Reference: Rankin, Keith  "Pensions, Money and Mercantilism", New Zealand Political Review Sept.1992.

Pensions, Money and Mercantilism

Keith Rankin, 21 August 1992


The taskforce on Superannuation released its report on 18 August. The issue is once again being discussed with due earnestness by journalists and politicians who regard money in much the same way as squirrels regard acorns. The simple act of putting money aside is commonly seen as securing our individual futures, and there is no doubt, we are told, that we must put money aside because the government doesn't enough to put aside for us.

The more obvious truth is that any pension/superannuation scheme is a social contract between people of different generations; for simplicity's sake, between old and young adults. Today's old have a collective maintenance contract with today's young. Whether today's old base their individual claims for a share of today's production on a private source of money income or on national superannuation, it remains the young (by definition) who are providing the goods and services.

Why do the young enter upon such a contract? They do not expect to make a profit by investing in the old. Sure, the old provided goods and services for the young when the old were young adults and today's young were children. The social contract with the elderly could be seen as a golden handshake; the means by which a grateful generation of altruistic workers publicly thank their elders for their past contributions. More likely, today's young adults are willing to support their elders because they want to set a precedent which their children will eventually follow.

A good superannuation system needs to reflect the fact that, no matter how many private contracts are made between individuals and insurance companies, there is still an implicit collective contract between generations. That contract involves an investment component to ensure the appropriate amount of goods and services is supplied in the future, and an equity component to ensure that every old person receives a fair share of future production.

The assumed link between increased savings and future growth is a fallacy. A rise in the savings rate does not in itself guarantee a rise in the investment required to ensure there will be enough goods and services for everyone in the future. If there are not enough people willing or able to utilise the savings of others, the result is reduced demand and an even deeper recession. And, at times of unemployment, investment activity can increase without any increase in the savings rate. All that is required is the will from either the banking system or the government to make the necessary credits available to prospective borrowers at an affordable rate of interest.

Why to we tend to discuss the issue in simplistic terms, in which we regard money put aside as wealth in itself (like acorns, which are durable wealth) rather than as claims on a share of future wealth? The answer lies in the 17th century philosophy of mercantilism which continues to dominate economic thought amongst journalists, politicians, and many public servants.

Adam Smith first used the term to identify the commercial system to which he was opposed. The mercantile system was a system of international commerce by which monarchs conferred monopoly privileges upon the big business sector of their day, in return for political favours. An example of mercantilist legislation was the British Navigation Acts, which decreed that British trade should be conducted on British ships, conferring favours on British shipowners and ensuring Britain a balance of payments surplus on "invisibles".

The system was justified because of the belief amongst bureaucrats and businessmen that wealth could be equated to the possession of gold and silver bullion, and that an economically powerful nation was one that was able to accumulate such stocks of precious metals via a balance of payments surplus. In essence, mercantilism is the belief that stocks of money, in themselves, constitute wealth.

Unfortunately, in the 19th century, the debates about mercantilism came to be intertwined with the debates on protection and free trade. Nineteenth century protectionists were much more concerned about the problem of unemployment and the need to keep money circulating than in the size of their nation's monetary reserves. The two issues were linked because an excess of imports over exports was seen as being both a cause of unemployment and a drain on gold reserves. As a result of this confusion, today, when people are labelled mercantilists, it is usually because they advocate protective tariffs or controls to restrict imports, thereby both increasing domestic employment opportunities and reducing a balance of payments deficit. Such protectionism is not mercantilism; it is simply one policy approach to ensure that imports are paid for. It is not an advocacy of a balance of payments surplus. Such an advocacy, as we have seen from post-war Japan, is mercantilism, and results in citizens producing more than they are able to consume and allows citizens of countries such as the USA and New Zealand to consume more than they produce for many years in succession.

What has this got to do with pensions? Quite a bit. Mercantilism is about the primacy of money as a definition of wealth. If we simply substitute to word "gold" for the word "money" whenever the pension issue is debated, the underlying mercantilist arguments would be clearly revealed. Modern-day mercantilists give themselves away when they say such things as "where is the money going to come from?" or "we have no money to pay superannuitants, nurses etc.". The National party is full of them. Party policy is that individuals should be encouraged to acquire money for themselves and to hang onto that money rather than spend it. National's external goal is for the country to accumulate foreign money, whether through exports or foreign purchases of our assets.

Money is in fact a medium of exchange - a flow to facilitate exchange rather than a stock of wealth. It plays a similar role in an economy to that of lubricating oil in a car. As most drivers know, it is more damaging for the car to have too little oil than too much oil. Money is an "elastic" man-made commodity which never needs to be in short supply. A sensible society with a shortage of its medium of exchange either allows or forces its banking system to create more. Mercantilists, who take the contrary view, are financial puritans; self-appointed moral guardians of our financial probity.

A lack of money need never be a problem for a society, although a lack of access to money is a problem for individuals because their money represents their claim on society's current production of goods and services. Money represents individuals' claims to a share of society's wealth. Saving money is substituting a claim on present wealth for a claim on future wealth, thereby raising the value of other people's claims today, and reducing the relative value of other claims on future production.

When workers save for their retirement, whether they relinquish present claims by paying taxes or by contributing to a private pension fund, they expect that claim to be indirectly transferred (via the banking system, or by government acting as a public clearing house) to someone else today, such as a retired person or an entrepreneur. Both the public and private sectors can and do distribute such claims to retired people and to entrepreneurs. Considerations of both distributive justice and administrative efficiency suggest that both the public and the private sector have a role to play in ensuring that enough money/credit/claims are being created, and that they circulate equitably and efficiently.

During recessions, there is an unfortunate tendency for both the private banking system and the public clearing system to inhibit the flow of claims from savers to beneficiaries and entrepreneurs at the same time. For banks, the process is called "prudence". For mercantilist governments the process is called "balancing the budget" or "living within its [monetary] means". When both institutions are inhibiting the flow of claims on current production, any increase in personal savings only makes present problems worse, and recession deepens into depression. A non-mercantilist government, on the other hand, realises that it has to compensate in a countercyclical way for failings within the private sector. Such public action, like an economic thermostat, acts to minimise the failings of the private sector as well as to compensate for them.

By exposing the flawed mercantilist thinking of the present government - thinking that comes to the fore in its misunderstanding of the superannuation issue - we can help our society to live to its economic potential. We can also bring the present economy into a sustained recovery, rather than the present cyclical recovery based on a 21/2 year inventory cycle. The only way to increase the average value of future pensions is through such a sustained recovery; through increasing the productivity of today's workforce (not just today' employed).

The New Zealand economy experienced a small recovery from depression in 1933-34. The recovery stalled in 1935, leading to a historic change of government. Having the courage to take a non-mercantilist approach to macroeconomic policymaking, the First Labour Government brought about sustained economic growth, universal pensions, full employment. This was all done at a time when demographic indicators about the ability of New Zealanders to support their future elderly were much more pessimistic than they are at present. The 1870s' and 1880s' baby-boomers were about to retire, and the birth-rate had fallen markedly since the early 1920s.

Whether New Zealand has the money to support today's dependent population is a matter of political will. New Zealand certainly has the resources to give all its population a significantly more comfortable life than we had 20 years ago. A modest amount of investment expenditure can assure us of a growth rate sufficient to ensure a comfortable standard of living for all into the indefinite future. Unfortunately, selfish mercantilist thinking is encouraging today's privileged to renege on the implicit social contract by which those who can work support those who cannot at equitable standards of living.


© 1992 New Zealand Political Review

NZPR | Rankin File