Redesigning the collectivist rudder, Michael Cullen

Simon Upton’s extended, but muted, cry of anguish (New Zealand Books, December 1994) marks a major intellectual maturing on the part of the New Zealand National Party’s only serious thinker. Had it been written in mid-Victorian Britain one would confidently predict a leap to Rome would mark the next stage of development. In New Zealand in 1995 it will probably be the slightly disgruntled acceptance of a position on the list, rather than the seeking of a constituency nomination.

Stripped to its bare essentials, what Upton is saying is that market liberalism lacks an intrinsic moral content capable of sustaining social cohesion and that it needs some such moral “rudder” if it is to prove the basis for an enduring and stable social and political order.

Or, to adapt the old cliché, under market liberalism the ship of state is rudderless. Upton offers us no solution, merely (merely!) the problem.

It is at least, refreshing to see a recognition of the problem that many of us in the social democratic camp have been pointing out for years (even to the extent of purloining some of our best phrases, such as “free market triumphalism”).

Even so, it is worth revisiting some of the assumptions and arguments that Upton uses. To do so may lead us to the conclusion not so much that market liberalism leaves us rudderless as that it leaves you shipless. Particularly questionable is the characteristic New Zealand tendency to assume that since 1980 there has been a sustained move to market liberalism within the western world. That one form of socialism has collapsed in much of the ex-Communist bloc is self-evident. But even there most countries, particularly those lacking democratic traditions, have scarcely followed a coherent market liberal path of reform.

As to the west proper, only our Anglo-centric traditions allow the simplistic conclusion of a drive to market liberalism. Privatisation of commercial activities has been common but by no means universal. New Zealand, almost alone, has seen a full-scale move from a heavily regulated economy to a much more deregulated one. Britain has been the closest to that model of change, but even there the end of the Thatcherite era saw state expenditure rising, not falling.

As for the United States, Reaganism was a fraud. It came down to little more than cutting some expenditure, cutting taxes a great deal more, and thereby blowing out the deficit. Its public sector – truly bloated in many respects – remained almost entirely unreformed.

New Zealand’s much more coherent drive to market liberalism is explained by the unique circumstances of its Muldoonist command economy, a jerry-built construct, which to some extent was the insane apotheosis of the much longer-standing attempt to generate economic development on the back of a cocooned domestic economy.

No such process can be discovered in continental Europe in the 1980s and early 1990s. Constraints on government spending and the difficulties created by excessive universality of generous social security systems should not be confused with a marked ideological shift. Nor is there anything peculiarly rightwing about balanced budgets or what is excruciatingly named fiscal responsibility. The historical fact in New Zealand is that large deficits have been more associated with National than Labour governments.

Yet it is fair to say that in New Zealand (and in Britain and the United States) neo-classical economics has been in the ascendant and in all three countries the social and ethical consequences of that fact are now becoming apparent. In that respect Upton is right to point to the lack of a unifying moral purpose to market liberalism. It is ironic that there has only been one real attempt to provide it throughout the 200-plus years of its ideological existence.

That, fascinatingly enough, was by Adam Smith himself. Nearly all his present disciples seem unaware The Wealth of Nations was not his first major book, but his second. Years earlier, in The Theory of Moral Sentiments, he had outlined the moral philosophy which remained central to understanding properly his later work.

It is not my purpose to revisit that philosophy. Suffice to say in this context that, by the standard of his successors, Smith was an optimist about both human nature and the prospects for sustained economic improvement. Those successors – Malthus, Ricardo and company – are the real originators of modern classical economics with its underlying theme of a grim struggle for survival and advance at the expense of others. Moreover, whereas Smith’s economic paradigm was (ironically or not) a collective organisation (the pin factory), his successors shifted the ground of debate away entirely to the individual. Thus Upton might do well to start his search for a rudder with Adam Smith and forget those who came after.

For social democrats the task is very different. It is to avoid being sucked into the myth that the fourth Labour Government destroyed a fully functioning social democracy and thus turned its back on 90 years of progress, however slow, on the true path. To get a stronger grip on the facts and therefore on the challenge facing New Zealand social democrats it is necessary to traverse as briefly as possible some of the historical ground of that 90 years, particularly the place of the Labour Party within it.

It is a mark of the peculiar nature of the New Zealand Labour Party that arguably the second greatest Prime Minister in the Labour pantheon of leaders (Richard Seddon) died before the Labour Party was founded and, indeed, led and helped create a political party that later became part of the National Party in 1936. It is, perhaps, equally significant that Labour’s second most successful leader in electoral terms (Peter Fraser) is, if not forgotten, certainly not remembered. And that the only genuinely revered leader of the last 40 years (Norman Kirk) lost three out of the four elections he led the party into and would almost certainly have lost a fourth had he lived.

That Seddon is retrospectively co-opted to Labour Party membership is to be understood not just in terms of the fragile Liberal-Labour understanding which marked much of his term as Prime Minister, nor indeed in his good fortune to die in office, an achievement which, as both Savage and Kirk were to prove, was also a good career move in terms of one’s subsequent reputation.

No, as every New Zealander is supposed to learn, Seddon appears as a sort of adoptive father of the Labour Party because his government was renowned for a broad range of social legislation, including women’s suffrage (by mistake), the Industrial Conciliation and Arbitration Act (1894), the last remnants of which were destroyed by the 1991 Employment Contracts Act, old age pensions and much else. In other words, Seddon is seen as the morning star of the welfare state. What he began, the first Labour Government finished.

As a rough first approximation to the truth, this account is far from false. What is interesting about it from the perspective of this essay are two elements in particular. The first is that the New Zealand Labour Party sees itself historically as the successor to an earlier political party tradition. It does not emerge as a social, economic or political redeemer unique in our history. Indeed, we may go further and say that, with a becoming modesty not normally characteristic of political movements, Labour gives historical priority to something which is actually identifiably separate and not uniquely part of the social democratic/ labour tradition. (Compare this, for example, with the British Labour Party which has spent much of its history trying to decide what is not part of its history.)

The second element becomes clearer if we once again look beyond our shores and see the emergence of the New Zealand welfare state in a broader historical and geographical context. The first stage of its emergence, the Seddon Liberal Government, immediately appears as a good deal less unique than an insular approach would suggest. Certainly in the breadth of some of their social legislation the Liberals went further, but later, than the imperial German governments of the 1870s and 1880s. Arguably, they went slightly further than the great British Liberal governments of Campbell-Bannerman and Asquith (1906-16).

But at best the difference is one of degree, not kind. The same proto-welfare state characteristics emerged in all three countries and elsewhere in the latter part of the nineteenth and early part of the twentieth centuries. In all cases motives were, to say the least, mixed. While including the genuinely radical and pro-worker, there was often a not inconsiderable interest in the possibilities of social control and (especially in New Zealand) racial preservation and improvement. The great majority of reforms would have failed later twentieth-century tests of political correctness comprehensively.

It is a long time, in fact, since any serious historian has accepted the simple, basically whiggish, traditional Labour view of social and political development in New Zealand. At times the danger has more seemed that the Seddon generation of reformers may be turned into a somewhat bizarre collection of reactionaries whose sole interest was in suppressing any form of radicalism. It is true a few, such as Truby King, positively invite such an interpretation. But overall it is a conclusion that can only be arrived at from the peculiar perspective of post-1960s marxists, a body of people whose numbers can be judged from the fact that, while nearly all have written books, one can wander entire libraries without finding a single copy which has been borrowed.

One little-remarked fact might give some further credence to such an interpretation. That is that the Seddon years brought largely to an end, not began, the process of growing state ownership of the New Zealand economy. This is a key point, little discussed in New Zealand Labour historiography compared with, say, British. In the latter the issue of state ownership and its significance bulks large. In ours it is almost a side-issue which only flared into significance in the late 1980s when New Zealanders suddenly discovered, or invented, a tradition and an underlying explanation for that tradition.

This matter is so important, both for understanding the significance of the Seddon period and the Savage-Fraser period, for our times that some further discussion is required. It is essential to distinguish between state ownership and control. The latter has been a thread connecting much of New Zealand’s history.

State control is never likely to wither and die completely. Even after the Friedmanite Sisters Grimm from Canterbury did their worst, central government is responsible for spending about one-third of New Zealand’s GDP. That fact alone means we do not have a truly laissez-faire economy. State ownership is a different matter. As we have seen, both in New Zealand and elsewhere the fashion over the last decade has been for the state to divest itself of ownership of a wide range of income-generating assets.

But the chronology and mechanisms whereby those assets have been acquired have varied greatly from one developed country to another. In New Zealand, the characteristic feature of the process has not been the same as it was in, say, Britain or France, the takeover of existing assets. Nationalisation is a word that scarcely exists in the New Zealand political lexicon.

As with any generalisation there are exceptions, Nash’s takeover of the Bank of New Zealand being the single largest and most obvious. But this was in the special area of finance where the New Zealand Labour tradition in the 1930s and 1940s had a strange, but non-marxist, heterogeneity about it. No theory of the commanding heights of the New Zealand economy was ever fully articulated, certainly not in practice, and perhaps only in theory as a feeble protest after the sales process had begun. And even then no-one could explain clearly what the state was going to do with a bank in a competitive banking market or mature trees in a competitive forestry industry.

This creeping socialism by circumstance aroused little opposition or comment. The most vehemently condemned state asset in the early decades of the twentieth century was perhaps the Public Trust Office. But the Public Trust was not a threat to a free market; it was a challenge to a legislatively protected and privileged monopoly, the legal profession. Labour quickly abandoned any idea of a massive challenge to this ad hoc, mix-and-match brand of state socialism. Given that the real commanding height of the New Zealand economy remained agriculture and given the subsequent dismal history of attempts elsewhere to manage agriculture as a state activity, that was just as well for New Zealand’s economic development.

This giant and necessary move towards the ability to gain power by literally not frightening the sheep meant that Labour had no distinctive economic philosophy. By that I mean that Labour had no comprehensive, connected, implementable theory of how an economy did and should work which was essentially different from that held by its political opponents. Some of the nuances were quite strong, for example in the area for public works. And there was a quasi-keynesian belief that putting money into people’s pockets would grease the wheels of economic activity. But even in terms of pragmatic demand management Labour could scarcely outdo Vogel in the 1870s, or for that matter, Ward in the 1920s.

Thus Labour revolution after 1935 was a social revolution, not an economic one. The nature and form of New Zealand capitalism in 1949 was not essentially different from what it had been in 1935. This was despite a great deal of rhetoric from both political parties which might indicate the contrary. Both had a vested interest in seeming to be different while maintaining a status quo which seemed to serve both equally.

By 1949 Labour had presided over the creation of sufficient affluence to ensure its defeat. Yet National’s victory was far from sweeping and it can be argued it was only the luck of the 1951 waterfront dispute and the intervention of a third party in 1954 (the Social Credit Political League) which served to establish the basis for the National dominance of postwar politics. But National was also adept at mounting a takeover bid for the social and economic consensus Labour had established. And while Sid Holland was neither a Churchill nor a Macmillan, Keith Holyoake had more than a touch of the latter’s skills and proved to be the most effective political operator of the postwar era. So, except for one term, National presided over a workers’ paradise not too far from Labour’s own dreams from 1949 to 1972.

It is now fashionable on the right to deride this era, to see it as dominated by a mediocre politics characterised by arbitration between different interest groups. Such is the peculiar nature of neo-classical capitalist ideology that while the pursuit of self-interest by the individual is the height of moral virtue, the pursuit of self-interest by a group of individuals is the exact converse (unless, of course, the group is a company).

The left is more muddled in its approach. Logically and even emotionally it wants to praise this era which saw full employment, rising standards of living which covered all groups in society and a high level of social harmony. True, much of the last was built upon effective suppression of the aspirations of many Maori, women and other groups. But part of the reason for that suppression lay in the emollient effect of the long postwar prosperity. And while the left may light upon that suppression of aspirations as a justification for what is at least an ambivalent approach, its real difficulty probably lies in the simple fact that National was the governing party for the bulk of this era – particularly since this makes it even harder to sustain the argument of the Great Labour Betrayal which is now firmly embedded in left-wing myth. If the golden age of the ordinary man (with a sort of trickle sideways to women) was presided over by National, wearing Labour’s stolen clothing, then any historically based argument for the left becomes at least a great deal more complex than that of a simple battle between good and evil in which a large part of the forces for good defected in 1984.

The essential point is that the golden age was far from a true social democracy. It was a welfare state, but quite a limited one by western European standards. Except for the addition of the accident compensation scheme, its scope and aims were little different in 1984 from what they had been by the time of Savage’s death. If the new neo-classical individualist orthodoxy after 1984 proved to be a ship without a moral rudder, as Upton argues, the old palely collectivist order was close to being a rudder without a ship.

The unique feature of that old order in New Zealand was the extension of the pre-war dual economy. The problem was that this prosperity was unsustainable on such a basis and proved to be so well before 1984.

This unsustainability was a direct consequence of the nature of the dual economy. It was assumed that our efficient, exporting primary or agricultural sector would earn the foreign exchange which enabled the importation of the capital, equipment, componentry, and raw materials necessary to sustain the growth of secondary industries which were to provide employment for the rapidly growing population (from both one of the higher fertility rates in the western world and from strongly encouraged immigration). It was accepted that for an indefinite period many of these secondary industries would be inefficient, at least as measured on a price-competitive basis. Thus they required protection by tariffs and, even more, by qualitative restrictions which often served to protect the New Zealand producer, not just against foreign competition, but also against the emergence of any internal competition as well.

It is sometimes said that what destroyed the coherence of this economic structure – which until the late 1960s delivered full employment and reasonably strong growth – was Britain’s entry into the European Economic Community. In other words, as long as New Zealand was assured of a base market for its agricultural exports then the policy was sustainable. In fact the structure had begun to wobble and show signs of disintegration before Britain’s entry. That is because, as I suggested above, there was a fundamental illogicality about it. It was not possible to maintain indefinitely within the one structure an exporting sector which had to be not just competitively efficient but more than that given the trade barriers it faced and an importing/ manufacturing sector characterised by high cost structures even where this was not due to inefficiency as commonly understood. That is because the high costs of the latter increasingly fed into the former, distorting its price structures and thereby reducing its efficiency. This interpenetration of costs occurred at various levels but the result was always the same – to reduce the long-term viability of the exporting sector.

These factors and others were causing concern and showing their effects as early as 1967-1968 when the New Zealand economy had its most significant faltering since the second world war. It is far from true, as the right-wing myth holds, that the problems went completely unrecognised or unaddressed. But over the next few years the New Zealand economy faced a series of shocks for which it was ill prepared. And the responses which occurred were often the wrong ones, intensifying the problems rather than resolving them. Apart from the British entry into the EEC the most significant of these shocks were the oil crises of the 1970s. Underlying them was a long, strong downward trend in New Zealand’s terms of trade, a factor outside of our control.

This failure to adapt entered its period of Götterdämmerung under Sir Robert Muldoon. The characteristic feature of Muldoon’s economic management is that he was, nearly always, a lamb dressed as a wolf. Coming himself from humble circumstances he was a direct beneficiary of the great postwar prosperity and, for all his bombast and anti-Labour rhetoric, he never found it easy to challenge its fundamentals. On entering office as Prime Minister and Minister of Finance at the end of 1975 he began corrective action but began to back away from it well before the 1978 election. In addition, the foolish promise to introduce the National Superannuation Scheme quickly placed strong pressure on the fiscal deficit. Muldoon was never to escape from this box of his own making.

Increasingly Muldoonism degenerated into a destructive combination of low-grade populism and economic adhocery. Useful (and successful) moves to expand the manufacturing element of exporting were more than offset by the incapacity to come to grips with the economic fundamentals and realise that an era had come to an end. Instead, Muldoon applied a reductio ad absurdum process to the economic principles of the great postwar prosperity and finally and conclusively demonstrated their inadequacy as the basis for ongoing prosperity and social justice. Some, sadly, still do not accept that lesson and wish to have Muldoonism with a human face.

The fact that the fourth Labour Government – part out of necessity, part out of the commitment and drive of a small inner group – took on the demolition of New Zealand’s peculiar postwar economic structure has nevertheless left social democrats divided and confused. One group, with substantial public support, hankers for the recreation of the basis and substance of the postwar prosperity, with suitably politically correct add-ons. Another group has essentially withdrawn into quietism. And a third group has largely embraced the new economy but wishes to solve Upton’s problem by attaching a redesigned version of the old collectivist rudder to it.

Labour by and large falls into the third group. Its success will depend on its capacity to create a new fusion of its traditional social ideals with an effective management of the new economy. Strong economic growth has by and large lessened its need and inclination to engage in an ongoing self-staged show-trial of its part in creating the new economy. Now it has to fashion a coherent philosophical basis for managing that new economy in a way consistent with its underlying ideals.

I would argue that that is nothing like as difficult as it seems to some observers. The reason for my arguing that is, I hope, apparent from what I have said earlier in this essay about the nature of the old order as well as about some of what has happened since 1984.

If we accept that New Zealand’s particularly heavily regulated and protracted dual economy before 1984 was the exception and not the norm amongst western countries then the coexistence of an open market economy with social democratic ideals is not the impossible dream it is sometimes assumed to be. It is only our peculiar traditions which makes it seem so. And, to underline that point, protected economies elsewhere in the world have been more associated with non-democratic regimes dominated by the interests of social and political élites. The quasi-command economy New Zealand was running by 1984 in no way represents either a sufficient or even a necessary condition for social democracy.

Nevertheless it would be foolish to deny that there has been a good deal of floundering around since 1984 and more than one false turning taken. Inequality has increased. The growth of atomised individualism has proceeded apace. Our health and education systems have lost any sense of coherence in terms of purpose or underlying philosophy. As in a number of similar countries, the sense of social anomie and decay stands in stark contrast to a strongly performing economy. We are, indeed, as a nation rudderless.

In this situation it is best to return to first principles, to work from there, and then see where that may lead us. And what we have continually to remind ourselves is that most, if not all, of these first principles are matters of faith as well as reason. They represent ethical beliefs which are supported by our experience of actuality.

The most important of these principles is that of the innate equality of human beings. By that is clearly not meant equality of intelligence or physical beauty or skill at macramé or whatever. But we do mean that each individual human being should be valued for herself or himself. Each has a right to participate in society and to be part of that society.

That therefore implies that each person can reasonably expect, given a sincere attempt to contribute to society, a fair share of the product of the collective effort of that society. The second principle is that human beings are social beings. The institutions which give real meaning or purpose to human life are social or collective institutions, whether they be family, school, community, or nation. The isolated individual, rejecting society, is normally regarded as dysfunctional (or a saint, which may be much the same thing).

In fact, the proponents of individualism actually import this principle by the back door into their own views. For in their view of human beings, the individual strives to succeed in order to gain the admiration of his or her fellow humans (see Adam Smith, again, for the best statement of this). Thus, ironically, individualism requires society to have any context or meaning.

The third, allied, principle is that by and large human endeavour is at its most successful and rewarding when it is carved out by people working with each other. This is now the conclusion of so many recent studies on work practices and organisation that it is surprising that the cruder forms of neoclassical thought have retained any credibility at all.

The problem for social democrats is that stress is placed on all these principles within the kind of open, competitive economy New Zealand now is. The answer is not to abandon the principles but to see how those stresses can be dispersed and withstood, so that social order does not collapse. In that respect social democracy is now in many ways a conservative view of life. It is attempting to preserve concepts of social order against the divisive tendencies of the modern world.

The answer does not lie exclusively in a reaffirmation of the role of government, at least not central government acting in a traditional way. But an effective and well-resourced central government remains a necessary if not a sufficient condition of a working social democracy. Functions such as large-scale income transfers, essential to the participation principle, cannot otherwise be implemented. If an open, competitive economy is the most effective means to wealth creation, then the sharing of that wealth cannot be left to the market. Taxation is the privilege we enjoy for the sake of an ordered and humane society.

But it is also a fact (as Sweden and others are learning painfully) that in a competitive world environment income transfer schemes need to have a high level of targeting if they are to be effective and efficient. Universality leads to inadequate redistribution to counter the effects of the market as well as very high tax rates to pay for the so-called “churning” effects that result.

That, therefore, places greater emphasis on those elements of public policy which bind together people on the basis of common citizenship. That is because a targeted income maintenance system places further stress on social cohesion in some respects even as it increases the chances of participation in society for many.

The elements I refer to particularly relate to the provision of social services. The most disastrous move of recent years has been that towards the targeting of provision for these services. This has greatly accelerated the level of social tension and mutual resentment as well as laid the groundwork for a highly stratified system of social provision in areas such as health and education. The reversal of that trend must be the top priority for social democrats. American experience shows only too graphically a stratified social service system in a diamond-shaped social structure quickly creates its own constituencies which cannot be defeated. (Thus the United States has a near-universal pension scheme which advantages the better-off in combination with a stratified health system which also advantages the better-off.)

This does not mean that all such services have to be centrally, rigidly controlled. The conscious building of community, the taking of decisions down to the lowest possible level, also has to be on the social democratic agenda. The notion of mutual responsibility – the logical conclusion of the three principles I have outlined – cannot just be articulated at the level of the nation. It has to be given substance within the contexts that have most meaning for people. The role of the state is to ensure the resources are available to support those communities whose own resources would otherwise be inadequate.

In a sense social democracy is thus moving from an organising idea based on the mixed economy to one based on the mixed society and the mixed polity. But there is no lack of rudder, or of moral purpose. There still is a politics which can legitimately derive its ancestry from the belief that one should do unto others as you would have them do unto you. The first clear statement of the principle was in fact in the Analects of Confucius. Perhaps that is why The Economist, the weekly bible of neo-classicists, recently said that the Analects “does not help much”. For the rudderless it just might.


Michael Cullen is a Labour MP and shadow finance minister. Before entering politics he was a social historian.


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