Gareth Morgan (Economist): a Boon to the Left?

Keith Rankin, 30 September 1998


I enjoy reading Gareth Morgan's Tuesday column in the NZ Herald. I enjoy it because he antagonises people in the political centre, thereby driving them towards the left. And he stokes the anger that the left needs to keep it from submerging into internecine division and apathy. He reminds the left who their enemy is.

I also like reading Gareth Morgan because he's honest. By honest, I don't mean that he's accurate or truthful. Rather, he's not politically correct; he calls a spade a spade. He doesn't claim that right-wing policies are equitable, or are good for everybody. For him the government rules, absolutely; and the government rules by creating a market utopia. While we might disagree with him, at least we can read him. He does not speak with forked tongues.

Actually he makes many concessions to the left, unintentionally. The left rarely pick up on them though. They are still too busy being outraged to constructively channel their anger.

His latest offering (Herald 29 September) is about "policy paralysis". Morgan openly admits that he is a committed supporter of activist government. No weasel words about getting the state out of our lives here. He wants the state into our lives, boots and all. Echoing Karl Polanyi's observations from the 1940s, activist government is a sine qua non of a successful market utopia. The difference is that Polanyi was a critic of the self-regulating market economy, whereas Morgan is a true believer.

Government plays a diametrically opposite role in Morgan's world than it does in the vision of Adam Smith. Morgan is an intellectual heir of Bentham (and Hobbes and Plato before that), the utilitarian contemporary of Smith who placed the ruling apparatus of the state at the centre of his Platonic vision.

In his journey from the opening gambit to surprising conclusion, Morgan makes a number of interesting observations.

Morgan claims that the "pragmatists" took over in 1991. By doing that, he places Ruth Richardson in the pragmatist (ie non-ideologue) camp that runs counter to his philosophy. By choosing 1991, he is claiming that not only was Roger Douglas his political hero, but he also praises Douglas's Labour Party successors. His ideal government today would be a Labour-Act coalition.

Morgan sees that a fundamental of the late 20th century economy is the "downtrend in commodity prices", and that therefore the main task that the reforms should have addressed - restructuring the New Zealand economy away from specialisation in primary production - was not addressed. He clearly despises National as being a farmers' party; as a party hostage to the vested interests of the dominant producer lobby. Morgan is an anti-physiocrat in a nation whose ruling ideology since the 1890s at least (ie since the "recolonisation" of New Zealand that historian James Belich emphasises) is physiocracy (meaning the supremacy of the land and the primacy of the interest of those who cultivate the land). Morgan, unlike say Roger Kerr, is an outsider.

On the matter of Producer Board deregulation, Morgan favours such deregulation because farmers will not benefit from it. This is 180 degrees different from National Party rhetoric, which tries to convince farmers that they will be the beneficiaries of such deregulation. Morgan says: "Any farmers who think those changes are primarily to benefit them needs cerebral stretching."

Morgan's anti-physiocratic ideology leads him into inaccuracy, however. He says that "we have to ask ourselves why New Zealanders continue to invest such large dollops of the financial capital available in forestry and agriculture when it's so obvious their output prices just slide". Morgan is wrong. Whereas industrial raw material prices have fallen relative to manufactures and services (eg minerals and fibres), food commodity prices have not been falling as Morgan claims.

A graph in the Herald's business section (29 September) shows that grain prices and meat prices have been on a rising trend during the 1990s (although both are falling in 1998 thanks to the emerging downturn in the world economy), whereas wool prices were on a falling trend.

The key statistical indicator here is the terms of trade which is a measure of export prices relative to import prices. Australia's terms of trade has taken a dive in the last 20 years. Yet, with more "policy paralysis" than we have had, the Australian economy has grown much more than ours has. The NZ terms of trade have been on a rising trend since the mid-1970s, which means that food commodities have been giving better returns than alternative products. New Zealand's main problem was that the reforms instigated by the Labour government led to massive disinvestment in agriculture, and that we as a nation were not able to take advantage of the significant increases in primary product prices from 1986 to 1996.

If we look back to 1925 (see graph), we see that the terms of trade then was about the same as in the 1990s. It was also the same in the late 1960s, and was lower in the 1940s, before the Korean War. They were lowest during the Great Depression of the early 1930s, and, surprisingly to many (including Morgan, I would suspect), during the export-led growth spurt of 1983-85.

Morgan is dead wrong in claiming that food production has been a loser in the past; he makes this claim on the basis of his anti-physiocratic ideology and not on account of the facts.

He may be more wrong with respect to the future than he is with respect to the past. From the late 18th century to the third quarter of the 20th century, classical and neoclassical economists have taken it for granted that food prices would rise relative to other prices, as a consequence of growing population on a finite planet. The recolonisation of New Zealand 100 years ago took place because of Britain's perceived need to secure its food supplies in the 20th century. That fear was the basis of the whole empire thing in the first half of this century; Britain was the dependent economy, not us. It seems inconceivable that New Zealand should turn its back on food production given the realities of the international economy. How many of us would be willing to bet that food production will be an inconsequential part of the world economy in say 2050? Just Gareth Morgan, I suspect.

Morgan is also wrong on growth theory. He says that "the major impediment to growth is ... inefficient allocation of resources". Now it is true that an efficient use of resources leads to more output than does an inefficient use of resources. But that tells us little about the long-term growth rate, which is determined by the rate of innovation and not by the rate of savings. Morgan is implicitly claiming that an equilibrium growth path is fastest, presumably because such a growth path is supposed to yield higher amounts of reinvestable savings. (Yet an activist government represents a breach of equilibrium.) Economic history, together with neo-Schumpetarian "New Growth Theory" tells us the very opposite (see "The 'Growth Illusion' vs. 'New Growth Theory'"). It is the tension of disequilibrium that motivates the creative problem-solving that generates long-run growth.

Most interesting of all is Morgan's conclusion. "Lazy policymaking" (see PS) has, he claims, brought about a "slide in the living standards here over the last 25 years, which has seen our income almost halve relative to the average American's".

Here Morgan presents a 'counterfactual' statement. He claims that, had we had better policies over the last 25 years, then we would have a GDP today that is nearly double what it actually is. While the claim is not at all credible, we should take that claim to its logical conclusion.

If we had had better policies, and GDP was double what it is today for the reasons given by Morgan, then none of that doubling of wealth would have been due to increased contributions from private labour or private capital. That growth would have been entirely due to government activism. (Lindsay Perigo must be shuddering at the thought!)

Who owns the Government? We do. It's a part of the public domain, the collective property of all New Zealanders. If the economy grew as a result of more labour, we would expect workers to be paid more for their efforts. If the economy grew more as a result of clever investment by Fletcher-Challenge, we would expect Fletcher-Challenge shareholders to receive the income that their directors created. Therefore if the executive government through its own efforts doubles the GDP, then all of that new income should be paid to the people who own/employ the government. All of the additional income would be payable as social dividends.

Without realising it, Morgan has spelt out a vision of a socialist New Zealand in 1998; a New Zealand with a government that is by far the dominant institution, and which is directly responsible for more than half of the nation's income. In such an economic society, market forces may well prevail. But, notwithstanding that, the major source of income would be social dividends; ie payments to the shareholders of the state. In Morgan's ideal New Zealand of 1998, there would be a flat rate of tax of well over 50 percent, representing a rent payable to the owners of the miracle-making government. Morgan, like Philippe van Parijs [1], would take us along a capitalist road to communism.


[1] "A Capitalist Road to Communism". Theory and Society 15(5) 1986: pp.635-55. Reprinted in Van Parijs 1993 Marxism Recycled, Cambridge University Press.


PS [1 October] On second thoughts, I am not sure that Gareth Morgan is always honest. When he says "lazy policymaking", it sounds really as code for "democratic policymaking". I am not sure that Morgan's ideal government is any more democratic than are the governments favoured by Bentham, Hobbes and Plato.

PS [29 November] In think that there is a perception in New Zealand that "policy paralysis" is a synonym for "democracy". Certainly, I believe that the diagnosis that "policy paralysis" is the most urgent problem we face is a call for an anti-democratic putsch. However, I most certainly do not accept that either democracy implies policy paralysis or that policy paralysis only exists in a system of governance that represents the full divergence of people's views. Democracy forces those in government to argue their way through the issues in a logical manner, and vetoes policies which cannot muster majority support despite the arguments of those who propose such policies. [back]


© 1998

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