Chapter 15 of In Stormy Seas: The Post-War New Zealand Economy, p.211-231. (This is a draft which enables the search engine. Please go to source for quotes.)
Keywords: Political Economy & History;
Their outlook, not too carefully reasoned, and no doubtful scornful of scientific thought, makes them incapable of self distrust. Like almost all men of action they have a contempt for theories: yet they are often captured by the first theory that turns up, if it is demonstrated to them with an appearance of logic sufficient to impose upon them. In most cases they do not seem to see difficulties, and they propose simple solutions for the most complex problems with astonishing audacity.
The dramatic change in New Zealand’s post-war economic structure took place between the mid 1960s and the beginning of the 1980s. All the earlier great structural changes had taken much longer: the arrival of the first Polynesians, the transition from the archaic to the classical Maori, the arrival of the first Europeans, and the rise of a pastoralism based on shipping refrigerated produce. A country’s economic structure affects the social and political configuration of its society. A rapid change could not but put the greatest stress on the society. Success required a rapid transformation of the vision of New Zealand. It required a renewal of the national leadership – of the Establishment.
The expression `the Establishment’ is used here to cover the group of men (and latterly some women) who are most closely involved in the governing of New Zealand. It includes key politicians, businessmen, and public servants who are influential in decision making, have a commonality of vision and a networking of relations. To say there is an establishment in New Zealand is neither paranoiac nor conspiratorial. Overseas political analysts discuss the notion endlessly, recognising that there is an ambiguity in the term and a number of meanings. Here we use the term to cover the `ill defined amalgam of institutions, social classes, and forces which represent authority legitimacy, tradition and the status quo’ (Stallybrass 1988:248) or `established power’ (Scruton 1982:155).
Neither does an establishment mean a country is not democratic, for the group may be responsive – and ultimately subject – to the wishes of the majority. However every establishment tends to look after its own interests and to reflect the viewpoint of its members. The New Zealand Establishment is typically male, older, white, wealthy, middle class and of middle class origin, living in Wellington or visiting Wellington regularly. It is relatively cohesive, because it is small, although there is always ambiguity as to who are on its fringes, who is joining, and who is left out.
Possibly its most powerful single mechanism of governance is that of patronage that is the appointing of members of the network to positions within the public and quasi-public sector. For the appointee the reward is status, additional income, stronger membership of the network, and possibly a little influence. For the Establishment there is loyalty and coherence plus further leverage over the resources of governance. Observing this is not to argue the appointees are necessarily inappropriate. But not always the best candidate for the appointment is selected – a point frequently made by feminists. The omission is usually explained in terms of the candidate not being `sound’. On the other hand, major defects could be overlooked in an Establishment appointee who is `sound’.
There is not a lot of writing about the Establishment in New Zealand, other than from a far left hysterical/conspiratorial perspective. The sober social scientist risks being thus identified, rather than recognised as trying to describe honestly a central phenomenon of the governance of the country. Instead the conventional wisdom prefer accounts of the deeds of `great men’ and vague political histories in which networking never appears.
In the 1970s and 1980s the New Zealand Establishment faced adaption to the new economic, social, and political circumstances which were opening up. The speed of change was such they did not. Instead there was the catharsis of the `Rogernomics’.
The (Muldoon) Old Establishment
Rob Muldoon presided over the great structural transition. He became Minister of Finance in March 1967, less than three months after the wool price collapsed, holding that office until electoral defeat in July 1984, except for three years in Opposition (December 1972 to 1975), when he was their spokesman on finance. For the last half of the 17 years he was also Prime Minister. Allowing for variations in family backgrounds. Muldoon’s personal history of the depression in the 1930s, the war in the 1940s, and moderate success in the 1950s was little different from that of the others who belonged to the network which ruled New Zealand from the 1960s to the early 1980s.
The New Zealand they had grown up in had settled down to the pastoral export specialisation. Many of the men of Muldoon’s generation grew up on a farm, many were farmers or depended upon the farm sector – processing, servicing, supply, or finance. There was a minority who were from manufacturing but it was an inward looking, highly protected activity, whose prestige came from the jobs it created rather than the foreign exchange it earned. Like Muldoon the other members of the Old Establishment around him were better educated than average for their generation, and had travelled overseas more than average, although much less so than subsequent generations.
Except for the most fortunate and insulated, the 1930s must have been a horrible experience for Muldoon’s generation, and they lost comrades during the Second World War. But the following two decades were ones of progress and stability. Ironically, as the generation came to power the experience of their formative years – late adolescence and early adulthood – was exactly the opposite to that over which they would govern. They were unready for the challenge the post 1966 economic structure posed.
There were various reasons for this inability to identify the evolving political economy. Pervading them was nostalgia for the past – for the golden weather. The pre-1967 world had been so much easier: grow some grass, minimally process it, ship it to the markets of Britain, and live on the proceeds. Family life was simpler when wives stayed at home, race relations simpler when the Maori knew their place was in the pa. The world outside New Zealand was scary, but safe with a protector such as the United States, while sentiment kept them close to Britain. But that was not the New Zealand they were to govern.
The nostalgia was reinforced by the power of the farm lobby. In the 1950s and 1960s no one could challenge the significance of pastoral farming to the economy, while an area-based first-past-the-post electoral system gave farmers a high degree of parliamentary representation and political leverage. It was not merely the farmers by themselves. The industries associated with farming were a part of the lobby, since their prosperity was dependent upon farming. Even key militant unionists – freezing workers and wharfies – depended on the farm sector.
The hegemony of the farm lobby was reinforced by the apparent lack of viable alternative strategies. If New Zealand did not export pastoral products, what would the economy do? Import substituting industrialisation was a poor alternative – at best a supplement. Very few in the 1960s had any confidence in export oriented manufacturing except at the margin.
This failure of national vision was partly a consequence of the way the Old Establishment approached concepts. Perhaps the leaders of a power elite cannot be expected to be intellectually creative, but New Zealand’s sometimes seems to be closed to new ideas, and frightened about anything but the most superficial and well established notions – the conventional wisdom.
This is well illustrated by New Zealand at the Turning Point, a report commissioned by Muldoon’s incoming government in 1976. Its main recommendation was the creation of the New Zealand Planning Council. Its opening paragraph states that after consultation the writers were left with `a sense of concern about recent trends in many aspects of our social life’. The next sentence announces `[t]he concern is accompanied by a general feeling that the adverse trends could be more readily reversed if governments were willing to take a longer view in their programmes, and if they could secure greater co-operation among different groups ….’. The rest of the report wanders along in this vein, continually expressing concerns about recent trends and vaguely promising that `planning’ – largely undefined – will contribute to the solutions. There is no rigorous attempt to give an account of where New Zealand was at the time, or to distil the concerns into some vision. It is littered with seductive platitudes, but there is an almost complete lack of analysis. Today this is not a report one puts down with a feeling that the writers were grappling with the structural change which had already been underway for a decade.
On the foundation of this report, the New Zealand Planning Council was born. Inevitably, given the substantial resources made available to it, some of the work in its fifteen year life was useful, and is quoted in this study. More is reminiscent of the Victorian view of sex: platitudinous, passionless, and pious.
Why did an institution set up to give the Old Establishment the guidance it required in a period of rapid change so manifestly fail? One answer, especially popular among those who became the New Right, was that those involved lacked the necessary analytical skills. This may well be true, but that begs the question why more skilled people were not involved, and why those few that were, as often as not, left shortly after in frustration.
A new vision of where New Zealand was and was going would have been subversive to the Old Establishment’s conventional wisdom. The Planning Council operated on the basis that it would not challenge the existing self characterisation of the nation, but defend it. In doing so it could not contribute to self evaluation or renewal. It is easy to pin the unwillingness to allow intellectual speculation on Muldoon himself. There is no doubt that he discouraged such challenges, often impatiently and brutally. But it has been a more fundamental feature than the predilections of just one man. The repression of dissent against the conventional wisdom continued after Muldoon had gone.
But if the Old Establishment was unwilling to countenance a revision from within, there were pressures from outside. In areas such as women’s rights, the environment, Maori policy, civil rights, and international affairs there evolved strong, often intellectually coherent, if sometimes politically fragmented, movements within New Zealand. The economic story is quite different because the impetus seems to have come from overseas, and was primarily channelled through government agencies.
New Economic Theories
Chapter 2 has already described the phenomenon of Radical Monetarism in New Zealand. It partly arose out of exasperation with the Traditional Monetarism being espoused by the existing Establishment. Muldoon’s highly interventionist policies, culminating in the price freeze from June 1982 to March 1984, were seen to be a reflection (or even logical continuation) of the Traditional Monetarists. In any case the latter were seen to be too closely associated with the Traditional Keynesians. In the circumstances it is not surprising that a different style of monetarism evolved in New Zealand.
Its origins were overseas. By the late 1970s monetarism had evolved into `rational expectations’, where economic agents make full use of the information available to them, and on average forecast accurately. This had the effect of wiping out even a short term trade-off between unemployment and inflation.
In an alas too simple illustration, consider a increase in government spending aimed to increase employment.
– In the early monetarist models (without expectations), there would be an increase in employment, but there would be a rising level of inflation;
– In the model with adaptive expectations (introduced by Friedman in 1968), the agents would observe the rising inflation, and cut back on the people they were planning to employ (in order to avoid the increasing wage bills). As they learned more about the higher inflation they would reduce their workforce further. Ultimately the economy would be left with the same size workforce, but a higher price level. So the additional spending would ultimately `blow out’ in higher prices, rather than in the higher employment that was intended. Note, however, there would be job gains in the short run, and the government might well be tempted to have another spending injection to obtain short run gain for a second, and third, and so on, time.
– From the mid 1970s the rational expectations version generalized other economic actors, as smart as the government, observing this repeated strategy, and recognising the spending boosts leads to price rises, incorporate the government strategy into their behaviour directly. So their prices would increase immediately, and there would be no job gains.
In intellectual terms, rational expectations theory, which evolved into a broader theory described as `New Classical’ Economics, has considerable elegance, eliminating some of the most intractable components of the mathematics of the short term. Its policy message is also attractive to those of a monetarist ideological bent, for it suggests that fiscal management is ineffective in terms of employment and output, but can impact on the price level. If earlier monetarism had said keynesian economic management was effective only in the short run at reducing unemployment (but with an inflationary cost), `New Classical’ monetarism – which was incorporated into New Zealand’s Radical Monetarism – said keynesianism would not work even in the short run (but there would still be the inflationary cost). If it were true.
But is it true? Basically rational expectations is an exceptionally strong hypothesis about human behaviour. It replaces Abraham Lincoln’s classic adage with `you can’t fool any of the people any of the time’, or perhaps `you can only fool so few people at any time it hardly matters’. That is an empirical question. But despite the lack of empirical verification, the theory was latched onto with alacrity in some quarters. Any success of rational expectations theory among some groups might be evidence for `you can fool a substantial minority of the people a substantial amount of the time’. In the end the new theory has not overwhelmed the economics profession.
It is true that some – but certainly not all – markets behave very nearly like the efficient market hypothesis predicts: most notably short term financial markets. A good example would be that when the government announces a financial stock tender, or the outcome of a tender, it is rare for the market to shudder. It has broadly the same information as the government, and providing the government is behaving systematically, the market has already predicted the outcome, and the event is no surprise. Financial markets had been becoming more strident since the 1970s. The theory that seemed true in the experience of those working in financial markets, supporting their ideological preference. there it was adopted with alacrity.
There had been a shift towards monetarism throughout the 1970s, for at least three reasons. First, the ideas of monetarism were developing quickly, and attracting new adherents, although in 1980 Milton and Rose Friedman were to say that while monetarists were no longer `a small beleaguered minority regarded as eccentrics’, they were `still far from the intellectual mainstream but now at least [were] respectable’. Second, for much of the troubled economic times of the 1970s, Keynesian advisers were influential throughout the world, and since their policies had appeared to have failed, the alternative appeared attractive. (The logic is not very different from awarding the prize to the second contestant having only seen the first.) Moreover monetarism said it addressed inflation, which was seen as the problem of the 1970s, whereas Keynesians’ main concern was unemployment, which at the time was not. Third, there is in economics, as elsewhere, inter-generational feuding. Monetarism was the flagship of the new generation.
To varying degrees the policies of monetarists took over in the 1980s in Ronald Reagan’s United States and Margaret Thatcher’s Britain, but far less in those other rich countries which were less accessible to the rogernomes since their inhabitants did not speak English. For while the US and Britain pursued more market, perhaps not as obsessively as New Zealand, and redirected income to the better off, their macroeconomics was quite different.
These new macroeconomic theories, and parallel microeconomic ones, were discussed economics departments in the 1970s. But there were many other interesting ideas. While individual academics may have been attracted to any or all of them, and to have taught them as a part of their macroeconomics program, there appears to have been no dominant teaching of Radical Monetarism in New Zealand until well after it was adopted – in many universities there is still not. In terms of the Waimakariri image of economic debates (Chapter 2), there may have been a sudden rush of water down the Radical Monetarism channel on the right bank from the late 1970s, but it was by no means the largest `mainstream’ in the New Zealand universities. With odd exceptions, it was never at any time in the 1980s either, and is not likely to be in the 1990s.
A couple of surveys of economists’ opinions in 1980 and 1990 indicate just how diverse the profession was (Coleman 1992, O’Dea 1981). Since both questionnaires involved 44 questions, and there was only a partial overlap, it is difficult to summarise the individual responses. Here a few interesting items:
– When asked whether `tariffs and import quotas reduce general economic welfare’ only 39 per cent of the 1980 respondents and 51 per cent of the 1990 respondents agreed, with 40 and 35 per cent respectively agreeing with reservations. We do not know what reservations the respondents had in mind, but whatever they were, even in 1990, the around half who agreed with reservations or disagreed, must have had some doubts about the wholesale stripping out of protection which occurred in the 1980s. Nevertheless the majority of responses were `more market’, and there was a shift in that direction over the decade.
– In 1980 15 per cent agreed without, and 34 per cent agreed with, reservations that `inflation is primarily a monetary phenomenon’. That is not quite a majority for even a mild form of the creed of monetarists. By 1990 the proportions had shifted to 29 and 35 per cent respectively, so now there was a majority for the mild form. Again there was a shift towards the propositions which underpinned the reformist strategy. But there was still a substantial rump of dissent.
– And there was an inconsistency with the standard monetarist model. When in 1990 asked whether `the quantity of money had no long-run influence on any real variable’, 49 per cent disagreed, that is, they thought the stock of money influenced the real economy, whereas only 35 per cent agreed with or without reservations. Coleman writes `the general tenor of our respondents cannot be characterised as either `monetarist’ or `anti-monetarist’.’ (1992:52) The profession was still deeply divided on macroeconomics.
– Asked who was `the modern economist who had made the greatest contribution’ 10.6 per cent of the respondents said John Maynard Keynes, 9.2 per cent said Paul Samuelson who is generally credited with the neoclassical synthesis, combining Keynesian macroeconomics with neoclassical microeconomics, and 7.4 per cent said Milton Friedman with just about everyone else nowhere. This response, consistent with the assessments of the certainly does not suggest that monetarism was a totally dominant paradigm here, nor was it in the United States, where graduates of five of the six top American economics departments – the exception being the University of Chicago – made similar assessments (Kalmer & Collander 1990:42, Coleman 1992:80).
– 50 per cent of male economists but only 19 per cent of female economists disagreed with the proposition `the free market underpays woman workers’.
– 51 per cent of all respondents disagreed with the proposition that `economists agree on the fundamentals’.
– More respondents disagreed than agreed (including with reservations) with the proposition `the economic power of trade unions should be curtailed’. (This was before the Employment Contracts Act.)
And yet, when the 1990 group were asked whether `the basic ideas behind `Rogernomics’ were sound’, 47 per cent agreed and 35 per cent agreed with reservations. I remember puzzling over this one when I filled in my questionnaire. What was meant by `Rogernomics’? If it meant the microeconomic ideas – essentially `more market’ ones – I agreed with reservations. If it meant the macroeconomic ideas, I disagreed. Or perhaps `the basic ideas behind Rogernomics’ were that we needed a change in economic policy from which had gone before. I could agree to that. No definition was offered, and it seems likely that different respondents though they were answering different questions.
What exactly is meant by `Rogernomics’ is a bit of a problem to the commentator too. The policies are close enough to the `Radical Monetarism’ of chapter 2 to be used interchangeably. More specifically it is an extreme form of `more market’ in microeconomic issues, and macroeconomic analysis which focused on monetary policy and microeconomic reform. The latter feature will become more evident in the next chapter, but a little more needs to be said about the microeconomics.
Being more market in the late 1970s encompassed a wide range of positions, so strongly was the thrust of economic policy anti-market. Moderates saw the use of the market as often more efficient in attaining social goals than more bureaucratic interventions. At the extreme there were those who saw the market mechanism as almost always offering a superior outcome, and indeed might even define a superior outcome as that which the market gives. Typically the more extreme, the more likely the economist is to agree or disagree to the sort of propositions that the surveys were exploring, without any reservations. There are numerous examples (Easton 1989b), while an uncritical commitment to privatisation was a good test of a rogernomic stance (Easton 1989a,e).
The surveys do not indicate this extreme commitment to the market mechanism, and/or monetary regulation without coordinated macroeconomic policies, was a widely held view. Certainly most economists were `more market’ in 1980, and more so in 1990, but most of these were not market extremists. There was much less unanimity on macroeconomics. There is little evidence that the majority of economists were supporting the full gamut of rogernomics policies in 1980. While there had been a shift towards them in the following decade, there was still no unanimity, and many had serious reservations. On some issues the majority view appeared to be the opposite.
In conclusion, while economists supported more market before the economic reforms of the 1980s, there was no overwhelming demand in the economics profession for the extreme microeconomic policies that were introduced. The support for the macroeconomic reforms was even more lukewarm. Nevertheless a rogernome could claim that the surveys showed that even if they were not in the centre of any `mainstream’ and while there may have been few supporters in 1980, the rogernomes had increased their following over the decade.
Which means the shift which occurred in the profession over the 1980s followed rather than led the revolution. The rogernomics thrust did not come from across the entire economics profession but from a small group within it. Much of the group’s story can be traced.
The Economic Reformers
In the 1970s, the proportion of monetarist advice was rising to central government in a cerebral, hard fought, but by no means unconstructive, debate with the various Keynesians. Radical Monetarism did not appear publicly until the writing of Treasury’s 1984 post election briefing. But the group of Radical Monetarists who were to take power was evolving within the Treasury and the Reserve Bank, probably from the late 1970s and certainly by the early 1980s. A couple of canards need to be put down.
First, as already explained, it did not represent a `mainstream’. In fact a small group within Treasury and the Reserve Bank developed a set of ideas and analysis, which was then imposed on the rest of the government economists, and ultimately the nation. The imposition occurred without open debate, and there was no moderating influence from the university economists, who to this day are more sceptical than those in government and business.
Second, neither were the policy prescriptions forced upon Treasury by some outside agency, such as the IMF (the most popular candidate of the conspiracy theorists). It is true that some of the prescriptions advocated in confidential papers by the IMF were also adopted by the Radical Monetarists, and undoubtedly their economists had an intellectual impact upon the group (as did the OECD economists). I know of no evidence that in the early 1980s they were strong-arming the New Zealand government, although of course they were encouraging the government to take some particular courses of action. It is true that the primary influences on the ideas of the reformers came from overseas, including the IMF, the OECD, and some American universities (Bollard 1989:9; Choat 1992). But their ideas were accepted voluntarily, if uncritically. At issue is not whether there was some insidious external subversion, but to what extent the importation should have been moderated by other New Zealanders (especially the university academics), and by empirical research (Easton 1989b).
The importiation of foreign ideas without a process of national intermediation could be explained by the anxiety of those involved not to have their ideology and ideas modified by others (or local content). They may have lacked confidence in their ability to create their own analysis; instead almost uncritically adopting what they thought they saw elsewhere. Without intermediation, the importing of ideas can be very clumsy. One of the justifications for a research effort within a country is to ensure that the whole range of possible theories floating around overseas are sifted and evaluated, and adapted for local use. This did not happen in the case of rogernomics – those involved had little ongoing research experience – with the result that overseas ideas were taken without understanding their complexity or subtlety. One of the defences of the overseas monetarists against the mess their policies made of the New Zealand economy will be that their principles were applied badly.
Third, there is only a little evidence (almost all anecdotal) that rogernomes were initially beholden to some New Zealand pressure group. There appears to have been some links between individual Treasury officers and businessmen before 1984 (James 1992:145), but they were probably not significant in the development of ideas. In fact the reformers were credulous about the efficacy of the private sector.
One outsider, however, was crucial to their success: Roger Douglas, the Minister of Finance from July 1984 to December 1988. Douglas is a strange mixture. His 1987 autobiography shows him a high energy activist, who given a direction is able to drive through so nobody could stop him. But while he has pretensions to be cerebral he is not an intellectual. His record is one of adopting numerous ideas, not all of which are coherent, and some of which are contradictory. As a minister in the third Labour government from 1972 to 1975 he is associated with the income-related, compulsory, funded, New Zealand superannuation scheme, which was repealed in the first year of National but which he did nothing to reinstate during his second term in the 1980s. He also presided over an inefficient broadcasting structure, and was on the key committee which recommended the ill-fated baby bonus (Bassett 1976). In 1980 he wrote There’s Got to be a Better Way, which is a collection of short paragraphs on single topics, intended to be an economic policy (Easton 1987). With hindsight it is possible to see the beginnings of Rogernomics in some of the slogans, but their general thrust was towards a level of intervention which would be an anathema to the rogernomes.
Perhaps as good an insight of the man as any comes from an affidavit arising out of insolvency proceedings of a pig farm which Douglas owned. It is sworn by Wayne Hoyle, the Sunshine Farms manager, described in Douglas’s own affidavit as `the best pig farmer in New Zealand’. According to Mr Hoyle `all the figures being given were what Roger reckoned could happen and would like to happen, but weren’t happening. The figures were based on assumptions rather than records.’ (Sunday Times 24 May 1992) Detail bored and confused Douglas. He saw himself as a grand strategist, not appreciating that detail is a check on coherence. But once set on a direction Douglas showed a drive and tenacity which no other minister in the fourth Labour Government could match, plus a willingness to cut procedural corners which left some of his colleagues aghast and others outwitted. In this way he became the barely challenged driving force in the cabinet for economic policy change.
It is not obvious when Douglas became a rogernome. he was not one in 1980, but by 1983 he had begun shifting that way, at least partly under the influence of some young economists, one of whom was a Treasury official seconded to the office of the Leader of the Opposition (Oliver 1989). He was probably fully captured by the approach by the July 1984 election, although there would have been a filling out of the detail subsequently. Certainly he wanted to float the currency on the day he took office.
The issue of the extent to which rogernomics was a case of parallel evolution or of miscegenation between Douglas and some officials need not detain us. What is important is that Douglas’s appointment as Minister of Finance decisively swung the balance within the Treasury and the Reserve Bank in favour of the Radical Monetarists. Debates may have continued within the institutions but the published record is that the given advice was dominated by crude simplistic economic analysis (Easton 1989c). And any debate diminished, as the adherents of alternative economic accounts were driven out of power. This occurred within the Treasury, as dissenters departed to other government agencies and the private sector, and as those outside found themselves ignored, their funding cut, access to contracts cut, appointment opportunities denied, and subject to petty harassment (Jesson 1989:71).
For the rogernomes were as intolerant of opposition as Muldoon who had preceded them. But Muldoon was one man, and open about it. This was more subtle and on a much wider front. There was resistance to rogernomics, even successful resistance, for Treasury rarely won against a well organised government agency defending its own areas of competence supported by an independent and articulate minister (Easton 1989a, Walsh 1989). But generally the tendency was to join ’em rather than fight ’em or, most of all, to run for cover.
This was nowhere more evident than in the universities. John Deeks, an academic himself, is perhaps extreme when he writes of `segments of academia, abandoning traditionally critical and sceptical positions as they discovered the dazzling excellence of Kiwi entrepreneurs’ (1992:16). The majority of university economists – with exceptions – got on with their teaching, dabbled with research, and grumbled in the tearoom about the theories underpinning rogernomics. Challenged, they pointed to their rising teaching loads and perhaps vaguely mentioned that the university administrations disliked controversy. Ironically this prudence meant that economists were in no position to assist their universities when rogernomics policies began to be imposed on them (Butterworth & Tarling 1994).
And the vibrancy of the profession suffered, as was strikingly illustrated when comparing the economic literature of the 1930s while preparing the material on the inter-war period. In the 1930s the main academic forum was The Economic Record, published jointly with the Australians. A comparison between its New Zealand coverage in 1930 and that of the 1990 volume of New Zealand Economic Papers, its successor, is instructive. In 1930 there were a number of articles primarily about the New Zealand economy focusing on big issues. In 1990 the articles are primarily technical ones – notably displaying econometric method, with little indication that the New Zealand economy – if mentioned at all – was suffering great difficulties. One cannot easily find any reference to GDP or unemployment in the 1990 volume – it is as if the nation’s economics problems were abolished by ignoring them. Alan Fisher’s quotation in Chapter 3 comes from an article the 1931 Economic Record, which is followed by a response by the editor, Douglas Copeland, who indicates he considers the article a little robust, and offers an alternative view. But he did not censor it. Sixty years later controversial articles – even those which mildly disagreed with the conventional wisdom – were less likely to be published. The cost of this pussyfooting was intellectual impotence, evident in the increasing irrelevance of academic economists in the public debate.
The political success of the rogernomes was not then, due to some intellectual excellence, some ability to succeed under the rigorous critical and sceptical review that Deeks sees as traditional to the intellectual process. The reality was that a small group were in the right institutions and received the right political support. Either because of the temperament of the dissenters, or the structures they were in, few resisted them.
The Rise of a New Establishment
Initially the ideas group was different from the group evolving out of the new political economy of the restructured New Zealand. Certainly there would have been connections, but there is no evidence that before 1984 there was a coherence between the various components which formed the new regime in the late 1980s. Brian Roper (1993) is right to observe that many pressure groups were calling for more market from the 1970s, but this was a consequence of the structural change, and they certainly did not call for it in the extreme form it was implemented. Shortly after the 1984 election the incoming Labour government held an Economic Summit. Paul Dalziel’s review (1989) of its deliberations suggests there was no significant pressure there for what today we would call rogernomics. Indeed rogernomes privately viewed the conference with contempt. Yet within a couple of years the ideologues and big business were firmly ensconced together.
In his 1986 book, The Quiet Revolution, Colin James argued the revolutionaries had the commonality of cohort experience, calling them the `Vietnam generation’. It is far from clear what he meant. His most sustained paragraph is “That optimism marked out the Vietnam protests as different from the previous outbursts of street violence – the industrial clashes of 1913 and 1951 and the rampages of the unemployed in the 1930s. Those clashes were negative and hard, centred on individual need and greed. The underlying characteristic of the 1960s was a big optimism concerned often with the self in the sense of individual salvation but allied to the broader quest for the salvation of humankind, a belief in human perfectibility.” (1986:31)
The oral and written evidence from the disturbances of 1913, the 1930s, and 1951 suggests James is unfair to those involved when he says the earlier groups were `centred on individual need and greed’. It is equally doubtful whether his romantic contrast with the 1960s demonstrations is justified, for all these public events had both a mix of the social idealism and the narrower needs of the self. Most fundamentally however, James fails to demonstrate that any of the rogernomes were involved in the peace and political movements of the time, except perhaps in its later stages when it was chic to be so. To the contrary, a key feature of the New Zealand anti-Vietnam campaign was a stout call for independence from outside powers, which was not a characteristic of those involved with the rogernomics revolution.
More acutely James describes `critics’ complaining “that it was the `Spock generation’ (after a 1950s American authority on child upbringing) lacking discipline and order, demanding immediate gratification, `gimme’ on a world scale: the right world. everywhere. now to make me feel right. And it contained elements British journalist Auberon Waugh has recently called `babyish libertarian romanticism’.” (1986:31)
Whether Dr Spock actually encouraged these virtues belongs to another place. But the paragraph better identifies some key features of the rogernomes. The time horizon of public policy shortened under rogernomics towards the immediate future. In practical terms that is the effect of a hike in the real interest rates, while long term social planning was replaced by reliance on short term market initiatives. Public policy became more individually centred and less altruistic and less community oriented.
More recently James joins the `critics’ describing the rogernomes as the `gimme’ generation, without any reference to his earlier claim of their commitment to salvation and human perfectibility (1992:40). The confusion arises because James wants to lump everyone together, whereas the generation – like all others – was diverse consisting of some deeply committed to their own self interest, some as deeply committed to wider human values, and most in an uneasy mix of the two. It was the selfish – the gimmes – who formed the New Establishment.
The pursuit of self interest became the central ethical principle in public policy of the rogernomes, even to the extent of the 1987 Treasury post election briefing enshrining it at the centre of its social policy. It is an enormously attractive principle for what it says is `do what feels good for you and that’s good for society’. At a stroke most of the great ethical dilemmas were resolved: the hours that the real Vietnam generation spent talking into the night worrying over what was socially responsible had been wasted. The obvious answer, if only they had not been hung up on social concerns, was `gimme’.
But James’ revised account misses the point for he ignores the underlying changes to the economic structure driving political change. The ideology of selfishness was a part of the response consolidating the gimme generation, but it did not initiate the transformation.
Of course the selfishness sentiment had to be dressed up less crudely than James presented it, a task for which a number of agencies – international ones such as the Mont Pelerin Society, domestic ones such as the Centre for Independent Studies, the Business Roundtable, the Treasury via its 1987 post election briefing – obliged. Such agencies, and those who supported them are often called the `New Right’, a term used in Britain, and to a lesser extent in the US, to distinguish its adherents from the old Right. It is a felicitous term in the New Zealand context, because it captures well the shift of power which occurred, as well as the shift of ideology.
The Fontana Dictionary of Modern Thought says “Components of New Right thought have shaped Reaganism and Thatcherism. Those include economic theories associated particularly with Friedman and von Hayek, often described as `neo-liberal’ which exalt capitalism not only for its productive capacity, but its claim to be uniquely conducive to the maintenance of political and social liberty. The New Right thus opposes a strongly interventionist or ownership role for the State in the economy.” (Reilly 1989)
This is not a bad description of the New Zealand New Right. They preferred individual to collective solutions, and exhibited a special dislike of inflation, unions, and the welfare state, with a much less concern for unemployment, big business, and inequality.
Figure 1 in Chapter 2, categorised various economic theories into four quadrants characterised by a Keynesian/monetarist horizontal axis and a moderniser-conservative vertical axis. If we replace the horizontal axis with left/right (which roughly correspond to the political positions of Keynesians and monetarists) and we treat the concepts of the vertical axis a little more loosely than the formal economic ideas we obtain Figure 1. It divides the area of political discourse into four separate groupings by the two dimensions left/right, and modernizer/traditionalist. The positions of the political elite are illustrated by various individuals and pressure groups.
Figure 1: Elites’ Ideological Positions
|Moderniser||Engineering Union||Ruth Richardson/Simon Upton
Business Round Table
Centre for Independent Studies*
Roger Douglas/Derek Quigley
Most Labour Party
Newlabour (J. Anderton)
New Zealand first (W. Peters)
Institute of Policy Studies*
The ideology of the populace is harder to characterise. A study of voting behaviour of the 1990 election enables the allocation of voters into the four quadrants, with an additional third dimension of social liberal/social conservative (Vowles & Aimer 1993). This is shown in Figure 2 with voter share as a percentage.
Figure 2: Populace’s Ideological Positions
|Modernisers||Centre Left (21,%)||Hard Right (6%)
Labour Core (6%)
|Traditionalists||New Left (11%)
Old Left (8%)
Social Conservatives/Social Liberals
The most important grouping has been the right traditionalists (in the south-east quadrant) who were almost half of the 1990 electorate, and from whence came the base of the Old Establishment. However they did not have a total control and formed a coalition with the left traditionalists (in the south-west quadrant) whose main power bases were the unions and various left wing groups, who provided more of the intellectual input, for the right traditionalists in New Zealand are there by feeling rather than by thinking. In any case by the late 1970s the pressures for modernisation tended to force the two groupings together, as the hegemony of the Old Establishment was threatened.
The left modernizers (north-west quadrant) have not been important in political leadership terms, at least on economic policy, although they form the second largest of the seven groups which Vowles/Aimer identify. They probably have been very influential on environmental, human rights, international relations, race, and women’s issues. On economic issues, there has been really only one significant institution, the Engineering Union, reflecting the modernization pressures which the manufacturing sector has experienced.
Instructively, the Engineering Union is one of the few unions that has had to compete against another in its sector: the smaller Manufacturing and Construction Workers Union one of the most left traditionalist unions in New Zealand. The internecine warfare that bedevils the left was probably the main inhibitor on the development of a strong leadership in the modernizing left position, but a nostalgic preference for an economy which was no longer existed reinforced the inertia. On the other hand, the Vowles/Aimer data suggests there is a latent group with left wing preferences who nevertheless support an economic approach different from the traditional one. Interestingly there does not seem to be a social conservative grouping among the modernizing left, although this may be an artefact of the statistical procedures used to identify the groupings.
The story on the right is different. An establishment always has a problem of renewal, but the issue is much more acute when the political economy is rapidly changing. The difficulties were perhaps compounded by Prime Minister Muldoon’s very centralist political and economic style, which ruthlessly eliminated any potential successors, and so gave no line of natural succession. Interestingly, Derek Quigley, who left Muldoon’s cabinet in 1982 over modernization/traditional policy disputes, has recently teamed up with Roger Douglas (who at the time was a member of the opposition) in ACT, the Association of Consumers and Taxpayers, a new right lobby group.
While this explains why the sharp shift in power from the traditional right to the modernizing right (north-east quadrant) has the characteristics of a coup, it does not explain why the New Establishment should have been such extreme economic rationalists. Part of the answer lies in the ineptitude of the left, plus its failure to develop a progressive tradition in economic policy. But the circumstances of the coup, and the institutional context in which it took place were probably more important.
The New Establishment did not come together overnight. Initially it was quite fragmented, united only in opposition to Muldoon, and indirectly to the Old Establishment. A key was Muldoon’s unwillingness to pass power to the younger generation; of not allowing his successors to take effective responsibility. The next political generation – those born a decade later – found themselves compromised by what happened if they stayed within the Old Establishment’s ambit, yet they had little influence.
Those younger still found themselves totally excluded. Most evidently, as the Treasury found itself increasingly less consulted in the early 1980s. Economics II – its thinktank – in particular began thinking about alternatives – alternatives which would inevitably be subversive to the Old Establishment. The arrival of a new Labour Government in 1984 allowed it to present that alternative of Radical Monetarism publicly in the 1984 Treasury post election briefing, and privately in its counsels. Douglas was quickly captured.
At the time the majority of the Labour caucus were emotionally Traditional Keynesians, and they had done very little thinking about economic alternatives to Muldoonism, being more concerned with civil liberties, the environment, international politics, Maori problems, and women’s issues. Faced with the determination of Douglas and a few like-minded within the caucus, with little to offer of their own, they were steadily overwhelmed. Some may have been attracted by the feeling that the new policies appeared to be almost the exact opposites of Muldoon’s, as if there was no other option. TINA – there is no alternative – was a very seductive lady.
While Labour had been connecting with big business while in opposition, for Muldoon had been alienating business interests too, the connection was not secure after the election. It seems likely that the crucial step was the corporatisation of the state owned enterprises, when the Labour government had to identify people to man (sic) the corporate boards and advisers and consultants to take part in the transition. By 1986 the ideologues of the New Right, who had started off in the Treasury and the Reserve Bank, had begun to disperse into the private sector, beginning to work with the business community. The corporatisation program of 1986 and 1987 was probably the critical point, as the Treasury looked for businessmen for the State Owned Enterprises, consummating the marriage of their New Right ideology with business political power.
The businesses which filled the vacuum were not the same as those which had supported Muldoon. At a simple level one generation replaced another. The ideology of the New Right was adopted by the new right which took over the political establishment. James was indirectly drawing attention to how Muldoon’s generation was replaced by that born in the 1940s, skipping over the generation born in the 1930s.
But there was a more fundamental change here than the crude vying for power between generations. As earlier chapters showed, the New Zealand economy had undergone a substantial structural change between the early 1960s and the early 1980s. The Muldoon generation reflected the old structure – pastoral farming, importing based on licensing, protected manufacturing and staid banking. Much of Muldoon’s activities were aimed at protecting that old political economy perhaps partly for nostalgic reasons, but also because he was its master and its servant. As the old structure was undermined, despite the subsidies and patronage being used to support it, Muldoon grew increasingly out of touch with the more market proponents and the evolving new political economy. The business component of the post-1984 political establishment reflected that new economic structure, especially the rising (entrepreneurial) financial sector.
The new generation – typically born in the 1940s – was more urban than its predecessors, and had not gone through the war experience which was distinctive to the Muldoon generation. Perhaps they were more urbane, more cosmopolitan, better trained too, but if so it was the result of a changing world environment and affluence, rather than any personal merit compared to the earlier generation. Characteristically, in a society that claimed to be egalitarian, these men came from the better schools and their fathers were middle class or better – farmers, professionals, self employed. In a sense the rogernomics revolution was the coup of one generation against its fathers. The network was not abolished, simply replaced by a younger one.
That business community belonged to the new political economy, arising from the structural changes of the 1970s. It was less dependent on farming, and more embedded in the financial sector, and in the new industries which had come to prominence in the previous decade. They were younger than the old business leaders, and very much more market in attitude, very often despising government intervention (although not unwilling to help themselves when the opportunity arose).
Alan Hawkins nicely captures the inter-generational tensions when he describes the general manager of the Westpac Bank whose employment he left to set up his own corporation, the ill fated entrepreneurial finance company, Equiticorp. “He was a Creeping Jesus sort of guy, a doomcaster with a bald head presiding over an appropriately bleak face, … It seemed to me that apart from some dismal God, the only thing he believed in was the inevitability of a New Zealand-wide Australian-wide or worldwide economic recession. He could work up quite a frenzy about that.” (1989:21)
Allowing for the antipathy between the two men, we have here couple of archetypes: Hawkins, a member of the Business Roundtable, for the new financial generation, all brag and confidence but with a certain attractiveness of personality; the Westpac general manager from an older generation of financiers: cautious, prudent. The ironic record is that the institution run by the younger man collapsed, whereas the New Zealand division of the Westpac Banking Corporation was one of the few financial institutions to survive the crash with less apparent pain than its competitors.
It was also ironic that while the businessmen despised government intervention, they were very dependent on the government for their success. Political patronage to a range of sinecures gave prestige, reinforced the new network, and provided additional sources of income. Consultants in the private sector benefitted from public sector contracts – especially from the Treasury – lavished on them. Opportunities for private profit were opened up by privatisation. And government policy favoured their interests, most notably in the lowering of the top marginal income tax rate.
It is true that the Old Establishment would have favoured most of these things too. But it found itself increasingly cut out of appointments, status, and opportunities. Privately the New Right was scathing about them, even those who thought they had been quietly opposing Muldoon. To this day some still have not realised how comprehensive the revolution was, still puzzling why they seem to be left out of the action.
Basically it was a coup within the establishment. Rogerer Kerr, chief executive officer of the Business Roundtable from 1986, captures the inter-generational change with “The average age of chief executives of major companies has dropped ten years … A generation of human capital has been obliterated.” (Spicer et al 1992:74)
Patricide is one of the most heinous of crimes, to be justified only by some greater purpose. In New Zealand the coup could not be justified – as happens in the third world – by an external threat, corruption, or communal tensions, so the new coup leaders used an ideological justification for their seizure of power. Conveniently, the Treasury and the New Right offered such a dogma, which involved – as is usual in coups – the exaggeration of the sins of the predecessors. Especially distorted was the claim of New Zealand’s poor economic performance, and the policy prescriptions to deal with it.
Of course, the business community in New Zealand is not especially philosophically competent. Intellectual activity in any of its manifestations was rarely pursued in their university training, and few showed much facility thereafter. Without genuine intellectual roots, the businessman was vulnerable to any political fashion, providing it allowed him to get on with business. Richard Hofstadter, writing of a society much less antagonistic to intellectual life than New Zealand, comments `I put business in the vanguard of anti-intellectualism in our [American] culture’ (1963:239), something with which Robert Lane concurs (1991).
The simplistic New Right philosophy, advocating the central role of self interest and restraining government involvement in the regulation of society was perfect for this purpose. The rising business community adopted it with alacrity, but without understanding.
The flagship of this business push/putsch was the Business Roundtable, a self selected lobby group of (about 40 of) the chief executives of New Zealand’s biggest businesses. It had begun quietly in the late 1970s but came to public prominence after 1986 following the appointment of a key rogernome from the Treasury thinktank as its chief executive officer. It began to take an active role in promoting policies in – as it said – the `public interest’.
This was only possible by the Business Roundtable ignoring those matters on which the New Right position would infringe their immediate interests. Thus they did not comment on tariff policy, research and development policy, accountancy reform, commercial law reform, or the issue of the substantial donations made by business (Roundtable businesses prominent among them) to political parties. When the government began running a large deficit policy in 1992, the Roundtable was silent on the issue, despite having advocated tight deficits before then. Instead it advocated privatisation, changes in educational, health arrangements and industrial relations in the direction which would favour private enterprise, and opposed electoral reform which threatened its dominance.
In general the claim that the Roundtable advocated policies in the public interest even where it conflicted with big businesses interests cannot be sustained. Like every pressure group they were careful not to offer any of their interests for sacrifice to a common good. Their ideologists avoided the tensions between the business and ideological wings of the New Right by scrupulously ignoring any contradictions.
By the late 1980s rogernomics was no longer the idea of a few officials and politicians. Dissenters within the public service were being driven out. The politicians had a headlock on the political process as far as central economic policy was concerned. Some of the rogernomes had moved out into business. The network was strengthened by the Treasury using consultants, typically ex-Treasury officials, to do some of its key thinking and publicity, while the Business Roundtable used the same consultants, sometimes for the same policy analysis. And big business was committed, both publicly and by secretly providing funds, for the Labour government to get reelected in 1987 and National to get elected in 1990.
Establishing the New Establishment
The post-1984 New Establishment would have inherited their position in the course of time anyway. The coup speeded that process up, perhaps by as much as a decade. But it was a Faustian deal, for the early power involved the adopting of an extremist ideology which may have suited the revolution, but in the long run is unsustainable.
Nowhere is that more obvious than in their macroeconomics, the failure of which is the central theme of the next chapter. But in a more fundamental way, by adopting an extremist position, the New Establishment left itself hostage to the next set of younger colonels, a threat vastly enhanced by the ineptitude of the economic performance they presided over. Perhaps their best defence is that of the satrap, the retainer for a foreign power, for such power the New Establishment has is increasingly beholden to the overseas investors, who filled the hole in the shortage of local savings, but at a price of subordination of the New Zealand economy. This combination of a mistrusted Establishment, overseas involvement, and public restlessness, makes the politics of the rest of the 1990s as uncertain as at any time in New Zealand’s past (expressed through the electoral reform), with the possible exception of the land wars. The deal which gave Faust his power, ultimately cost him his soul or – as we might say in a more secular world – his authority and dignity.
Behind this is the complicated issue of a revolution. Ralf Dahrendorf identifies “two quite different versions of dramatic change. One is deep change, the transformation of core structures of a society which in the nature of the case takes time; the other is quick change, notably the circulation of those at the top within days or months by highly visible, often violent action. The first might be called social revolution, the second political revolution. The Industrial Revolution was in this sense social, the French Revolution was political.” (1988:5)
New Zealand experienced both. The social revolution was the dramatic change in the economic structure from the mid 1960s, precipitated by the fall in the structural terms of trade then, and the seizing of new opportunities. Dahrendorf is cautioning us to expect further long term and – from today’s vantage point – unpredictable effects which are likely to echo through to the next century. On the back of the social revolution there was a political revolution in the mid 1980s, as a new elite seized power, although not violently.
This political revolution was exactly the sort of extremism that Karl Popper cautions against in his The Open Society and its Enemies written, ironically enough, in New Zealand. For the ideology abandons the incremental pragmatism which Popper advocated, for the vision of millenarians which he abhorred. The irony was compounded when in 1988 the Mont Pelerin Society held its (second Southern Hemisphere) conference in Christchurch to celebrate Popper’s contributions to intellectual thought. Rogernomes trooped along, like eighteen year olds to a debutante ball, celebrating virtues which their previous actions had corrupted.
On the imprint page of Popper’s book is a quotation from Samuel Butler’s Erewhon “It will be seen … that the Erewhonians are a meek and long-suffering people, easily led by the nose, and quick to offer up common sense … when a philosopher arises among them … “ André Siegfried’s observation which headed this chapter was not the first time this frailty of New Zealanders was noticed, nor will it be the last.
And yet, to see the New Establishment as failure would be to ignore both its members’ success at obtaining power, and that ultimately they reflected the new political economy, which had arisen out of the transformation of the economic structure after the mid 1960s. The Old Establishment has little to complain of, for it failed to respond to that transformation quickly enough. If the macroeconomic performance under the New Establishment had even been average by post-war New Zealand standards their leadership would be celebrated. In fact on almost every significant measure – except inflation – their performance was well below average.
 A. Siegfried Democracy in New Zealand. I am grateful for David Choat drawing my attention to this quotation. He in turn got it from Jack Vowles.
 The expression comes from a portmanteau of `economics’ and `Roger’ (Douglas), the Minister of Finance from July 1984 to November 1988 by analogy with Reaganomics. Rogernomic supporters are sometimes called `rogernomes’, partly – one assumes – to draw some tenuous connection with the `Gnomes of Zurich’.
 Coleman (1992:56) in a survey reported below observes that younger New Zealand economists were more monetarist than older ones.
 Reagan in fact ran a large deficit – a sort of crude Keynesian. The British story has to be untangled from the benefits from the North Sea oil wells.
 For a review of many of the microeconomic theories see Easton (1989b).
 The strong form is Milton Friedman’s classic statement `Inflation is always and everywhere a monetary phenomenon’.
 Even here there is a problem, since some respondents may not have classified Keynes as `modern’ (no definition was given) because he was dead, and had been so for over 40 years. All other economists reported mentioned were alive at the time of the questionnaire.
 As a rule economists who were university teachers were more sceptical than average about a strong more market position and rogernomics generally (Coleman 1992:72-3).
 I met an IMF biennial delegation in early 1984, just before the exchange rate float, and gained the impression they were somewhat uneasy following their discussions with officials. They were very discreet, but my best guess at the time was that they thought the New Zealand approach was too extreme. (I asked them which country would it be most helpful to look at as a guide to New Zealand’s experience. They replied “Chile”.)
 I was once a spectator in a heated exchange over whether Treasury was directed by an outside agency such as the IMF. My tuppence worth was
You cannot hope to bribe or twist,
The Treasury economist.
But seeing what the man will do
Unbribed, there’s no occasion to.
 In a CBC Ideas programme, ‘The Remaking of New Zealand’ (first broadcast in October 1994), Phillida Bunkle said
“I actually did graduate work in the United States and I met a large number of them [incipient Rogernomes] in the United States. They’re baby boomers, and they returned to this country with a vision that was very much gained from graduate school in the United States. They came home with a cosmopolitan[‘s] view of New Zealand. They were going to transform this society. Now they thought they had 1960’s student values, but they actually were very impressed by North America and its consumerism and its choice and civil rights and all that. They came back with that liberalized kind of vision.
“But it was also I think that they had a kind of sense of embarrassment about what a hick little place they had come from. They were in Chicago, they were in New York, they were in Harvard, and they were very aware that they came from `Hicksville’. And part of it was their awareness that they were products of the welfare state because what the welfare state does in New Zealand is bring in social uniformity. It is deeply egalitarian. People end up having the same social services. They were not very sophisticated. and what they were going to do – they were going to bring us into the global village. They were going to bring MacDonalds and all these wonderful slick things and transform `Hicksville’ into a sort of social paradise