Review: Jane Kelsey – The FIRE Economy: New Zealand’s Reckoning

downloadJane Kelsey  The FIRE Economy: New Zealand’s Reckoning,  Bridget Williams Books, with the New Zealand Law Foundation, 2015

Robert H. Wade

Jane Kelsey’s new book is a tour de force, a fascinating account of how the neoliberal “revolutionaries” (as they thought of themselves) went about embedding neoliberal principles at the commanding heights and all the way down to the nooks and crannies of New Zealand policy and institutions (education, health, welfare, civil service, diplomatic corps, post office, infrastructure), from 1984 onwards. But its significance goes far beyond New Zealand, because similar ideas, partly inspired by the New Zealand theorizing and experience, were embedded in other western countries. Many developing countries, too, via multilateral organizations controlled by western states, such as the World Bank and the IMF. So the New Zealand case shows the more general playbook for hard-wiring neoliberal principles into modern societies.

The key idea of neoliberalism is that corporations – often wrongly equated with “markets” – should have wide scope to decide on resource allocations with little or no “government intervention”. Even cases of widely acknowledged “market failure” do not provide sufficient justification for government intervention to correct the market failure, because in general the costs of government intervention exceed the costs of uncorrected market failures (echoes of “Think Big”). The government’s job is to ensure a stable macroeconomic environment, with low inflation and low taxes on corporations and high earners so as to ensure that existing ones stay in the society and new ones are attracted in; to take responsibility for the supply of infrastructure; also to provide a minimum level of social protection; and pass and enforce laws which help to sluice income and wealth up towards the top (such as intellectual property laws, laws for corporate governance and salaries, laws about inheritance tax,  laws about collective action by workers, and in the United States, laws which disallow public financing of elections meaning that candidates depend on private donors).

On the ground in New Zealand and many other western economies, the application of neoliberal principles resulted in huge growth of the FIRE economy (finance, insurance, real estate) relative to the rest.  In fact, western economies have come to rely on the FIRE sectors for economic growth.  Rich people and organizations lend down to poorer people, who borrow to increase their consumption out of near-stagnant incomes. The downward flows are restructured into financial securities and sold far and wide (justified as “reducing risk by spreading risk”, a proposition exposed by 2007-2012 as untrue); which has the merit from the lender’s perspective of removing risk to him or herself.  This mechanism can sustain aggregate demand and hence economic growth for a time – but it is unsustainable.  From the neoliberal perspective, the linked growth in inequality is not something to worry about, or only in so far as it goes with sustained or increasing poverty at the other end of the scale, for which some “government intervention” may be justified.

Kelsey shows how economists and ruling politicians bought into neoliberal principles from the 1980s onwards.  People in the FIRE economy, and individuals at the top of income distributions, supported economists and politicians as they drove New Zealand’s and other western countries’ institutions from the “embedded liberalism” of the post-Second World War decades (responding to the Great Depression, Second World War and the looming threat of Russia and communism), into the “embedded neoliberalism” of Roger Douglas, Margaret Thatcher, Ronald Reagan, and most mainstream economists.

Contrary to the promises of the champions, overall economic performance in western countries deteriorated fairly steadily from around 1980 onwards, with short interruptions.  Demography – end of the baby boom and suburbanization – is one important reason.  To what extent the slowdown was also caused by the policy and institutional framework of neoliberalism (nationally and internationally) is, of course, disputed.   At least it is clear that the neoliberal paradigm did not prevent the steady deterioration.   So we might be surprised that western states have pushed many developing countries (including through international organizations controlled by western states, like the World Bank and IMF) to adopt much the same neoliberal principles (“There Is No Alternative”) – until one realizes that the neoliberal policy paradigm applied in the rest of the world works very much to the advantage of western corporations, behind the screen of “win-win”.

Perhaps the most chilling theme of Kelsey’s book is the attitude of senior New Zealand policy makers towards democracy.  It is not the same as Turkey’s President Ergogan, who said, “Democracy is like a bus you take to where you want to go [and then you get off]”. But it went in the same direction.  Here is Kelsey: “the intellectuals who drove this transformation set out to anticipate and neutralise what they variously called “the commitment problem”, “political slippage”, and “despotic democracy”, and to embed their new regime as deeply as possible…. The Treasury Secretary from 1994 to 1999, Murray Horn, was quite frank about this process when he outlined various ways to prevent political slippage and to ensure that the political and private interests driving that particular radical change continued to enjoy the benefits long-term” (p. 121).  Lack of continuity from one government to another can certainly constitute a major problem.  But to stress only the “commitment problem” of democracy sounds like the Wall Street executive who declared to the TV camera, “Democracy is not important. What is important is capitalism”.   The New Zealanders whom Nicky Hager exposes in The Hollow Men: A Study in the Politics of Deception (2006) and Dirty Politics: How Attack Politics Is Poisoning New Zealand’s Political Environment (2014) might unofficially think the same, and with barely an exception they got away with their misdeeds scott free.

Robert H. Wade is professor of political economy at the London School of Economics. He graduated from Otago University and Victoria University in the 1960s, before departing for the UK to do a PhD. His book Governing the Market won the American Political Science Association’s award for Best Book or Article in Political Economy, 1992; and he won the Leontief Prize for Extending the Frontiers of Economic Thought, 2008.