy of selling NZ Steel, Treasury officials broke the law. They did not tell their ministers, and therefore surely they ignored established procedures? The officials did not personally benefit financially from the transgression, but the fact that no full communication occurred between them and their ministers on such an important transaction surely amounts to a corruption of the body politic.

The Wild West attitude that gripped much of the private sector in the 1980s seems to have overtaken a major department of State. Did some of the so-called sheriffs in this case join the rustlers? It raises the question of how widespread these cavalier attitudes were, even within the public service. Roger Douglas said in court that he was keen to get rid of New Zealand Steel to demonstrate to the Labour caucus that he was serious about privatisation. We must wonder whether the general tone of government encouraged other fast and loose transactions within the public sector – it isn’t hard to think of various infelicities that have been put down in the past to enthusiasm, incompetence, or procedural ambiguity.

In the case of NZ Steel, Equiticorp bid almost twice what the government thought the firm was worth, but, because it did not have the cash, offered to exchange NZ Steel shares for its shares, with a guarantee to convert to cash later. This arrangement led to the breach of section 62 of the Companies Act to which Treasury officials apparently closed their eyes. In the wake of the court decision, Treasury needs to demonstrate that this regrettable – and costly – mistake was an isolated instance, and not a characteristic behaviour of the time.

The court sat for 204 days before it yielded its judgment. While there may be questions of law to be considered by the Court of Appeal, and even the Privy Council, the facts seem well established by the court. It would be easy to ignore the consequences of these facts, by arguing that any investigation will paralyse the Crown’s chief economic and financial adviser. However, we may be sure that if one does not take place, next year a parliamentary select committee will make its own investigations, generating a chaos of allegation and counterallegation, much of which is unlikely to be resolvable.

In order to allay the suspicion that the Treasury was a law unto itself, the public needs to know how it dealt with the issues when they became evident, A Treasury in which such an improper procedure was an isolated instance, rather than a common occurrence, would have taken a series of routine actions once the problems had begun to surface. These would have included an investigation of the events by an officer from another division of Treasury, a comprehensive report with a set of recommendations to ensure such procedural break downs would not occur again, and a prompt implementation of those recommendations.

Although those actions would have been secret, the appalling story of the sale itself is now public, and that further story of the response within Treasury must now surely become public, too. The State Services Commission should appoint an independent investigator to report whether appropriate steps were taken. It is not just a matter of the additional $328.4 million burden on the taxpayer – the public’s confidence in the integrity of Treasury itself is at stake.

Philosopher-Kings and Public Intellectuals

Revised version of the Lecture to the 1996 Auckland University Winter Lecture Series, Still Fretful Sleepers: the Intellectual in New Zealand. 20 August, 1996.

Keywords: Political Economy & History;

Still fretful sleepers?(1) Has not New Zealand changed since Bill Pearson finished his “Sketch of New Zealand Behaviour and its Implication for the Artist” with that resounding call for the need to awaken New Zealanders from their fretful sleep?(2)

Of course things have changed in the five decades since Fretful Sleepers. We are rid of that rampant militarism captured in “if the National Party was more astute it would have a V[ictoria] C[ross] as its party leader”;(3) there is an active Council for Civil Liberties indicative of a greater public concern for human rights; many of those marginalized at the time of the original essay – women, homosexuals, Maori – have a more prominent and vigorous role in New Zealand society; the arts are flourishing beyond the wildest expectations of those who dreamed of a renaissance; the dictator-leader that Pearson feared is much less likely. So is New Zealand still the society of conformists which the essay portrayed? Surely today there is a diversity in New Zealand which is celebrated, rather than condemned.

However Fretful Sleepers does not present a static account of New Zealand society. It contains the following prediction: “[t]he breakdown of puritanism is the dissolution of one of the cementing elements of our society: when every man cooperates only as far as he has to earn money and in his leisure pursues his sensual pleasures, society is due to breakdown.”(4) So the puritanism and conformism held New Zealand together, and as it faded – replaced by a cash nexus – society would break down. That is not too bad a forecast – made 45 years ago – of New Zealand today. And yet I want to argue an account of how New Zealanders behave, which has parallels with Pearson’s, but which differs in some crucial ways.

Bill Pearson was writing about the 1940s when he was in his twenties. In particular, and as he has said of himself, “Fretful Sleepers is partly based on my close contacts with New Zealand troops between 1942 and 1946.”(5) This is a time when New Zealand males were heavily institutionalized in a military environment where conforming to authority was required. Yes, they were conformist in a general sense, in that they were reluctant to resist the direct pressures from authority. In a different sort of social environment, with different sort of pressures, New Zealanders behave differently. My account is more pessimist than that of Fretful Sleepers because it implies that New Zealanders have less foundation than even the conformist puritanism it describes. But my account is also more optimistic, because the different characterization is in some ways more attractive and more rebellious to the pressures which worried Pearson.

For there is a sturdy resistance to authority in the New Zealand makeup, illustrated by Bill Pearson himself. In the 1950s my father backed a trailer up to a beach and filled it with sand. I asked him whether it was legal – perhaps my childish eye had been caught by a notice prohibiting the removal of sand. Dad replied that what he was doing was not illegal, it was only illegal to be caught doing it. Today I know enough about the ecological role of sandhills to be a little embarrassed about the story, although I did have a lot of fun in the resulting sandpit. May I redeem the transgression by using it to illustrate two diametrically opposed accounts of the meaning of that event? It no doubt happened in some form to almost everyone else of my generation.

The first account is that we grew up with the belief that it was only wrong to get caught. It is an ethic (if we may give the attitude such a distinguished status) which led to the Wild West show of corporate greed and dishonesty in the 1980s evident, among other places, in some of the evidence to the Winebox Enquiry.

The second account treats authority at best as a guide, with each of us to judge the right or wrong of an action in terms of some higher standard than the law. Dad was not, after all, seeking his own personal gain from the theft of the sand – he was doing it for his children. Note how my adult embarrassment is not that we were breaking a law of man, but that we were interfering with nature. It is also the approach that many New Zealanders have taken over the Winebox affair – the issue is not just whether the corporations involved have broken the law; they are expected to perform to a higher standard of ethical behaviour than just to abide by the law.

Nevertheless, however attractive to internal authority or higher principle beyond the law is, the exercise of such ethics is complicated and dangerous, fraught with the possibility that as we each pursue our own ends there will be a breakdown of social harmony. There is an apparent answer to this in the theory that in a market in which only voluntary transactions occur, the “invisible hand” coordinates our individual decisions into some overall social good. That view has been central to the reforms of the last decade, especially in its New Right philosophy summarized in their notion of “liberty”. Thus the societal breakdown, of the foreshadowed replacement of puritanical conformism by hedonistic individualism, was to be resolved by the capitalist market.

While there are many strands which could be pursued here, time limitations confine us to but one. In keeping with the series topic I want to consider the role of the intellectual in this transformation, and the reforms which, while intended to resolve the potential breakdown, seem to have exacerbated it. The term “intellectual” is a complicated one, involving at least two distinct notions. The first use of “intellectual” covers anyone who works primarily with their brain rather than their muscle. It is a matter of record that the number of intellectuals in this sense has increased dramatically over the post war era. In 1951 professional, technical, and managerial workers were just 9 percent of the labour force. In 1991, they were 36 percent – four times as many by proportion and eight times as many in number.(6)

But all brainworkers are not intellectuals in the other sense. Edward Said describes “the intellectual’s role is to represent a message or view not only to but for a public and to do so as an outsider, someone who cannot be co-opted by a government or corporation.”(7) That immediately rules out most occupational-intellectuals, because they are insiders typically loyally working for the government or corporations. Said’s “public intellectuals” – as I shall call them – the critics and consciences of society, are outsiders.

Within the occupational-intellectuals there is a key group who provide its leadership. Although a few were politicians and businessmen, historically in New Zealand the key leaders have often been public servants. In 1952 they included Bernard Ashwin, Clarence Beeby, and Alistair McIntosh. During the revolution of the 1980s again the key leadership came from public servants, although most subsequently moved into the private sector. The best known are Rod Deane, Roger Kerr, Graham Scott.

As the title of this lecture indicates, this leadership group may be thought of as philosopher-kings. Recall how in Plato’s Republic they were the ones who broke their shackles in the cave, climbed outside to see a reality, and who returned to tell us – in the case of New Zealand’s most recent philosopher-kings – that the ideal was business. Ironically our philosopher-kings, being public servants, came to their conclusion without themselves having had much experience of the market, cosetted as they were in the highly protected public service bureaucracy. They looked at the public service system they ran, decided it was failing, and concluded that private business was better, even though they knew little about that which they idealized. As George Stigler said: having listened to the first singer in a competition, they awarded the prize to the second without even having heard her.

Being a philosopher-king involves having a high degree of certainty as to what the truth is: a certainty which enables their kind to sacrifice the lives of others – literally in many instances – in the undeviating pursuit of that truth, and to ignore any indication that the truth they seek may be wrong, or the costs they incur too high. Writing The Open Society and its Enemiesto condemn the regimes Bill Pearson fought against, Karl Popper characterized their fascist philosophical underpinnings by the writings of Plato.

The public intellectual in Plato’s writing is clearly Socrates. Although Plato’s portrait was intended to make Plato’s own ideas more acceptable, his Socrates is nevertheless a humble seeker of truth, one of society’s critics and consciences, who saw himself as a servant of that truth and of society. Socrates was not a philosopher-king, even if he vies for the title of king of philosophers.

Socrates would not have lasted long in Plato’s republic. Nor would have, and Plato is explicit about this, poets and associated artists. (Nor would have Said’s public intellectuals.) In Plato’s view poets tell lies. In the same sense so do public intellectuals because they are continually challenging the “truth” that philosopher-kings tell. Intellectual control becomes key in Plato’s republic, for there is only one truth, that held by the philosopher-kings. Any challenge to that truth is treachery.

Fortunately Plato’s republic has never dominated human society. There has been always one poet, one artist, one intellectual, who has challenged the philosopher-kings’ monopoly on the truth, and succeeded – albeit usually in the long run and often at great personal cost. So when the current regime of philosopher-kings came to power in the mid-1980s they were unable to immediately shoot the intellectuals, as Lenin advised after the revolution. Instead there has been a steady squeezing of the centres of intellectual dissent, usually justified by improving the accountability of those involved to the government.

My book, Commercialisation of New Zealandscribes this process in some detail – in broadcasting, science, the arts, health, heritage, and education. Let me give but one example. Suppose you had told Bill Pearson some decades ago about a university system organized as follows:
1. The appointment of the senior academic (the vice-chancellor) requires the approval by the cabinet or a cabinet committee;
2. The public funding of the teaching activities of each university is directly determined by the government;
3. The content of each university course is increasingly determined by a government-appointed agency;
4. Public policy does not distinguish between a liberal education and vocational training.
5. The research funding and content of each university is increasingly determined by a government agency;
6. The board of governance of each university consists predominantly of government appointed persons.

Given such a description, Pearson would have said then, I think, that these were the characteristics of a university in a fascist state. And yet in the 1990s in New Zealand those six features almost characterize the New Zealand university system.
1. Vice-chancellorial appointments have to be approved by a cabinet committee;
2. There is no University Grants Committee or equivalent intermediary between the government and the universities;
3. The government appointed Qualification Authority approves many tertiary courses;
4. The Hawke Report, on which the tertiary reforms were founded, specifically said there should be no distinction between education and vocational training.
5. Most research funding is controlled by the Foundation for Research Science and Technology, or other directly controlled government agencies;
6. At least one University Council seems to be advocating the removal of faculty and student representatives, giving greater weight to government appointees.

It is not enough to say that academic freedom in New Zealand is guaranteed by law. Totalitarian states have such laws. A statute does not protect the universities from authoritarian interference by a central government, nor does it guarantee that an institution will pursue its legislated goals.

In summary, the New Zealand university system has been increasingly coming under the direct control of the government. This is not to say the government of New Zealand is, or the individuals (politicians, advisers, acolytes) in it are, totalitarian. It would be easier to discuss these issues if they were. But if totalitarians were ever to take over the government, they would find it increasingly easy to impose their ideology in teaching and research, and to repress dissidents.

How has this happened? The current philosopher-kings have an extremely simplistic account of the ideal society. Only two forms of public organization are allowed in their ideal state. One is the business organized private corporation, the other is the government agency under direct ministerial control. All other organizations are to be converted into one or the other. Ideally they should be converted into business corporations. That is the underlying justification for corporatization and privatization. If a business form is not possible the institution is placed under the direct political control of the minister. Having resisted privatization, the universities have been systematically forced under political control.

This has interesting implications for Said’s public intellectual who is beholden neither to corporations or the government. In the old regime it was possible to exist in the miscellany of organizations which were neither purely private corporations nor purely government departments. These peculiarities of control created niches from which public intellectuals could function effectively. The scorching of this ground cover, and the herding of all into fortified villages, closely supervised by politicians or business people in the best traditions of military operations against guerilla forces. has exposed some intellectuals, cowed others.

I do not think that our philosopher-kings usually did this deliberately. But their vision of society led them to destroy all possible resistance centres to their utopian vision. A recent worrying example is Roger Kerr, chief executive of the Business Roundtable and recently appointed by the government to a university council, who stated “you cannot attribute any of [the extraordinary changes in New Zealand] to the intellectual community as represented by the university communities. The faculties have provided critics, but not opinion leaders. In Asia, it [is] people in universities that have pushed governments in free market directions. Here they have been resisting.”(8) Like many of Kerr’s statements this one is not wholly accurate, for there are university personnel who have publicly supported the changes (and no doubt are deeply disappointed that the Roundtable has not noticed them). Others have selectively done so, supporting a more market direction of economic regulation, but not the extremism Kerr expounds. But it is also true that the universities have provided critics of the changes, some uncritically hostile, some cerebrally thoughtful. Universities are charged to be such critics in their statute, which also requires them to be consciences of society. One has the uneasy impression that if Kerr were to have his way, that criticism would be eliminated.

What appears to especially irritate Kerr is that there has not been widespread support from the university economics departments for his political position. A 1990 survey found that within the economic profession, those based in universities were much more cautious about the reforms than those in government or the private sector.(9) (However there was general support for a more market direction of economic regulation.) Yet despite the main thrust of the central reforms being economic throughout the country there has been, with rare exceptions, little public criticism from university economists. Contrast for instance, the substantial number of books about the reforms written or edited by academics from this university from such subjects as accounting, education, geography, history, law, management studies, Maori studies, political studies, and sociology. Multiply Auckland University’s effort across all universities and however you measure it the economists cannot compete either in terms of criticism or support, even though economics was the central organizing principle behind the reforms.

The reason for the muted record of university economics needs to be discussed elsewhere, but there is an lesson to be learned from it. In contrast with the 1970s, university economists have been almost irrelevant in the public economic debate, as it has moved off-campus. Today if a journalist wants a comment, he or she is much more likely to go to an economist in the financial sector who frequently provides poor quality opinion representing his sector’s self interest, rather than independent and informed view. This change does not merely reflect the impotence of the university economists. It suggests, ominously, that once another centre of occupational-intellectuals starts up, the centre of the professional debate moves to them. Where the university has excelled in its role as a critic and conscience of society has been where there has been no competition from elsewhere in a profession. Where there has been an alternative centre the university professionals have lapsed into irrelevance.

One fears any significant discipline can be neutralized by the development of an off campus profession in exactly the same way, but it would be a centre which has no independence from its paymasters, and would bias the public debate in their favour. Even if the thrust to control universities through an increased share of ministerial appointments fails, there are other means of making them impotent, reducing them to mere vocational trainers of occupational-intellectuals. The prospect for New Zealand universities remains that described in the report of the 1925 (Reichel-Tate) Royal Commission on Universities which commented that New Zealand “offer[ed] unrivalled facilities for gaining university degrees but … [wa]s less successful in providing university education”.(10) Degrees are qualifications, often used for vocational enhancement. Education involves a wider achievement.

This is not just a New Zealand problem. In his 1995 Massey lecture, Canadian philosopher John Ralston Saul said:

“… we are faced by a crisis in language and communication. This crisis is being accentuated, not eased by the universities. … While the universities ought to be centres of active independent public criticism, they tend instead to sit prudently under the protected veils of their own corporations. We are faced by a crisis of memory, by the loss of our humanistic foundation. The universities, which ought to embody humanism, are instead obsessed by aligning themselves with specific market forces and continuing their pursuit of specialist definitions …” (11)

What might be added is that New Zealand universities have succumbed to the disease more than the overseas universities they admire and try to imitate.

An easy way, especially in the social sciences and humanities, to sterilize the university is to have a policy with the effect of appointing only people with foreign backgrounds. Of course a university must have a balance of those from overseas, those which are its own graduates (preferably with overseas experience), and those from other New Zealand universities. However a dominance of any one group is an indication that the department is not functioning well. Too many foreigners means that there will too many on the staff who have little connection with New Zealand, and unable to function as public intellectuals. Recall that Said specifically describes their role as “to represent a message or view not only to but for a public.” It is very difficult to do this if the academic has little connection with the public, especially if any research is not based in some New Zealand context. (Again I am not demanding that all research should be New Zealand oriented: it is a question of balance.)

The foreign imbalance often reflects a colonial cringe, the attitude that New Zealand intellectual endeavour is inferior to that overseas, and therefore any overseas work is necessarily superior to the domestic product. This is a question with which Fretful Sleepers wrestles, because Pearson was wrestling with it in his personal life. Peter Simpson suggested that the essay was the catharsis which led Pearson to conclude that despite all its faults, New Zealand was his home to which he must return. The message in the essay can be summarized as “New Zealand is awful, England is worse”.(12)

There has to be a tension between the rich active intellectual life in many countries and the thinner gruel here. Again it is too complex to explore in full in this lecture, but the cultural cringe permeates all New Zealand occupational-intellectuals, right through to the philosopher-kings. Perhaps they obtained their inferiority complex from their university teachers, perhaps from their overseas experience, perhaps it is the cross that all local intellectuals must bear, especially in small English speaking countries (which is a key reason why the Pakeha has drawn so much strength from Maori intellectuals).

What is clear is that the philosopher-kings decided to imitate some idealized model of an overseas economy, ignoring the characteristics of the local one. This is most evident in the publications of the Business Roundtable, which typically commissions studies of very ordinary overseas academics, selected for their conformity with a New Right ideology, but presented as though their scholarship is world class. I recall a Roundtable pamphlet on immigration policy by an Australian academic who did not even feature in a survey of the Australian scholarly debate on their immigration policy. Yet his conclusions were treated by the Roundtable and its acolytes as though they were the work of a leading expert.

Alas the problem has not been confined to the Roundtable. The Treasury has had a policy of importing foreign advisers, consultants, and staff, who are out of touch with New Zealand in all sorts of ways. I recall a paper on the local business cycle, presented by one who had been at the Treasury for a year, and which replicated work that had been done in New Zealand some years earlier. Neither the foreign presenter nor, apparently, his Treasury colleagues were aware of this local research, and the new material was no better in quality or insight than the old.

Another example is the health reforms where it seemed to be a matter of principle that the economists who were involved knew either nothing about New Zealand or nothing about health economics. No wonder the health reforms have collapsed into a shambles. Indeed it is no wonder the economic reforms in general have been so unsuccessful, for not only did the philosopher-kings ignore the aspirations of New Zealanders, but they failed to design a system for local conditions.

This uncritical acceptance was not confined to the philosopher-kings. For reasons I leave them to explain, academic economists failed lamentably to provide a research program on the reforms which would have been world class and internationally interesting. Their task need not have been to have provide a critique of what happened, but simply to provide an account of what happened. This is not an unreasonable demand. One only need contrast the alacrity with which political scientists are investigating the transformation from an FPP based to an MMP based electoral system. Although we have not yet had the first election under the new regime, there are two major university research teams, plus a number of other projects in the other universities, at work with already a substantial literature. In contrast, with the economic reforms now going back over a decade, there are a couple of significant university based books albeit with a substantial off campus contribution. Neither are particularly accessible to the general public, nor do they show the degree of integration mixed with the disagreement that comes from a strong research program and open debate. The one significant institutional research program about the reforms involved the N.Z. Institute of Economic Research, a research institution which the local university showed little interest in acquiring when discussions took place about a decade ago.

My point is not there has been no good quality economic research in the universities. There has been some – but that with rare exceptions the academic economists failed miserably to seize the opportunity to make a significant contribution to the world economic profession, when the golden opportunity of monitoring the reforms presented itself. One contrasts the vigorous role of the Australian economics academy in the world profession. It is insufficient to say this is because New Zealand is so much smaller than Australia. We do not accept our population size as an excuse for failure in international rugby, or even cricket. Why should we accept a lesser standard in intellectual life?

Of course there are areas in which New Zealanders are making an international contribution. I do not just mean those of exceptional talent who have worldwide acclaim: Allen Curnow, Colin McCahon, Keri Hume. There is now a solid artistic achievement of recent years which has international standing, so that New Zealand art, writing, film making is not judged as if from a provincial backwater. Although some is boringly imitative of international fashion, prominently displaying the cultural cringe, the best is a complex combination of indigenous experience in a wider cultural context. The Maori did this as the developed their indigenous roots, but many Pakeha have found the balance too.

Yet as much as we may take pride – and hope – in the achievement of New Zealand arts in recent years, there is a notable omission. Perhaps the artistic community has not carried the burden the Fretful Sleepers saw for it, for there is little art which addresses the social experiences arising out of the recent reforms, in contrast to the vigorous role it played in the preceding prime ministership of Robert Muldoon.(13) For instance in the novel there is only Maurice Gee’s Crime Story, and Fiona Kidman’s True Stars. In part this reflects the sheer difficulty of portraying economic and political events in a fictional form; in part the fact is that writers have been concerned with other issues. But I cannot help wondering whether the tacit understanding is that providing the intellectual community does not criticize the reforms, it may be left alone. Recall the menace in Roger Kerr’s “the faculty have provided critics, but not opinion leaders”. Not providing anything may well be acceptable. With the ground cover destroyed, with the only safe havens the fortified villages managed by the government and business, the remaining options are compliance by avoidance, and outright defiance.

As is appropriate in a university winter lecture, I have illustrated my thesis by reference to universities. But the same point applies to other institutions of intellectual life as they have been either moved into the private sector or put under greater direst political control, especially where public funding is involved: arts, broadcasting, literature, science. It is no accident that investigative reporting has all but disappeared in the last decade: the Wellington reader of the morning newspaper is painfully reminded of the dumbing down of intellectual life in the capital city. The nature of the public intellectual is that it cannot be subject to tight political control by the establishment. Instead public intellectual activity must be suppressed. The consequence of philosopher-kings is bad public philosophy and a general deterioration in the intellectual life of the nation, a conclusion which will surprise no reader of Plato for the best bits are where the original Socrates is involved, and the worst where he becomes a mouthpiece for Plato.

Ironically this lowering of the quality of public debate has rebounded back on the philosopher-kings. Roger Kerr has recently complained about what he called the “chattering classes”, referring – it would appear – to those on radio talkback.(14) Kerr’s complaint is that they criticize his business masters, but the way they do it is not very different from the way his own side argues: the conclusion is forgone and the argument is constructed to obtain the desired conclusion. In the end there is not a lot of difference between radio talk back and, say, a Dominion editorial. This is vividly illustrated by the Dominion’s editorial cartoonist, who cannot draw, is not funny, and clings to the editorial line. In general, cartoonists are the one group of public intellectuals who have continued to represent a message not only to but for a public, and from an outsider perspective. Their trade depends on them being critics and consciences of society – the limitations of the Dominion cartoonist shows what happens if such fundamentals or ignored.

The Dominion editorials themselves are often not greatly different from the Roundtable arguments. I am not referring to political content, although that is true enough too, but the quality of the argument, where a preordained conclusion is determined, and arguments are dug up to support it, while alternative views are ignored or misrepresented. It is too easy to present two over-simplified options for the nation, one of which is unacceptable, and the other of which is advocated. The reformers did that by suggesting the only economic courses were those of Robert Muldoon and Roger Douglas. It was analogous to the grossly absurd simplification of the Cold War: communism or capitalism – Muldoonism or Rogernomics. As the fear of Muldoonism receded, they sought other simplifications, disguised behind the shadows of offering “liberty” and “choice”, terms which have a somewhat different meaning from everyday usage. Our philosopher-kings have not been endowed with intellectual subtlety.

As one whose life has been dedicated to attempting to raise the quality of public argument – not with much success I regret to report – I find the Business Roundtable quality of argument as uncomfortable as that of the chattering classes. It is not redeemed by the footnotes. But can the so-called “chattering classes” be redeemed? They are a central concern of Fretful Sleepers, with their portrayal as conformist and subservient to authority. The picture in recognizable to this day. Consider “few of us have the guts, at the challenge, to uphold any moral principle (except in social conduct) when it is flouted by a party of greater number than ourselves.”(15) If we extend the statement to an unwillingness when faced by a party more powerful than ourselves – irrespective of the numbers – we have a simple explanation of why there was so little public resistance to the recent reforms.

And yet there is something in the New Zealander of stauncher quality than this – something attractive enough to make Bill Pearson want to go home to the intellectual desert he saw as New Zealand. If Fretful Sleepers was prescient in many aspects of the following five decades, it has little explanation for the civil disturbance in 1981 we label “The Tour”. It was not just as if the country wanted to reject the label of “passionless people”. Something happened when the population divided over a political issue, and literally fought in the streets to promote their point of view. Explaining that offers a more positive account of the character of New Zealanders, and a more hopeful one for the role of intellectuals.

The explanation starts a long time ago, when there was a public protest – mentioned in Fretful Sleepers – against the sending of a Maori-less rugby team to South Africa in 1949. Initially it was just a few people, who felt passionately about race relations. They probably did not expect to stop the 1949 tour, but the believed that it was necessary to witness publicly the grave injustice which they saw. Over the years that few steadily recruited more to their cause – from its beginning Pearson was a member of the Citizens Association for Racial Equality which confronted sporting relations with South Africa as well as domestic issues.

The point is not that these people were anti-racist; many other New Zealanders in their own way and in their day held similar views, even though they did not express them in public. What was important was that a few ordinary New Zealanders chose to flout the convention that one conformed, that one did not stand out in a crowd, that one’s principles were private not public matters. Their witness led others to join them, incrementally, till over the thirty odd years there were enough to lead to that extraordinary display of public protest which we know as “The Tour”. This is not a unique phenomenon in New Zealand: the peace movement, feminism, and the Maori renaissance are other outstanding examples. The history of New Zealand is littered with reform movements which started with a few outsider witnesses, but who built up a public support which gave a success beyond the instigators’ boldest hopes.

This suggests a more promising account of the New Zealand character. Sure it tends to be conformist. Sure it tends to be concerned with things practical rather than things of the mind. But it is not hopelessly subservient to authority. New Zealanders will strike out in a direction which does not conform with authority if the community environment is favourable. The function of the public intellectual is to provide the quality analysis which supports that environment.

Author of The Lucky Country Donald Horne has written “[t]he general idea of `public intellectual life’ is more useful than the `public intellectual’.” He goes on to describe how public intellectual life “provide[s] a kind of public acclimatization society for new ideas. All kinds of people may play a part in working up these ideas down in the subterranean passages of critics’ culture and others may take over the business of negotiating them in the public sphere.”(16)

To put this point another way, sometimes one may ponder as to who are the public intellectuals in New Zealand society – perhaps to admire them, perhaps to shoot them. But that is not a helpful approach. Rather we should ask what contribution is each person making to the totality of public intellectual life? (Better still, ask yourself “what contribution am I making to public intellectual life?”)

What can we say about public intellectual life in New Zealand? First it is thin, perhaps inevitably given the smallness of the country. Size also means it suffers from an excess of colonial inferiority, so that the overseas expert often has a status out of line with her or his competence. More generally we confuse public intellectual activity with occupational intellectual activity. This is most evident in Wellington, the centre of government, where a mediocrity’s intellectual status becomes enormously enhanced by patronage. (How often have you gone to hear the chairperson of this or that, and learned that he or she knows absolutely nothing about the subject?) Indeed there is a continual struggle by government and business to overwhelm public intellectuals by captured mental eunuchs: we do not always have the discernment to distinguish quality. Yet public intellectual life goes on in the way Edward Said describes: outsiders functioning in the margins of the society, and yet ultimately having an enormous impact on its central core. Even so public intellectual life was not robust enough in the 1980s to withstand the onslaught of Rogernomics. There were two reasons.

First, most of the niches in which public intellectual life occurred were the result of substantial public sector funding. When the new philosopher-kings scythed through the public sector, public intellectual life lost its base. Institutionally we had relied upon the public sector to protect genuine intellectual activity, as it largely did even under the worst excesses of the Muldoon era. The attack on the public sector ripped out the institutional structures.

Second, the attack came from an unexpected direction. Public intellectual life in New Zealand does not focus greatly on economic and social issues, its concerns have been foreign affairs, human rights, moral issues, the environment, and the arts. With a few exceptions there was little awareness of the changing political economy which provided the substratum to the revolution, nor the rise of the New Right overseas.(17) For we must acknowledge that whatever their failings the philosopher-kings were grappling with real economic and social issues, perhaps inevitably given that they were pressured by being in the centre of the government system. Most public intellectuals were concerned with issues far more peripheral to the revolution. So the attack was unexpected, the guns of defence were turned in the wrong direction, prepared for the wrong enemy.

For the reformers were bolsheviks of the right, a small group of men who succeeded by surprise and determination, seized power by unconstitutional means, and are now consolidating their position by eliminating centres of dissent, most by notably the destruction of public intellectual life. Meanwhile public intellectuals have been too busy regrouping, creating new institutions less dependent upon the public sector, to provide the leadership role that the public yearned from them.

Even so electoral reform has been one extraordinary success of public intellectual life. By the late 1970s there were a few outside witnesses – university political scientists, perhaps responding to the oddity of the 1978 election when Labour obtained more votes but less seats. They used their discipline plus overseas experience to propose another way of electing parliament. Their vision was probably realized much earlier than they might have expected, given the traditional reluctance by the public to innovate constitutionally. Yet despite the reluctance, the public voted for MMP in 1993. This was not a vote by a conformist people reluctant to challenge authority, which – it will be recalled – was almost unanimously opposed to electoral reform. Rather it was an angry people, infuriated by the way the economic reformers had ignored them. They had found a way to rebel.

One is left with a picture of New Zealanders less like Fretful Sleepers described, and more like Bill Pearson must have hoped for when he decided to return. As with the soldiers with which he fought, we may as a people be slow to wrath, but we are strong in battle. Given leadership, from artists and other public intellectuals, given a robust public intellectual life, New Zealanders will reject authority that they loathe, and chose alternative ways to those desired by the Establishment.

For with one caveat, the success of the philosopher-kings may be a short lived victory. They may have devastated the countryside, and corralled the populace in their fortified camps. But they have not won the hearts and the minds of the people. The 1996 election offered an opportunity for another peaceful revolt. Probably the only chance the philosopher-kings have of retaining such authority they have arises from the way in which – through their actions based upon a their colonial inferiority complex – they have handed more power over to outsiders than at any time in the last 60 years. It is not just symbolic that the Business Roundtable is dominated by foreign-owned companies, and its members are but satraps for multinationals. The room for manoeuvre – for the ability of New Zealanders to determine their own destiny – may remain very small if we are but a commercial colony of a distant imperium.

George Macaulay Treveylan remarked that it was still too early to form a final judgement on the French Revolution.(18) New Zealand’s reforms are but a decade old. It took the Soviet Union three generations to throw off their bolsheviks. It remains the task of public intellectual life to take a lead in awakening New Zealanders from their fretful sleep.

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Endnotes
1. I am grateful for comments by Professor Bob Chapman, who also chaired the presentation.
2. Page references are to W.H. Pearson, Fretful Sleepers and Other Essays , Heinemann Educational Books, Auckland, 1974.
3. op. cit. p.4. That one has for a contemporary audience to expand “VC” into Victoria Cross to distinguish from Vice Chancellor (or Viet Cong) is an indication of how far things have changed.
4. op. cit. p.27
5. pers. com.
6. Using a slightly different classification. Data from the Population Censuses.
7. E. Said, Representations of the Intellectual , Vintage, London, 1994.
8. Sunday Star-Times , July 14, 1996, p.C1.
9. W. Coleman, “Concord and Discord Amongst New Zealand Economists: The Results of an Opinion Survey”, NZEP , vol 26(1), June 1992, p.47-82.
10. Reported in R. Butterworth, & N. Tarling, A Shakeup Anyway: Government and the Universities in New Zealand in a Decade of Reform , AUP, Auckland, 1994.
11. J.R. Saul, The Unconscious Civilization , Anasi Press, Ontario, 1955, p.73.
12. After the lecture, Bill Pearson expressed a concern that the essay might be taken to imply that he was anti-British, an accusation made by others. He suggested it would be better to have said “If New Zealand might be unattractive, England is worse.” I have kept the phrase of the original lecture, not only because it presents better, but because it captures better, I think, the high spirit of the young man who wrote the essay. But it would be wrong to think that man, then or now, was anti-British. He was simply forming a view of English society and concluding that he preferred his own, for all its faults.
13. B.H. Easton, “Piggy in the Middle”, Metro , August 1996, p.82-87. (It may be of historical interest that working on this essay precipitated the idea of the lecture series.)
14. Dominion , August 3, 1996, p.2.
15. op. cit . p.9.
16. Australian Book Review , July 1996, p.19.
17. This is elaborated in B.H. Easton, In Stormy Seas: The Post-War New Zealand Economy , University of Otago Press, Dunedin, 1997.
18. Speech, National Book League, 30 May 1945.

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