NZIER Working Paper 85/31: Draft of paper presented to the August 1985 Conference of the New Zealand Association of Economists

Originally written in mid-1985, some routine editing since.

The title ‘Victoria School’ for the seven economists [1] who wrote a critique of the Treasury and Reserve Bank’s Post Election Briefings [2] was, I understand, coined by Murray Weatherstone, Secretary of the NZ Association of Economists. It has since entered the journalistic and professional vocabulary, although we need to be aware that a number of economists at the Victoria University of Wellington are unlikely to associate themselves with the seven.. I would imagine that neoclassical economists like Henry Ursprung and Girol Karacalagou would have a number of reservations, as might the economic historians and those economists associated with the policy school in the economics department. Indeed, as I shall discuss shortly, this latter group may be entitled to describe themselves as the ‘Old Victoria School’, and treat the seven as recent upstarts or, at most, ‘the New Victoria School’. I would prefer to call the seven by this latter term, but we will have to see how the jargon pans out.

Where the three professors of economics fit also has to be resolved. Professor David Shepard publicly described himself as an adherent of the school, [3] but as he is on leave I have been unable to discuss this with him. Professor Fraser Jackson’ s research work has primarily been in micro econometrics. This has influenced the school, but it would not be appropriate to include Jackson as an adherent on this basis. Professor Bryan Philpott describes himself as an adherent and there is sufficient overlap between his work and the seven’s to treat him as a member. We have little evidence how the seven see his work in the areas of growth and planning which, until there is evidence to the contrary, we take to extend and complement the school’s views. As well as Professor Jackson, other staff of the Department have carried out associated research, or written papers with the group which might suggest they are also school members, but that is for individuals to commit themselves.

To avoid long expressions I propose to describe them in this paper as ‘the school’, ‘the group’ and ‘the seven’, as well as by the full title ‘New Victoria School’. [4]

My reasons for preparing this paper are threefold. First, I have always had an interest in economics as an intellectual process, and the naming of a group of New Zealand economists as belonging to a school tantalizes such an interest. Second, there was a debate between the two public sector institutions and the school at the February 1985 Economists Association Conference. Since then it has all but disappeared, and mindful of the OECD injunction

it is hoped that the debate will continue and develop in a positive way (1985, p 54)

it seems to me that this paper might be a constructive and stimulating addition to the dialogue,

Third, and in some ways most pertinent, this paper was precipitated by the death of Mervyn Pope, who was one of the seven, I first met Merv in 1964, he being my teacher, and as I reflect 21 years later, it strikes me that intellectual environment we knew in the economics department at Victoria University then was quite different from that of the seven. It is a fascinating question as to how that transformation occurred, particularly given that Merv and John Zannetti, also a member of the seven, were there almost continuously. It is not my intention here to define or criticize that ‘Old Victoria School’, with its strong interest in policy and, as I have indicated, I believe that the school still lives on. Nor am I yet ready to discuss how the transformation happened. Rather it is my intention to try and characterize the New Victoria School around about the time of the death of the economist who has been described to me by other mem- bers as its most central character.

Thus far I have begged the question as to whether a school actually exists. I propose to start off with the hypothesis that it does, with the intention of seeing whether that proposition is coherent. The conjecture is plausible. Seven economists from the same economics department came together to write a commonly authored critique. Four of them have written papers with other members of the seven. Finally, and perhaps most significantly, they keep coming together in the Departmental tea room, and I am certain that one does not go to the Victoria University Economics Departmental tea room for the quality of the physical environ-ment .

Methodological Issues

Before identifying the school’s economic analysis, it may be useful to make some broad brush remarks about its methodological stance. I want to suggest that the school sees a distinctive New Zealand economy, it has a strong empirical base, it is primarily concerned about macroeconomic issues, that it is analytically careful but eclectic, and that as befits university teachers it is Socratic; policy conclusions are not high among its priorities. I am mindful I cannot always precisely document these points, but I believe they are a fair representation of Mervyn Pope’s position, if not of the others. Any characterization of one methodological position is at least implicitly a contrast with another position, but here the focus is on the school.

Distinctive Economy

There is one view that there exists an ideal l economy [5], which characterizes all economies of a particular type (say those be- longing to the OECD), and that any particular economy, such as New Zealand, may readily be analysed using it. A common practical variation is that there is a particular economy, which is close enough to the ideal, to be used as a model, When Merv and I were students, the model was Britain; today it is more likely to be the United States. [6] This extreme is thus closely associated with the conduit strategy, where overseas research is used for policy purposes without some intervening step of using the over- seas work as the basis for applied economic research in New Zealand. (Easton 1985)

This view is very far from the New Victoria School perspective. It sees each country’s economy as unique, so that there is no simple single overseas model for New Zealand. There are two variants of this stance. One is that New Zealand is a special case; the second is that every economy is a special case or, rather, that every economy is unique but none is a special case. The New Victoria School probably favours the second variant rather than the first, which smacks of parochialism. Never-the-less, one might expect that they would examine many economies, particularly the small European social democracies, for insights into the New Zealand situation, rather than depending upon Britain, the US and/or Australia if they were strongly of the latter approach.

It is certainly true that members of the school show no great faith in searching for the Great Overseas Expert or Great Over-seas Theory which, once identified, will solve all our problems. There is no doubt that they are well read in the economics literature and make use of visiting economists. But it is a part of the search for insights rather than solutions,

The Empirical Approach

It is difficult to offer an alternative to the empirical approach of the school which is not derogatory. Nevertheless, one can but compare others’ work, and admire the quality of the New Victoria School’s empirical work and the care that is given to accurate characterizations of the world. Much of Pope’s work was the careful development of data series for analytic purposes (1971, 1974, 1982b), and the same attention can be shown of other school members. (Philpott’ s Research Projection Planning holds one of the largest economic data banks outside the government sector.) It is particularly significant that Wells, who is a high power econometrician, nevertheless puts in quite a bit of work evaluating the quality of the data series he is using (e.g. with Evans (1983)).

That the school places some importance on an accurate characterization has the important consequence in microeconomics which I shall discuss shortly.

The Macroeconomic Focus

The narrow conception of macroeconomics is Keynes’ triad of Employment, Interest, and Money, together with inflation and the balance of payments. This is the focus of the New Victoria School, either in terms of the coverage of the critique or its published work. In particular, there is little on the growth process (except for Philpott’s work) or on microeconomics. The omission of microeconomics is probably fundamental. This will be returned to later, but here it is suggested that there is not a lot of sound useful microeconomic empirical research in New Zealand the contrast with macroeconomics is quite marked. What this means for a group as empirically based as the New Victoria School is that without such research it is difficult for them to tackle the topics with the same vigour as macroeconomic ones, [7]

Analytic Eclecticism

An important contrast between the New Victoria School and the economics which Mervyn Pope and I were taught 20 years ago at the same university, is that the New Victoria School is analytically much tougher. This is not the same as mathematical neither school is particularly mathematical – the notion here is the conscious and constant application of economic analysis, at a deep level if necessary. My suspicion is that there are some differences within the seven about the degree to which formal models are necessary. Pope was skeptical of heavy formalization of models – he was buried with a much studied copy of Harrod’s Towards a Dynamic Economics. However his joint writings with Buckle do include algebraic models; and Wells, for instance, has been very concerned about the process of economy-wide modeling [Wells and Evans (1983), Wells and Easton (forthcoming)].

I have thought about whether to describe the school as Keynesian. It is unlikely they would describe themselves as ‘monetarist’. Merv was, for instance, very skeptical of the efficacy of the money transmission mechanisms which are identified by monetarists. However, describing them as Keynesian’ raises the same problems as to whether John Maynard Keynes was a Keynesian. What is certain is that the group is not the crude Keynesians who dominated so much New Zealand postwar economic policy, and who are readily parodied by New Zealand monetarists. I suspect that the seven are somewhere in the general Keynesian creed, and indeed different members may belong to different sects.

That is why it may be better to describe the school as eclectic which leads naturally to the last methodological feature mentioned here – the Socratic approach.

The Socratic Approach

Mervyn Pope, in particular, was wont to carefully subject any economic view to scrutiny, without obviously exposing his alternative. Indeed, the latter may not have existed. The thrust of his last paper, written with Buckle (1985), illustrates this. It aims to examine the weaknesses of the arguments of those who advocate floating the exchange rate. The final paragraph suggests that the writers do not have a decisive policy stance. They advocate ‘the situation whereby the exchange rate can, if necessary, be managed with greater flexibility’, and that ‘exchange rate management should be constrained toward the variable pegged end of the spectrum’. The methodological contrast with the companion paper is illuminating. Keenan (1985) is advocating floating the exchange rate, and provides a carefully articulated and defended argument, with this in view. The very title of the two pieces are a contrast. Pope and Buckle’s article questions ‘Do Exchange Rates Need an Anchor?’ Keenan’s is a firm ‘The Case for Floating the Exchange Rate’. [8] The contrast would have been even more marked if I, as journal editor, had not asked Buckle and Pope to include some policy conclusion when the paper was being revised; the first version had no prescriptions at all.

An article with a question mark in the title occurs elsewhere in Pope’s cannon, and the question was common in his verbal discussions. Other members of the group have similar, if less pronounced, characteristics. Their approach is reminiscent of Socrates, whose ‘aim is not to win a debator’s victory over an opponent, but to clear the atmosphere of false or irrelevant definitions, to arrive at the essential character or essence of a virtue or idea. (Edman, 1928)

If so, they are certainly in a minority of the profession. The OECD’s remarks show a testiness towards critics without policy alternatives which I have heard verbally elsewhere. To repeat the earlier quotation, but at greater length

The Treasury and the Reserve Bank make the point that they would have welcomed a more positive response to their views, in the sense of counter suggestions (sic) where rele-vant. It is to be hoped that the debate will continue and develop in a more positive way which will lead to a better understanding of the policy problems facing the society.’

One might recall Thrasymachus, in the first book of The Republic, who is impatient with the Socratic method and wants to get on with his own views which justify certain actions. [9]

There is, I think, among the majority of the profession a view that economics is primarily policy oriented. It is one of the characteristic features of the Old Victoria School and, understandably, also a feature of the Treasury and the Reserve Bank.

The view that economics is a science concerned with an under- standing of the world is not an indefensible position. Teaching via the Socratic method has an honourable history. The New Victoria School is doing no more than what it is paid to do.

However, for Thrasymachians, it is very frustrating. The policy debate in New Zealand has been very much about attacking policy positions of one’s opponents rather than providing carefully worked through analyses. There is an often quoted view that the differences between Keynes and Friedman are unimportant, and a tendency to judge economists on how closely their perceived policy conclusions concur with one’s own. This is not necessarily the position of all those who disagree with the New Victoria School, but some who are cheering on the side might consider whether they are not participating in that sport, which many of us had hoped had been abolished a year or so ago, of playing the man not the ball.

It is important that we recognize these methodological differences, particularly what here has been called the Socrates-Thrasymachus distinction. There is an important role for the careful scrutiny of policy, without demand of the scrutineers that they provide alternatives. Indeed, in my view, there have been occasions of policy obsession to the neglect of all economic analysis, which have not been in the best interests of the economy. In addition, one needs to be more careful of economic forecasts made by those with a policy emphasis, and as a business economist I would see little point in consulting those with policy axes to grind.

New Victoria’s Economic Analysis

Having identified some of the methodological underpinnings of the school, particularly to contrast them with other approaches, I now turn to the details of their economic analysis. Critiques are not, of course, the places to offer alternatives, whatever the OECD may think. As a result I am going to have to use other writings of the group.

Fortunately, however, the seven’s Critique does include a summary of its views (the last two sentences are included to remind us of the Socrates in the group):

… we see equilibria as being path dependent and recognise that, because adjustment in some markets is faster than in others, floating some prices may actually be destabilising; we see inflation as a complex phenomenon with many causes, not usefully represented as a simple variable P governed by simple control variable M; we see labour markets as highly structured institutional mechanisms through which policy must have its effect and with which it must therefore come to terms. In general, we regard as more plausible those accounts of adjustment mechanisms which make sense in terms of known institutional structures and processes. But there is as yet little hard evidence about which adjustment mechanisms are quantitatively more important in which circumstances, and in its absence it behoves us all to pronounce with caution and restraint on the likely effects of particular policies. (Zannetti et al, 1985)

I will go through each of the first four sentences in turn by referring to other published work by members of the group:

            “We see equilibria as being path dependent”

Probably the best exposition of the group’s view is by Wells (1985), but Philpott (1984) also discusses it; they both are referring to Hahn’s Reflections on the Invisible Hand (1982). Wells is writing with the opening of the books debate in mind:

Some economists argue that in order to understand the macroeconomy, it is sufficient to analyse the optimising behaviour of rational individuals and firms.

For hardliners holding this view, the problem for policymakers is to establish a framework of laws in which everyone can pursue their own self-interest; the outcomes of the competitive pursuit of self-interest will ensure an optimal result for the economy as a whole, and a view of the macroeconomy is unnecessary. Of course there may still be a role for Government intervention in, say, the pursuit of an equitable income distribution. But aggregate demand management, or price fixing in terms of managed exchange rates or incomes policies, would be a waste of resources.

This view may or may not be correct. What is clear, however is that there is no basis in economic theory for asserting its validity.

Put another way, there is no theorem in economics which guarantees

that when firms and households are acting in their own self-interest in an approximately real-world setting, the result is a stable equilibrium for the economy as a whole.

The analytic point is, of course, unquestionable. The conditions to ensure a unique optimal equilibrium, even of the standard equilibrium model, are extremely strong. To what degree there are multiple equilibria in the actual world, and how different such equilibria are is not known.

At this stage the point that the seven are making is primarily a Socratic one – are the people they are criticizing aware of the defects of their theory? There is also a negative policy conclusion. If there are multiple equilibria, a number of which are stable, then from where the economy starts and how it adjusts may determine the outcome. Thus it does not follow that a low intervention strategy will necessarily take us to the best equilibria. Whether the seven believe that any equilibrium will ever be attained, or near enough to be attained, is unclear. My impression is that Merv Pope would, in his Socratic role at least, exhibit doubts as to the practical usefulness of the equilibrium notion.

While this may be, in the OECD terminology, negative, interestingly Wells and Evans provide some empirical evidence for the view, I think. Using a VAR econometric model, which implies a relatively low opportunity to impose a theoretical preconception on the model’s behaviour, they show that the New Zealand economy appears to exhibit a long run real response to a common nominal shock in export and import prices (1985). Now until we have the confidence intervals on the long run behaviour, any conclusion must be tentative, and in fairness to the econometricians it should be mentioned that they are aware of this problem, but do not have the resources to tackle it. [10] However, suppose that the econometric conclusion holds. The theoretical explanation may be that New Zealand experiences multiple equilibria, and that the stocks have in the past shifted the equilibria to which the economy was homing. In response to questioning at a seminar where he presented the model, Wells suggested that the phenomena the model generated might be a consequence of asymmetry in the investment behaviour of the export and import sector. [11] It is possible to see dimly that such behaviour could generate multiple equilibria of sorts

.

            ‘Because adjustment in some markets is faster than In others, floating some prices may actually be destabilising’

While this proposition is quite general, the seven have discussed it most with respect to floating the exchange rate. Wells remarks that:

… in view of the fact that financial-market deregulation is virtually complete, the most urgent questions now concern stability of macro-outcomes …. there’s no micro theorising which gives explicit results regarding the consequences of differing degrees of flexibility in various markets. The macro theory, however, suggests that if policymakers are intent on having deregulated markets for credit and foreign exchange, then labour market policies need urgent attention.

One aspect of this view was recently expressed by Dornbusch, a member of last year’s Brookings Institution study of the Australian economy: ‘Making the exchange rate flexible when all other wages and prices have a large institutional component is very, very risky, and if you cannot quickly get everything else flexible – and you certainly can’t – then you need a significant incomes policy to make the flexible exchange rate work.’ (1985)

Wells then defers to Buckle and Pope (1985). They argued:

Indexation is not necessarily complete in all domestic mar- kets. But even if it were, floating is not cost free in an indexed economy. Adjustment to nominal exchange rate chan- ges in New Zealand is not instantaneous. Some of its markets, in particular its product and labour markets, are more rigid than others; it usually takes some time before changes in tradable prices are indexed into the price of non-tradables. Further, we now know that in a floating system, exchange rates are determined principally in asset markets and the trade balance may have little or no bearing on the rate

“Nominal exchange rates can aIso get out of line with fundamentals – for instance, they can overshoot. Such overshooting will be greater, the less flexible are the economy’s product and labour markets. For in those circumstances, the trade balance is slow to respond to changes in the nominal (and real) exchange rate. Adjustment to external imbalance comes largely through the capital account (asset markets) and because of that, the necessary change in the nominal exchange rate is greater than would be the case were the trade balance more responsive.

The point being made here has been elegantly put by Tobin: ‘exchange markets are necessarily adrift without anchors.’ [11]

Among the points they are making is that during the transition, prices may be very poor guides to the long run or fundamentals – recall Pope may well have been sceptical about the relevance of the long run anyway. The same point is made by Philpott, who argues for a planning mechanism to give better guidance than the short term market. Note that this issue is particularly acute for an economy which is thought to be a long way from its equilibrium (assuming there is only one), and is going through a major process of adjustment.

The underlying policy issue is that of ‘ sequencing’. If it is not possible to implement all (ideal) policies at once, and get instant private sector adjustment to them, in what sequence and at what rate should they take place. Obviously there is a political problem over the order and rate, but there is no Great Overseas Theory on sequencing either. It does not follow from this that there is no relevant theory. Perhaps the turnpike theorems give some guidance, and certainly second best theory provides some rules, albeit static ones. It also warns us that sequencing is a very difficult issue. Overseas empirical studies may be relevant. Latin American experience suggests New Zealand was right in liberalizing its external capital account before the floating of the exchange rate (and European experience provides useful insights into the relationship between labour markets and exchange policy).

This latter relationship is a major concern of the seven. As the above quotations indicate, Philpott (e.g. 1983) has also written on the topic. Financial and exchange rate market liberalization with labour market rigidity can be disastrous. A few years ago it was fashionable: to argue that domestic market  should precede external liberalization. [12] In the event the reverse order has been implemented, and European experience suggests that that sequence is not always successful.

            We see inflation as a complex phenomenon

The relevant text here may be Pope and Buckle (1983) Inflation and an Evaluation of Recent New Zealand Exchange Rate Policy. There is no summary of the paper. The model they present is clearly a cost plus one, in which world inflation is transmitted into domestic inflation (p 50). They do not specify any role for money in the model, and it is a little unclear to what extent the model is in the short run, medium run, or long run. Philpott is another who sees inflation as a complex phenomenon, and he places considerable emphasis on the rigidity of real wages and, in Policy terms, the need for an incomes policy (1983). Clearly these three, at least, are not sympathetic to the monetarist explanation of inflation (except in the very long run?) The reason given is (inflation) is ‘… not usefully represented as a simple variable P governed by a simple control variable M’.

This involves three propositions. First, as befits teachers, they draw attention to the difficulties of defining and measuring the price level, P, and the stock of money, M. Their emphasis on empirical research comes in here too, Pope (1971) and Buckle and Snively (1979) have worked on measuring and monitoring the money stock. Wells had publicly worried about definitions of prices (1983), and Bertram and Wells have discussed the difficulty of defining real wages (1983).

The second proposition is that even if the two variables could be adequately defined, the relationship between them – i.e. the demand for money function – is not (in the jargon) stable. This proposition is developed in both Buckle and Pope (1985) and Zannetti (1984).

We can see why they might hold to this view in terms of some of the school’s earlier analysis. The conventional demand for money function is

                        M = F(P, x)

where x is to represent all the other variables, typically quantities and relative prices. The most common assumption is that the function can be decomposed, perhaps to a form:

                        M = Pf(x)

and that in the long run the x is independent of M and P. Now in a multiple equilibria economy, this is not at all obvious though one could envisage the equilibria being clustered together sufficiently closely for the proposition to be roughly true.

Moreover, in so far as the Wells/Evans conclusion, that the economy is not neutral to the export/import price shock, is correct the demand for money function could appear to be unstable.

The third proposition is that, even if the second proposition held, it is very difficult (or impossible) to control the required money stock. This appears in a number of places in the school’s writings. An indication which might illustrate the sort of practical policy problem this proposition raises is that it is accepted that under the current monetary and exchange rate regime it is usually taken that the Reserve Bank has considerable control over primary liquidity. However, the Reserve Bank’s work with its econometric model would suggest that M3 is the relevant monetary variable to control, The relationship between primary liquidity which can be controlled and M3 which perhaps ought to be, is not understood.

In summary the New Victoria School sits easily with those who have grave doubts about the Monetarist interpretation of monetary phenomena, and they would be, I imagine, very sympathetic to the sort of policy prescriptions that Goodhart’ s law suggests albeit such prescriptions may be negative .

We see labour markets as highly structured institutional mechanisms through which policy must have its effect and with which it must therefore come to terms.

We approach this statement with some caution since others (e.g the Treasury) may agree with the sentiment but provide an entirely different interpretation of it. A second reason for caution is that there is not a lot of written material by members of the school which sheds light on their views. As has already been reported, Buckle and Pope (1985), Wells (1985) and Philpott (1983) all argue that a higher degree of flexibility is required in the labour market for the sorts of policies enacted by the current Government to work without undue hardship. Other aspects of the labour market are discussed by Buckle and Tomlinson (1983) and Bertram and Wells (1985), but these are at a very aggregate level. Brosnan has carried out a considerable amount of microeconomic analysis on ethnic differences in the labour market (1984), as well as on unemployment in aggregate, but again this is little help in interpreting their remarks.

I am uneasy about drawing inferences from the Critique, not only because the Treasury thinks that the Critique misrepresents its view. What, however, may be inferred from the Critique is the rejection of the idea that the notional Walrasian market is an adequate characterization of the labour market and the view that, despite the thrust of their research, they do not think that the labour market can be summarized in terms of national aggregates.

A likely explanation for this silence on the microeconomics of the labour market is that the New Victoria School’s strong commitment to an empirically based economic science limits its ability to comment on areas where appropriate research does not exist. As Brecht points out in the first act of The Life of Galileo, underfunding of research can be as an effective a form of censorship as some of the procedures which appear later in the play.

If I may intrude a little here, I try to base my Listener economic columns on well-grounded analysis and research, particularly when I am writing at the more abstract end of the subject. Earlier this year I committed myself to write a column on labour market rigidities because it was topical within the profession. However, when I began reading the literature, I found it vague, imprecise, and opinionated, with little sound analytic or factual base. Despite rewriting the article on two occasions (and even one re-write is unusual for a column), the result was unsatisfactory. Thus the problem of ignorance of the labour market is not a peculiarity of the Victorian School. [13] Groups from as diverse perspectives as the NZIER (Easton, ed, 1983), the Treasury (1984) and Boston (1984) lament the lack of information and call for research in the labour market; and still nothing is done. [14]

At this point the identifiable statement of perspective of the New Victoria School is exhausted. Perhaps one could use the Critique and other research to assess their views on matters such as growth, social policy, and so on, but this would be speculative and perhaps, through misunderstanding, imposing views which are not the group’s.

The New Victoria School: An Assessment

It is with reluctance that I begin this assessment because I cannot avoid commenting on remarks by an Assistant Secretary of the Treasury that “there is not in place a coherent body of alternative thought” to that of the Treasury (Scott 1985). Thoughtful people may wish the statement had not been made, or that it be quickly forgotten, but it keeps appearing when non-economists are writing about the economic debate, and thus it would be cowardly for me to ignore it.

An implication of the statement is that the New Victoria School, as well as any other economists in the country, are inconsistent, at least as far as their policy pronouncements, and that any criticism they or any others make of the government’s policies is not coherent. First, is the logical point that coherency does not guarantee correctness, nor incoherence mean the criticisms are wrong. But is the New Victoria School incoherent?

As far as its analysis is concerned, I see no evidence of the group being any less coherent than any other group of theorists. Indeed, as I have reported them, there is a consistency between the papers which at the casual level one might not have expected, and somewhat sounder understanding of some of the theoretical issues than perhaps is apparent among other participants in the New Zealand economic debate.

What the group lacks at this level is a comprehensive account. While the focus of this paper has been on their macroeconomics, I have suggested they may well have a common view on the growth process, and possibly in some other areas. However, I am not convinced that they have a common view on important microeconomic issues. Certainly, I have been unable to find one, although I particularly searched for it because there is some diversity of microeconomic viewpoints in the New Zealand debate and I wanted to consider where the seven belonged.

Turning to their policy analysis, one could well argue there is a lack of coherence. Policy is not a priority in their work, and indeed one need not expect it to be among a group of economists who are funded to teaching and research. It is perhaps ironic that those who broadly support a user pay approach to the economy should expect otherwise in the economics profession. This year the Treasury has voted $4.3m to provide economic and financial (plus below the line services) planning and advice. I estimate that the Victoria Economics Department has between $100,000 and $200,000 on an equivalent basis, available after it has met its teaching and administrative requirements. [15] Not all of this is available to members of the New Victoria School, and that has to cover their research effort as well as any work they want to put into policy pronouncements. Compared to government economists, the school has -limited resources for policy creation even if it were a priority.

However, even if there were the resources and the will I suspect that the New Victoria School would find it difficult to agree on a ‘coherent’ policy stance, particularly as they would eschew the platitudinous. To see why it may be useful to contrast the school with a public sector bureaucracy, such as Treasury. The point about a bureaucracy is that it is organized in such a way that it is able to present a coherent stance to the outside world, even though there may be considerable dissent within. [16] It is interesting to reflect that if the economists of the New Victoria School had been within Treasury, they would not have been able to publish their Critique. Indeed, the aforementioned assistant secretary also stated that there was considerable debate within Treasury, a point which has been overlooked by those who have criticized the Treasury using his earlier quotation, perhaps because he gave the impression that the debate had been resolved. I bet it has not in the intellectual sense.

Now a university department has quite a different organization there is virtually no way of silencing strong minded dissidents with tenure. The earlier point that it is not evident that a majority of the Victoria Economics Department belong to the New Victoria School reminds us of the essentially liberal (decentralized?) nature of a university compared to a bureaucracy. [17] In such an environment, it is extremely difficult for a group of economists to agree on a consistent comprehensive policy on a voluntary basis. Any core of policy agreement is likely to be platitudinous, or non existent. It is understandable, then, that the seven had not sought policy unanimity. Indeed, one may ask whether there is analytic unanimity. There is no obvious case of one article of the seven criticizing another, but perhaps there are tensions which have not been fully explored.

That raises the question as to whether the school will continue; a particularly pertinent issue given the death of Mervyn Pope who played such a central role in it. To an extent that issue is for the group to decide. However, a useful approach might be to imagine a liberal government committed to economic democracy deciding to provide adequate funding of economics outside the government service, and ask what might be expected from the New Victoria School in such circumstances.

My first point is that the New Victoria School is one of the most worthy groups to be promoted. [18] Second, given the important role of empirical research to the school, one would want to look at greater efforts in the following:

            (a) The Wells/Evans VAR model, both because of world standing (in terms of publication in international journals), and because of its value in raising issues about the New Zealand economy (as illustrated earlier).

            (b) The Research Project on Planning. I should like to add that it would be a tragedy to the profession if its data base was not continued. Given the recent cut in government funding of the project there is a real possibility that the existing data base will not be maintained, and eventually lost to researchers.

            (c) Professor Jackson’s work on the microeconomics of the firm. I recognize that Jackson is not really a member of the school, but his work has been important to them.

            (d) In the area of the labour market there is a need to pull together existing, or develop new, data banks about actual wage rates, and to carry out the sorts of analyses which are common overseas. This need not be done at Victoria University, but I would expect any useful research to the picked up by the school. Note that the proposed Quarterly Labour Force Survey will not provide the required data base, because it will not be – nor should it be – oriented towards wage data.

            (e) More generally, any quality addition to empirical research which impinges upon the interests of the school, is likely to benefit it – irrespective of who carries the work out.

            (f) Finally, there is a need for a detailed account of the performance of the postwar economy from an economist’s point of view, in order to give us all a reference history. (The most recent book in this area, by a politician, has some inadequacies.)

Having established a better empirical base from which the school is to work, it seems to me that we might expect the following developments:

            (i) more detail in its account of the monetary system, including a more positive alternative to the Monetarist’s account;

            (ii) a comprehensive and vigorous view of what labour market flexibility means;

            (iii) more attention to microeconomic behaviour – perhaps even developing its own distinctive microeconomic viewpoint;

            (iv) a fuller account of how they see the relationship between the short term and the long term. I suspect that Mervyn Pope could have argued that short term behaviour means there is no longer term. Even so, the school ought to be able to give more positive guidance on sequencing issues;

            (v) how the school sees the relationship between macroeconomic

behaviour, as defined above, and growth.

Ideally, I would also like to see:

            (vi) greater use of the experiences of other economies, as a part of the profession’s over-reliance on the British/USA model experience;

            (vii) further work on the implications of multiple equilibrium, on analytic, empirical, and policy work.

Finally, I do not expect policy pronouncements will play a substantial role in any future Victoria School. It has a comparative advantage in teaching and research, not in policy. The case is for trade between them and the government economists, not autarchy by either group.

Bibliography.

This paper was a draft and there was not a bibliography.

Endnotes.

[1] Geoff Bertram, Peter Brosnan, Bob Buckle, Mervyn Pope, Bob Stephens, Graeme Wells, and John Zannetti.

[2} The critique appears in two versions, Zannetti et al (1984), and Zannetti et al (1985). This paper uses the latter, which is more detailed.

[3] At the debate on the “Opening of the Books” which took place at the February 1985 meeting of the Association. Note that I was not able to be at this meeting, and since there is no official record, do not further refer to it.

[4] There is an ambiguity in calling the eight economists (i e. the original seven plus Phi1pott) ‘the seven’. I take ‘the group of 77’ as a precedent.

[5] ‘Ideal’ is used here in the Weberian sense of an ‘idea1 type’ which are constructs that are not intended to describe any actual society, but which are fruitful in the analysis and investigation of actual societies. See Bottomore (1962) p 117.

[6] For a strong criticism of this approach see Seers (1963).

[7] As Director of the NZIER I must add defensively that we have been building up a body of microeconomic research, including research papers on Transport, the Labour Market, International Trade/Industrial Economics, and Market Regulation. However this material is too recent to impact on the profession yet. Jackson and Evans at Victoria have also made important contributions to microeconomic research.

[8] Since there has been misunderstanding, it should be emphasized that the institutions were not demanding positive approval for their views, but viable alternatives.

[9] Lest there are some readers who know their Plato better than I do, I state here firmly that I am not accusing those who hold Thrasymachus’s attitudes of also holding his political and ethical views.

[10] Wells and Evans are not unique in this regard. The much better endowed Reserve Bank of New Zealand model has not, to my knowledge, provided confidence intervals for any simulation run.

[11] In the deleted section, which illustrates the indexation, the writers refer to Jackson’ s empirical work (Jackson 1975, Jackson and Yeo 1985), showing his role in the school’s thinking.

[12] Bowie’s reports on the peripheral labour force and the dual labour market may be a fruitful starting point for the development. (1984a,b) One notes that school member Brosnan refers to the second when discussing ethnic labour force differences (1984) .

[13] Perhaps because New Zealand’s labour market is so institutional (or distinctive) it is highly unlikely that there is any Great Overseas Theory, while visiting Great Overseas Experts are understandably quiet.

[14] There are 113 staff (including secretarial etc) in Treasury in the policy advice division, compared to about 22 staff in the Victoria Economics Dept. About two-thirds of the standard university staff time is expected to be spent on teaching, but the government has set a 19 to l student-staff ratio for business subjects such as economics, compared to 15 to 1 for the university This gives available resources as $4.3m x (22/113) x ( l-2/3×19/15) =  $1 30,000. In addition the RPEP and other activities generate some outside funding.

[14] Sometimes the dissident minority may reach the point where they act outside the official procedures (e.g leaking material to the media) but the best New Zealand examples of recent years which come to mind do not involve economic policy.

[15] It is worth recalling that some overseas university departments have gained unanimity by sacking anyone who did not adhere to the party line. Chile is a classic example.

[16] There is no way that any Director of the NZIER would say that the School is the most worthy group.

<
>

     ¹1. Economic and Social Trust On New Zealand, www.eastonbh.ac.nz