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Economic thought

by Gary Hawke

Largely ignored by the public, economic thinking has had a major influence on economic policy and New Zealand’s prosperity. Most economic theories have been imported, but they have required some local adaptation.


Wakefield and the economics of colonies

Systematic colonisation

New Zealand’s organised European settlement from 1840 owed much to Edward Gibbon Wakefield, a major figure in the New Zealand Company. His plan of ‘systematic colonisation’ marked the most significant early impact of economic thinking on New Zealand.

When London intellectuals discussed New Zealand colonisation in the 1820s, they recalled the successful revolt of the American colonies in the 1770s. At that time it was an open question as to whether or not colonies were desirable. They could be expensive, and they could be politically embarrassing. But they offered employment prospects, especially for young European men.

Advantages of trade

Colonies generated trade. In the early 19th century political and intellectual leaders were grasping the theory of comparative advantage and the benefits of free trade. Widespread trade was seen as more beneficial than the exclusive trade between colonies and colonisers. People theorised that if a country was better at producing a product like wine, while another country was better at producing cloth, both countries benefited if one specialised in wine and the other in cloth, and they traded. Britain began moving towards free trade.

Economic thinkers like David Ricardo also showed that while trade was mutually beneficial, it did not guarantee social harmony. As an economy grew, owners of limited resources (especially land) would gain more than others, for example those who just had their labour to sell. This redistribution of wealth did not reward enterprising behaviour – it was just a function of who owned what, and depended too much on luck and game playing.

Adding to the land supply

Wakefield recognised the relevance of colonies to economic debates. By adding to an economy’s supply of land, colonies diminished conflict over the division of economic wealth between landowners, entrepreneurs and labourers.

Wakefield felt colonies could also provide work for the unemployed, especially for men who were no longer required for military purposes after the defeat of Napoleon, and might cause social disorder.

Wakefield had some original ideas about the economic circumstances in the colonies. Ignoring the rights of indigenous peoples, he argued that in a newly-settled colony land would be plentiful and therefore cheap, and rents would be low. He thought this would make it difficult for farms and urban employers in the new colony to retain labourers. He proposed a ‘sufficient price’ to stop labourers from buying land until they had built up funds by working for others – government could retain land rather than sell it straight away, and so ensure an optimal balance of land, labour and other factors of production.

Wakefield’s thinking was based on the economics of wheat-growing southern England, rather than the large sheep runs which became the main source of New Zealand’s early economic growth. Yet he influenced the colonial authorities – an early example of reliance on overseas ‘expert’ advice rather than local experience.


Single tax

The ‘unearned increment’

British economist David Ricardo’s theory of rent led to the ‘single tax’ movement in the late 1800s. The value of land, which is in fixed supply, rises as economic growth increases assets which have a flexible supply, such as labour and capital.

Landowners benefited from increasing land values as settlement proceeded, not through their own efforts to make their land more productive, but through the increased availability of labour and capital. This increase – the ‘unearned increment’ – was seen as suitable for taxation. People felt that increased wealth should depend on worthy endeavour and not luck.

The idea of a single tax on the unearned increment of landowners was an international movement of the late 19th century, associated most with Henry George, an American thinker. The idea was prevalent in recently settled European colonies where examples of undeveloped land were visible.

It proved difficult to identify the unearned increment on land values. No tax on rising land values could have generated sufficient revenue on its own for the government. But the movement had more effect in New Zealand than most places. Local rate-setting methods link to the unearned increment. Local councils can still use ‘unimproved value’ as a basis for determining rates in the 2000s, though most councils use ‘land value’, which includes buildings and improvements on property.

Morality of wealth

 

Wakefield’s ‘sufficient price’ for labourers buying land had a moral quality. It ensured that only the deserving could progress from being labourers to landowners. The ‘unearned increment’ also drew on the notion that increased wealth should depend on worthy endeavour and not luck. The idea still persists – income from sources other than direct labour is often targeted for higher taxation.

 

Marginalism

Deeper economic analysis suggested that economic growth changed the relative value of assets according to their flexibility. Rather than viewing land as ‘fixed’ in supply, and labour and capital as being mobile, economists came to believe that assets varied along a spectrum of adaptability. The recognition of the ‘margin’, the point where development was worthwhile or possible, was the most significant development in economic thinking in the later 1800s. Key figures in this advance in thinking were William Jevons in England, Carl Menger in Austria and Léon Walras in France.

There was no major contribution to leading international economic thinking from 19th-century New Zealand. Economics was restricted to minor adaptations of imported ideas, such as the development of rating according to unimproved value.


Protection and free trade

The theory of comparative advantage – that widespread trade was good for all economies – was widely accepted in Britain. It spread to continental Europe and the United States but was not as zealously embraced.

William Gladstone, chancellor of the exchequer (finance minister) in the early 1860s and British prime minister in 1868, adopted free trade. He campaigned against government corruption, making it hard for respectable politicians to be in favour of anything other than free trade, and restricted government spending.

Economic thinkers like Adam Smith and John Stuart Mill argued that the only areas where government intervention was indispensable were the classic ‘public goods’ of justice and defence, and initiatives where entrepreneurs could not make a profit on investments. Tariffs (taxes on imports) were seen as protecting businesses from fair competition, and imposing unnecessary costs on consumers. The sophistication of Gladstone and leading economists was simplified in everyday discussion, which talked of minimal government.

Revenue tariffs

There were problems adopting laissez-faire economics in New Zealand. In the 19th century government revenue depended heavily on tariffs, but free-trade economic thinking required abolition of tariffs. New Zealand politicians struggled to reconcile necessity with respectability. They wanted to maintain government revenue but also adopt free trade orthodoxy to show they were abreast of contemporary thinking.

Politicians developed some New Zealand economic ideas. ’Revenue tariffs’, which could be levied without affecting the size of imports, were distinguished from ‘protectionism’ which aimed at reducing imports. (Even the United Kingdom retained some revenue tariffs.) Revenue tariffs were on goods that were not produced domestically and could be termed ‘luxuries’. This drew on an older idea that luxuries should be taxed rather than necessities. The argument was dubious as demand for luxuries is usually sensitive to price increases, and tariffs raised prices, but New Zealand retained both trade respectability and government income.

Infant industries

Local thinking went further. As in the United States and continental Europe, a notion of development was put forward. Mill, England’s leading economist, endorsed the idea of ‘infant industries’. Tariffs on imported goods could help a local infant industry making similar goods grow to a level where it needed no tariff protection. This idea had economic validity in New Zealand – people argued that a period of transition would enable the economy to reach a position where resources were used efficiently and protection could end.

However New Zealand politicians could see infant industries everywhere. They developed sophisticated economic ideas to assist the development of colonial industries though tariffs. But in practice there was a lot of political horse-trading – imported goods used in farming and other influential local industries were excluded from the tariff schedule.


Measuring progress

Development

Economic thinking about development went further than tariffs. Settlers wanted to build a ‘better Britain’, a more sophisticated colonial economy that could continue to provide living standards superior to Britain’s.

In the 1800s modern concepts of measuring a country’s national income (such as gross domestic product) did not exist. Progress was assessed through indirect indicators like population growth (once censuses were introduced in the mid-1800s), the measurement of exports and imports, and the output of some industries.

Statistics

Over the 19th century an increasing range of statistics was collected and processed, but there were limits to available information. It was not easy to distinguish growth in one industry from overall growth. For example railways destroyed coaching businesses but provided new services. The financial difficulties of particular industries were not necessarily good indicators of overall income growth. For example declining wheat yields were more noticeable than the growing output of meat and dairy products. Prices were especially risky indicators. Prices of outputs (like wool) were more prominent than input prices (like fertiliser), and both declining and rising prices can occur while production increases.

Charles Knight

Although these issues were of interest in both Europe and New Zealand, there was a particular interest in measuring progress in a new society. In the 1860s civil servant (later auditor general) Charles Knight recognised that assessing output available to consumers had to take into account the way that products from one industry could be inputs to another industry, whose outputs could improve the standard of living.

This concept of ‘value added’ rather than ‘value of output’ did not become part of international economic thinking until the 1920s and 1930s. Knight’s sophistication had no direct international significance – overseas statisticians also developed the same ideas. Yet it is a rare example of original New Zealand economic thinking.


The economics profession

Universities

Economic theory emerged in New Zealand before there were economists. Economics only emerged as a distinct academic discipline in the 1880s, and as a profession in the 20th century. Before then it was taught within other disciplines, especially philosophy, but sometimes mathematics or history. The American Economic Association was founded in 1886, and the Royal Economic Society in Britain in 1890. At that time economics was seen as part of a liberal education and a preparation for a life of public service.

New Zealand economists

From 1869 New Zealand universities were founded. Economics was not among the first disciplines for which teachers were recruited. From the late 19th century economics was taught by teachers of other subjects. It became a part of commerce degrees, which were developed for accountancy qualifications. Some university teachers were significant thinkers in New Zealand.

James Hight taught at Canterbury College from 1901 to 1949. Primarily a historian, he later excelled as a university administrator. His students included some significant economists, including J. B. Condliffe who wrote an early study of New Zealand trade. His later career in the United States included a major study of world trade, The commerce of nations (1950). Douglas Copland, another student of Hight’s, became a leading economist in Australia.

Horace Belshaw was a professor in both Auckland and Wellington and had an international career with the United Nations’ Food and Agricultural Organisation. Albert Tocker, professor of economics at Canterbury College from 1921 to 1950, lacked the scintillating quality of these economists, but he made a major contribution to the understanding of international finance, with an analysis of New Zealand banking in relation to the international role of the British pound. The Canterbury school shared an interest in relating economic thinking to practical affairs, especially rural affairs, though these were also concerns of economists at other universities.

Alan Fisher at Otago University was notable for exploring economic change over time, in terms of the relative size of the agriculture, manufacturing and service sectors. He challenged common beliefs that farming was the backbone of the economy, and that a drift from rural areas to cities and towns was a cause of concern. Economic thinking has often shown that people’s assumptions are not always sound.

Economics exams

New Zealand universities quickly provided high-quality courses in economics. The scripts of final-year candidates were marked in Britain. Examiners were often from universities like Cambridge, the academic home of Alfred Marshall, who succeeded John Stuart Mill as the leading English economist of his generation. Some of his top students, including the influential economist John Maynard Keynes, examined New Zealand students’ papers. Remarks by examiners show that New Zealanders were as well served academically as students at leading British universities.

Business studies

In the 1930s American economist Edward Chamberlin developed a theory of monopolistic competition. Chamberlin argued that where there were many firms producing similar products, firms developed minor differences and sought to attract brand loyalty. If they were successful they became price setters, not price takers.

This theory inspired the development of business management as a distinct academic discipline. Economics had previously moved from philosophy and liberal education towards public administration, and training the public service. It now became a business subject, and eventually part of the curriculum of business schools. Economics, sociology and other disciplines grew independent, and left philosophy as a minor (but respected) component of the arts. Economics itself became a minor (but respected) component of business education. Management, marketing, operations research, finance and other subjects became independent of economics.


1930s economic depression

Economics and public affairs

In the 1920s economists taught students, and also gave public advice. Horace Belshaw at Auckland University explored cycles and trends in New Zealand agricultural output, and stimulated academic studies in subjects such as land prices. Towards the end of the 1920s economists from all major universities contributed to a public debate over unemployment.

Overseas examples

The 1930s depression brought economists further into public life. New Zealand-born economist Douglas Copland was recalled from Australia to chair an economic committee to advise government. To temper the adventurous thinking of academic economists the government included the secretary of the treasury as a committee member. It also sought advice from a committee of businessmen, and from other sources.

Copland had already been involved in lively debate in Australia and gave academic-based advice to the Australian government. Copland and Belshaw were in touch with contemporary English debate, and both knew John Maynard Keynes. His advice specifically on Australia and New Zealand was not especially weighty – Keynes played a role like that of John Stuart Mill in an earlier era, his ideas conferred respectability on local proposals.

Economists in government

Economists had been providing advice to the government since their emergence in New Zealand. Bernard Ashwin was secretary of the treasury from 1939 to 1955. He became one of New Zealand’s most influential public servants. He built on Albert Tocker’s analysis of New Zealand’s monetary system and provided insightful analysis of links between New Zealand and Australian banks.

Belshaw joined the office of Minister of Finance Gordon Coates, and contributed economic understanding to the design of government policy on rural mortgages and dairy industry finance.

Things must be bad

 

In the great depression the willingness of the government to turn to academic economists for advice was remarkable. As Allan Fisher, economist at Otago University, wrote in 1932:

‘Any doubts which New Zealand citizens travelling abroad in the early weeks of 1932 might have entertained about the reality of the economic crisis in New Zealand were at once dispelled by the news that the Government had seriously turned to academic economists for advice and guidance. Such a revolutionary change in long established custom clearly indicated the gravity of the situation.’1

 

Social credit and other ideas

Economists were not the only sources of advice in the 1930s. The government had plenty of suggestions to ‘cut the coat to suit the cloth’, accept just retribution for past profligacy, and the usual cant which accompanies economic crisis. There were other movements which arose from popular cults rather than significant economic thinking. This included Social Credit. Begun by a Canadian engineer, Social Credit appealed to the old belief that bankers and other financial interests conspired against the real producers and workers. The ideas had political influence in Canada and New Zealand, especially among dairy farmers, whose incomes took longer to recover from the depression than most. The ideas also influenced many members of the first Labour government.

Many elements of the response to the depression owed little to economic thinking. The policy of ‘insulation’, which favoured the erection of barriers and buffers between international markets and New Zealand incomes, was moderated by economic thinking. Its origins were not rooted in economic theory but rather reflected political moves towards greater protectionism in the world economy.

Depression’s legacy

During the 1930s the government shrewdly chose from different kinds of advice, but relied mostly on the economists. After the depression there was a belief that economists would retreat into the academic world. But there were new challenges for economists like Douglas Copland and others who ventured into public life.

The depression influenced perceptions of economics and economists. It showed that economists provided useful practical analysis and advice to policymakers. Training in economics was seen as a desirable preparation for senior public servants. Public recognition of ‘Keynesian’ economics – which advocated government spending during a recession, but were only loosely related to Keynes’s theories – established the view that newly imported economic thinking could be adapted to issues facing the government.

Footnotes
    • A. G. B. Fisher ‘The New Zealand economic problem – a review.’ Economic Record VIII (May 1932), p. 74. Back

Post-war economics

Economics flourished in the post-war years. Tertiary education spread and there were more jobs for economics graduates in the public service and business. University staffs expanded and so did the range of economic thinking. Many specialities were introduced. Development economics and econometrics were especially important.

Attacking the cranks

 

Post-war economists continued to enter public debate by exposing errors in public thinking. Alan Danks, professor of economics at Canterbury, became prominent by describing the fallacies underlying Social Credit, which had returned to political significance in the 1950s.

 

Development economics

Development economics grew from European thinking about post-war reconstruction and growth in newly-independent countries in Latin America, Africa and Asia. Development economics provided many practical ideas for economic policy, though some ideas were less successful than others. Import-substitution industrialisation set out to establish industries making products that a country previously imported, saving import costs and providing jobs. But over the 1960s and 1970s east-Asian economies favouring export development outstripped economies which favoured import substitution (especially those in Latin America). The most enduring New Zealand contribution to this thinking included Horace Belshaw’s Population growth and levels of consumption.

Within New Zealand W. B. Sutch adapted ideas of import substitution. Sutch was perhaps New Zealand’s best-known economist, crossing the boundary between public servant and public figure. He made the economics of education and the economics of design more widely understood. Sutch’s appeal as a public figure was as a radical dissenter. He attempted to guide New Zealand on a path of economic nationalism based on import-substitution industrialisation. In New Zealand such industrialisation was not aimed at growth of gross national product per capita, or exports. Instead it pursued social goals such as employment, and building a more varied economy capable of providing jobs for people with different skills and aptitudes.

International development economics influenced New Zealand most in its attempt to utilise the power of co-ordinated efforts through centralised planning. Conferences established economic objectives and implementation plans, and provided advice. Sir Frank Holmes, a professor at Victoria University, was a leading participant.

Government planning which aligns incentives for individual and group behaviour remains central to contemporary thinking about economic policy, but it is often subordinated to the notion that centralised management is inherently desirable.

Econometrics

Econometrics uses quantitative and statistical methods to study economic problems. It grew out of two major developments:

  • the advances in applying mathematics to economic theory in the 1920s and 1930s (especially in the United States) and to agricultural economics (in which the Canterbury school had made minor contributions)
  • statistical theory and computing power.

It became feasible to relate economic theory to vast bodies of empirical data. Initially, there were hopes that big economic models could be built to provide precise answers to policy or business problems. In practice, even large models generated more questions than answers. The complexity of the models made it hard to evaluate results.

Econometrics changed the nature of economic thinking by more clearly separating economic theory from business studies. It also marked a line between rigorously researched economics and emotive media commentary, and added immensely to economic knowledge. In New Zealand the Reserve Bank pioneered the use of econometrics in economic thinking, and it remains a characteristic of Reserve Bank analysis. Other providers of economic services, such as consultants, have had to pick up econometric skills to remain competitive.


Global economic thinking

New Zealand economists overseas

Over the 1940s the international centre of economic thinking moved from Europe to the United States. New Zealand academic economists directed their publications to American journals. Increasingly postgraduate training was in the United States. Economists were to be found in the US rather than the United Kingdom. John Condliffe’s earlier move to Berkeley in California in 1939 was a sign of the times.

However for a time there were some prominent New Zealand economists in Britain. Ronald Meek became a leading figure in the history of economic thought. He studied the 18th-century French economists, the Physiocrats, who were among the originators of laissez-faire economics and minimal government intervention in economies.

Rex Bergstrom, based at the University of Essex, made major contributions to early econometrics. The best-known New Zealand-born economist was Bill Phillips. He became known for his work in Britain on the relation between unemployment and inflation. He used his skills in electrical engineering to build the MONIAC (Monetary National Income Analogue Computer), a machine which illustrated some emerging principles of economic interdependence – although (as he knew) computers were about to make it superfluous.

In recent decades, the best-known expatriate economists – Stephen Turnovsky and Peter Phillips – have worked in the US.

New ideas

The main changes in international economic thinking were responses to major changes in society. The political cohesion that had developed as a response to the depression and the Second World War changed over time. The boom years of the 1950s and 1960s gave way to economic stagnation and inflation in the 1970s. Government spending was increasingly questioned.

Intellectual advances, mostly in the US, on the boundaries of mathematical economics and the off-shoot field of finance, made it possible to calculate the values of new financial instruments. Since the 1930s the standard response to managing financial risk had been to socialise it – to give governments responsibility to look after risk. Then it became possible to manage risks through futures markets, which predict future incomes and spread the risk that these fail. Financial liberalisation – unregulated markets – was the result. This worked well until the 2008 world financial crisis, which demonstrated that markets do not always manage risk well.

Market forces

Growing economies gave new impetus to economic thinking. Developing markets emphasised the role of incentives, especially prices, in driving consumer behaviour. Within certain constraints, consumers were seen as economically rational decision-makers. It followed that prices should not be distorted by government interventions, but should be determined by markets. This had been the core of economic thinking since Adam Smith in the 19th century, but successive governments had ignored it after the 1930s.

Rogernomics

 

Roger Douglas was minister of finance in the Labour government from 1984 to 1988. His brand of new right economic thinking involved liberalising international trade, deregulating industrial, agricultural, finance and labour markets, widespread corporatisation and privatisation of government activities, and social welfare reform and tax system reform. His views echoed Gladstonean liberalism in the Victorian era. These policies were continued by the incoming National government in 1990. The policies were labelled Rogernomics, but the economic thinking was an adaptation of overseas thought.

 

When New Zealand faced significant economic issues in the 1980s, economists, especially those in the treasury, provided analysis about New Zealand’s economic future in the light of contemporary developments in international economic thinking. The embrace of globalisation and a free-market economy was the result. To people wedded to decades of trying to solve New Zealand’s structural economic problems through government spending these treasury officials appeared ideologues, but genuine analysis depended on understanding economics.

Environmental economics

Over the 1970s environmental concerns became more prevalent. Economic theory – most notably that regarding externalities – was increasingly used in assessing the costs and benefits of large development proposals, such as the aluminium smelter proposed for Aramoana near Dunedin. Externalities are costs or benefits for which no one pays any financial price in a market, for example air pollution from a factory. Economists were increasingly called on to carry out economic modelling and cost–benefit analysis for large developments.

Scepticism about economic thinking

Economic thinking remains separate from any general attitudes. It is a severely logical style of thinking which is not confined to material welfare. There is a considerable public scepticism about its claimed expertise. Because economics deals with areas in which some experience is common, and where private interests are deeply affected, economists have difficulty establishing the boundary of their specific knowledge.

With its tradition of drawing feely on imported knowledge, and its history of drawing on popular thinkers for a social vision, New Zealand finds it especially problematic to find the appropriate boundaries around economic thinking.


How to cite this page: Gary Hawke, 'Economic thought', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/economic-thought/print (accessed 19 September 2019)

Story by Gary Hawke, published 11 Mar 2010