Reference: Rankin, Keith (1997) "A Battle of Ideas", New Zealand Political Review 6(1):40-43.


A Battle of Ideas; Alliance vs. Act on Public Policy
Economics vs. Business Perceptions

by Keith Rankin

 

Introduction

The new MMP Parliament has inherited a number of Acts of Parliament which have constitutional significance with respect to economic policy. Of particular significance are the Reserve Bank Act (RBA) and the Employment Contracts Act (ECA).

The new Parliament now has people on the Left and the Right who are well placed to debate the issues covered by such legislation. I sincerely hope, therefore, that the Alliance, for example, will use existing legislation as opportunities for creative amendment and constructive discourse. The last thing we want in the new Parliament is a backward-looking left wing, wanting only to reverse the changes of 21 years of right-wing government.

The Alliance's performance in Parliament will be judged on its vision, not on its righteousness. Their views will be easily accessible, on the public record, as will the views of their arch-nemesis, ACT. They can lead constructive public debate, seeking to insert multi-coloured bricks into the blue edifices of the Right. The Right will we obliged to respond to initiatives from the Left; they will have to justify the scientific validity of legislation dear to their hearts. The Right should no longer be allowed to adopt the tactic of simply ignoring the best arguments of the Left.

The Alliance's policies are fully consistent with economic orthodoxy. ACT's policies are consistent with prevailing business orthodoxy. There has always been a tension between economics and business; a tension not generally appreciated by either the media or the many technocratic economists who have little sense of history.

 

Business Truths versus Economic Truths

"The science of economic administration is not confused here with the trivial and specious science of financial operations whose subject-matter is only the money stock of the nation. The monetary movements resulting from traffic in money ... as in the case of gambling, bring about nothing but a sterile circulation which only in exceptional circumstances can be of any benefit ... monetary fortunes are a clandestine form of wealth which knows neither king nor country."

François Quesnay (1758), first of the Économistes.

Economics and economists (qua economists) do not identify with financial and business interests, despite the perception of many that economics and business are one and the same, and despite a perception by some business interests and some business schools that economics should be aligned with business. As an example of the distinction, economics gives a high regard to markets as an institution, and believes that firms do and should seek to maximise profits. But economists - except those subject to private sector employers - do not see any particular virtue in businesses actually getting the high profits that they seek.

Indeed, economists are attracted to competition because it can be an effective impersonal mechanism for denying businesses profits at the expense of the communities they operate in. Powerful businesses, on the other hand, are attracted to markets because, much of the time, markets fail. Unregulated markets fail much more than well-regulated markets.

The tension between economics and business is clear in the writings of early economists such as François Quesnay, the founder of the first school of economists - the 'old right' - the school which gave us the term laissez-faire. In 1776, Scottish moral philosopher and political economist, Adam Smith, said that while "the violence and injustice of the rulers of mankind is an ancient evil" it is not as bad as "the mean rapacity, the monopolising spirit of merchants and manufacturers, who neither are nor ought to be, the rulers of mankind".

Smith's anti-business message is echoed throughout American culture; for example in the place in history of the 'Robber Barons' who misappropriated customers' and shareholders' funds, and in caricatures of popular fiction such as Homer Simpson's employer. Indeed, it would be appropriate to claim that America was founded on Smith's dream; a dream both libertarian and egalitarian.

Similar tension in New Zealand is highlighted by the renewed activism of the Commerce Commission. Now headed by an economist - to the chagrin of Lindsey Perigo ("Bread Bollard and Big Brother"; Internet 29 October) - it successfully prosecuted two dominant baking corporates for conspiring to fix prices (17 October), and has threatened multi-million dollar fines in future cases. The tension is also exemplified by a struggle for the survival of academic economics in Tasmania, in the face of apparent pressure from business and management interests within the University of Tasmania.

From the window of my office in the University of Auckland, the Casino Skytower can be seen to rise above and behind the familiar 'Ivory Tower' of the Old Arts Building (see photo). For me, this brooding apparition symbolises the conflicting values behind economic policymaking: the monetary values of corporate business interests and the "policy entrepreneurs" of the business-funded think tanks (see Paul Krugman's 1994 book Peddling Prosperity) versus the reflective philosophical values of social science.

While even scientific 'truths' cannot be known for sure (they are always tentative, subject to being disproved), the centrepieces of contemporary economic legislation represent the lesser truths of business culture. The Reserve Bank and Employment Contracts Acts in their present forms represent nothing like a consensus of economists' views about monetary policy or the workings of the labour market.

 

The Reserve Bank Act 1989

"The IMF no longer believes that monetary policy must be directed solely at maintaining low inflation. At the same time as limiting inflation, monetary policy must also try to stabilise output and minimise cyclical unemployment."

Anatole Kaletsky, The Times; printed as "IMF heresy illuminates economic blind faith" in The Australian, 30 September 1996.

Alliance policy is closer to present IMF (International Monetary Fund) orthodoxy than is the Reserve Bank Act. Indeed, the 'Friedmanite' position that inflation is always and everywhere a monetary phenomenon never was accepted in any consensual way by the economics profession.

Milton Friedman himself recognised that monetary policy had effects that went well beyond the maintenance of price stability. Friedman believed that the Great Depression was caused by the US Federal Reserve (the Fed) maintaining an inappropriately tight monetary stance in 1929 and 1930. By responding differently to a similar situation in 1987/88, the Fed has shown Friedman's warning of the dangers of tight monetary policy to be justified.

Today's monetary orthodoxy - as acknowledged by the IMF - is that monetary policy based on high interest rates has many effects and operates through a number of channels. The anti-inflationary effect is indirect, while problems such as balance of payments deficits or unemployment are more direct consequences. New Zealand has a chronic balance of payments deficit.

High interest rates actually cause a country like New Zealand to be flooded with money. This is the very opposite of the assumed effect of monetarist theory which was devised for an autarkic economy. The theory was devised for the United States, which has, historically, been highly protected and has had a comparatively large domestic sector.

High interest rates are meant to work by deterring banks from lending. But high interest rates only deter genuine business lending. They do not deter lending for capital gain, and they do not deter home buyers who know that their floating rate mortgages will fall.

This year, New Zealand's economy has been beat up in much the same way as it was in 1987. Any unravelling of the associated consequences will not be a result of MMP; it will be a result of the Reserve Bank Act in its present form. A report in The Australian (September 7-8, 1996) states: "Japanese interest rates [are] close to zero. ... New Zealand, with an overnight cash rate of 10 percent, has overtaken Australia, with a cash rate of 7 percent, as the fastest growing destination for deposits of a year or less. Citibank in Tokyo reports that since May last year NZ dollar deposits have grown almost six-fold to make up 17.4 percent of all its foreign deposits."

The RBA ensures that ordinary New Zealanders are paying a premium to both foreign and domestic investors. Workers and beneficiaries get less, and holders of financial assets get more. The sub-text has nothing to do with price stability or stable monetary conditions.

The latest balance of payments statistics reveal that, in the year to June 1996, New Zealanders paid foreigners over six billion dollars net in interest and profits. In August, the Australian Financial Review ("Deficit in Fiscal Joy for Kiwis", 20/8/96) warned that Mexico was in a similar situation before its financial crash in 1994. New Zealand probably won't go through a Mexican-style crisis, however. New Zealand is small, and perceived to be stable. The international financial community can and will sustain our 'investors' and exploit our workers for as long as we confine ourselves to policies that Standard and Poors approve of.

Nearly 50 years ago, an American economist (Randall Hinshaw, Quarterly Journal of Economics) spelled out the circumstances in which today's Reserve Bank policies might be appropriate as a means of containing inflation. A persistent deficit in the balance of payments was not one of those conditions:

"Currency appreciation is an effective, although not necessarily the most effective, anti-inflationary measure in situations where the inflation is the result of a persistent surplus in the balance of payments. In the absense of an external surplus, currency appreciation is not likely to be of much value in dealing with inflationary tendencies unless the appreciating country either can afford the increased volume of imports which would normally occur, or can count on a substantial improvement in its terms of trade."

Monetary policy has many effects, and inflation has many causes. The Reserve Bank Act should be amended to reflect goals other than inflation. The Alliance has the authority of the IMF, no less, to seek such an amendment. I would like to hear what the finance spokespeople of the centre and right-wing parties have to say in refutation of the orthodox views of Randall Hinshaw and the IMF. I hope that the Alliance will provoke responses from those parties.

 

The Employment Contracts Act 1991

"Whenever expectations point towards a worsening of existing conditions, market outcomes will not be equilibrating but disequilibrating."

Robert Heilbroner, Twenty-First Century Capitalism, 1992 Massey Lectures, CBC.

The Employment Contracts Act reflects a nineteenth century mechanical view of the world that sees free markets settling at some stable, socially optimal, level of wages and working conditions. Unlike many influential academic economists, employers, when it suits them, choose to see free labour markets as harbingers of stability and concord. The ECA is justified through this mechanistic view.

Chaos theory - which emphasises unstable processes and extreme sensitivity to initial conditions - is however bringing change to the social sciences. The ECA is in fact only favoured by businesses because it was implemented at a time when initial conditions favoured capital over labour. Employers took a similar view in the late 1920s and early 1930s.

Ironically, the best known period of class warfare in New Zealand's history occurred from 1908 to 1913, when it was the workers who wanted the right to free independent bargaining, and the employers who favoured regulation and arbitration. The employers, supported by the likes of Massey's 'Cossacks' (somewhat different to Muldoon's Cossacks of 1975), literally fought for the continuance of Labour market regulation.

In the 1960s, under Tom Skinner's moderate leadership of the Federation of Labour, the employers also got the best of the deal. Award wages did not rise with the growth of the economy. It was the partial breakdown of the regulated system in 1968 that allowed for an upwards correction to wages. Radical unions in the 1960s wanted "free collective bargaining". They now have that right, but only a small proportion of workers have the power to exploit that right. While the ECA represents bad economic policy because it accentuates pre-existing imbalances, we don't need a return to the 1960s' accord.

The ECA can be amended, through an initiative by the Alliance, to reflect knowledge about labour market failure. Indeed, we should be expecting to routinely amend the ECA to reflect advances in knowledge, and to acknowledge academic disagreements about labour market behaviour. The present ECA serves businesses who would be happy to see wages spiral downwards, and strategically placed workers (especially managers) whose salaries are spiralling upwards. ACT should be pressed to acknowledge that unregulated labour markets can and do fail.

 

Conclusion

Soon the nation would "consist only of two classes - labourers and the possessors of immense capitals". The result might be social revolution.

Sir William Molesworth (1838), House of Commons.

The new tenants of Parliament Buildings in Molesworth Street might take heed of Molesworth's warning (cited from Bernard Semmel, 1993, The Liberal Ideal and the Demons of Empire) of the consequences of legislation and policy that upholds inequitable outcomes. Molesworth was an advocate of emigration. In his day, emigration and industrialisation staved off social revolution. Today, new solutions are needed. Nevertheless, new welfare legislation in the United States reinforces the nineteenth century view that everyone who is not a capitalist should be a labourer, and should compete against other labourers for the diminishing pool of income available to labourers. Smith's dream has become unstuck because its American subscribers have placed too much faith in competition.

The business view of the economy is a subjective truth. More consensual truths can only emerge from the process of open debate. We now have a Parliament which can avert any threat of social revolution next century by initiating the public discourse required to bring about substantive evolutionary change. We have a Parliament which can legislate without a veto from the right. Is the Alliance up to such initiative? Can we balance the interests?

Adam Smith did not want business interests to have free reign. Concluding his chapter on profits, he said:

"Our merchants and master manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."

 

© 1997 New Zealand Political Review


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