The Enlightenment thinker Adam Smith had articulated in Wealth of nations the importance of economic individualism and the dangers of state intervention in the form of mercantile regulation, legal monopolies and subsidies. New Zealanders inherited this belief in the virtues of individualistic economic activity and competition.
However, the state’s ad hoc responses to crises developed a growing acceptance of government intervention, and the economic depression of the 1930s discredited classical economics. In Britain John Maynard Keynes argued that capitalist economies developed market failures which the state should remedy. Keynes emphasised the importance of demand and the role of the government in regulating demand to maintain prosperity and full employment. Keynesian economics prescribed a central role for government, which was followed in New Zealand after the Second World War.
New neo-classical ideas
In the 1970s western economies such as New Zealand experienced both high unemployment and inflation, which according to the Keynesian model was not possible. Economists, especially in the United States, developed new ideas which revived neo-classical economics.
- They suggested that the market, not the government, should be the major driver and determinant of the economy.
- Inflation was caused by too much money. Therefore monetary policy, not the government’s fiscal adjustments, was the key policy tool.
- Rejecting Keynes’s emphasis on demand and therefore on controlling inflation through an incomes policy, they suggested that wages should be left to settle at a market price.
- Infringements on the free operation of the market, such as trade restrictions, subsidies or a fixed exchange rate, should all be abandoned.
- Private enterprise and the price mechanism were always more efficient than government interventions or picking of winners.
- Public choice theory emphasised the dangers of ‘policy capture’ and the importance of separating policy makers from providers of services.
New right in New Zealand
Economics as a profession emerged strongly at New Zealand universities in the 1960s. Before long, trained economists began to have an impact on such institutions as the Reserve Bank and the Treasury. There was a group of young economists who were well versed in the new ideas. Many had spent time in the United States. They included Graeme Scott, Rod Deane, Bryce Wilkinson and Roger Kerr.
One place where new-right economics flourished was Economics II, a think tank in the Treasury in the late 1970s and early 1980s. It was staffed by young economists (many of them US-educated) and was responsible for many of the new ideas that began to surface.
In the early 1980s new-right economics was aided by the evident failure of Robert Muldoon’s Keynesian and interventionist fiscal policies. These had included controlling wages, prices and interest rates; establishing new subsidies; and promoting ‘think big’ industrial projects. The New Zealand economists did not significantly add to the ideas coming from overseas, and the debates echoed those internationally, but this group became highly influential in a small society. Critics gravitated to the circle around Opposition finance spokesman Roger Douglas, who was especially influenced by Treasury official Doug Anthony.
New right in action
In 1984 a Labour government was elected. The ‘New Zealand experiment’ began. It included:
- removal of protective tariffs and subsidies
- floating the exchange rate
- introduction of an indirect tax on goods and services (GST) and a flatter income tax
- selling off or corporatisation of government-owned services in energy, transport, forestry and communications
- an exclusive mandate for the Reserve Bank to control inflation through monetary policy
- the Employment Contracts Act (after the National government was elected in 1990), which allowed freer setting of wages and individual labour contracts.
These measures were hailed around the world as among the purest applications of new-right economic ideas. Once again New Zealand became a much-watched social laboratory. Some ideas, such as the corporate model for the state sector, were copied elsewhere. However, as in earlier examples, New Zealand’s role was more to comprehensively implement ideas sourced from abroad than to develop the ideas in the first place.