From Opportunism to Investment: Rethinking Economic Policy, 1850–1980
Chapter 7 of ‘The Revolution that Nearly Was: How Aotearoa New Zealand’s progress was frustrated, and utopia mislaid’
AS the nineteenth century became the twentieth, economists would double down on atomistic opportunism as the foundation of their discipline. This was an intellectual development that would come to be known, in its most common form, as neoclassical economics.
Yet neoclassicism would not be the dominant intellectual current of the age when it came to actual economic policy. Policy inclined, instead, toward a relaxation of the opportunistic paradigm and toward an emphasis on the maintenance of high levels of investment instead: a social goal that opportunism was now seen to put at risk.
Putting investment ahead of opportunism became the new normal, at least until the coming of neoliberalism in the 1980s.
The Three-Class Problem
As we saw in the previous chapter, the earlier classical economics, or political economy as it was then known — the edifice erected by Smith — had placed decentralised opportunism at its fore.
Nonetheless, classical political economy had also maintained a concrete distinction between land, in the sense of natural resources and space on the map; labour, which included mental effort; and capital, meaning not so much money as, rather, every kind of productive investment and improvement —the new industrial machinery above all, but also things like houses and farm buildings.
Though Smith did not have too much to say about capital and class, his immediate successors came to view land, labour, and capital as the basis of a three-cornered and thus unstable class system: a political version of the three-body problem in physics.
Land, labour, and capital came to be seen not merely as useful categories in economics, which might for instance be taxed differently — indeed, Smith had drawn attention to the often privately unearned nature of land value windfalls — but also as the means by which potentially antagonistic interest groups derived their respective slices of the social cake.
Why was this three-class system unstable? Well, over time, the classicals began to zero in on the way that the interests of the three classes might be antagonistic. And how they might also be subject, therefore, to shifting alliances in which two might gang up on the third.
For instance, in 1817, Sir Edward West, a colleague of the Reverend Malthus and a better-known economist named David Ricardo, noted that economic and demographic progress affected land and capital differently. As cities grew and populations increased, the value of land tended to display windfall gains. On the other the expansion of the economy led the products of industry to grow cheaper through learning effects and economies of scale.
West noted that this development had the potential to lead to a perverse outcome, whereby all of the gains of industry would tend to flow to the landed sector, while industry would become increasingly unprofitable.
This idea became known as the theory of the ‘all-consuming rent’, and it was to greatly vex the most serious economic thinkers of the nineteenth century.
Smith was an optimist. But thereafter, from Malthus to Marx via West, Ricardo, not to mention John Stuart Mill, his wife Harriet and his father James, the analysis of classical political economy pointed inexorably toward some kind of looming crisis for the new society that was otherwise being forged by such captains of industry as Isambard Kingdom Brunel, iconically photographed in front of the anchor-chains of his new and unprecedentedly colossal steamship, the Great Eastern.
Brunel is doing his best to look confident, but in reality his finances were always rickety, much more so than the things he built.
Classical political economy predicted that the ever-more-numerous urban workers would face higher rentals and, if Malthus was right, increasingly expensive food as well. This would lead them to agitate for higher wages even as the rent for the land beneath the factory went up, while the industrialists all undercut each other with ever cheaper, and therefore less straightforwardly profitable, products.
It was for such predictions of a looming crisis, as well as for other reasons, that classical political economy came to be known as the dismal science.
One possible outcome of the expected economic crisis was that landlords and industrialists might then join forces against the workers, in which case a revolutionary scenario was on the cards.
Alternatively, industrial capital and labour might join forces to throw landed wealth under the bus, in which case a form of social democracy might emerge.
Thus was formulated something akin to the famous three-body problem in physics, except that it applied to the sphere of political economy. A sphere which was, indeed, nakedly political in those days.
Land on the Defensive
In the second half of the nineteenth century, the cause of the landed interest had grown especially embattled, as the landowner was now increasingly perceived as a feudal relic in a time of industrial progress.
As far back as 1848, in the first edition of his Principles of Political Economy, Mill had proposed a confiscatory tax on all future gains in land value beyond an appointed date.
A generation thereafter, the American reformer Henry George was to amend and popularise Mill’s idea, via his own proposal for what came to be known as the ‘single tax’: meaning the imposition of all taxation on the unimproved value of land and privately owned natural resources.
Land would thereby become cheap and accessible to the many precisely because it bore the burden of taxation. At the same time, the burden of taxation would be taken off workers, industrialists, and shopkeepers.
George’s magnum opus was an 1879 book called Progress and Poverty, though he also wrote many pamphlets and articles.
The ideas of Mill and George on the land question were hugely influential throughout the English-speaking world, New Zealand included.
While the industrial capitalists of that era were challenged by early socialists and budding trade unionists, the progress they wrought seemed to shield them from the revolutionary Communist demands that the young Marx had thought to be just around the corner in the most industrialised nations.
But no comparable benefit of the doubt was accorded to the landowner who had swooped in to take possession of land that soon became more valuable as “whole populations” were “conjured out ot the ground” by industrial development, new methods of farming, and railway-era colonisation, which was more intensive and reached further inland than had been possible in the eighteenth century.
What the New Zealand historian James Belich has called the “explosive” nature of steam-age Anglophone colonisation, as opposed to the more limited and coastal colonisation of the age of sail, was depicted in its day by several allegorical paintings and prints. One popular example is reproduced here.
On the exploding frontiers of the nineteenth century, a form of class-resentment soon arose between forerunner settlers who had come into large tracts after defeating or deceiving the indigenous peoples, and newcomer settlers who arrived to find the best places taken by law. Whence, the complaint of the New Zealand colonist who observed, in the North Otago Times of 15 March 1890, in regard to a forthcoming visit by Henry George, that:
One gentleman states that no people are in more need of a lesson from the great reformer than ourselves. Be that as it may, here we are, sir, in a brand-new country, not one-tenth part populated, with hardly standing room left for the outsider. The percentage of good or middling good arable land to the whole area is insignificant; yet we can boast of even single individuals owning their 100,000 acres, more or less, of the pick of the land. They acquired it originally, probably, for a trifle, and have got it enhanced to its present value by the people and their borrowed money. (at p. 3)
Even back home in Britain and Europe, the upheavals of the time, which included the growth of large industrial cities (often on land owned by rural aristocrats) added fuel, in the same era, to old resentments against the gentry. And while depopulation and lack of industry were the main concerns in Ireland, there, too, the land question still came to the fore.
Not for nothing was the landlord, as it seems, the villain of every Victorian melodrama.
Speaking on 13 April 1883 to a packed Dunedin Lyceum Hall, described in the Otago Daily Times as “crowded in every part,” the Mayor of Dunedin in the chair, a politician named Robert Stout, whose address bore the Georgist-sounding title of ‘Politics and Poverty’, declared that:
Land is a monopoly, and it will always remain a monopoly. I, however, believe that the land should belong to the State, and not to individuals. — (Applause)
One year later, Stout became the Premier of New Zealand.
Such were the developments that contributed to New Zealand’s growing reputation, in that era, as a ‘social laboratory’ in which new political experiments were being tried out. Experiments that included, from 1893, universal and equal suffrage for women. Māori political representation at the national level was also ensured de jure by a parliamentary quota from 1867 and, by convention, in the cabinet from the 1890s. While imperfect, this degree of indigenous representation at the national level contrasts with the situation in Australia, Canada, South Africa and the USA at the time and for a long time thereafter, where there was effectively or actually none.
Such developments — not so much the more liberal reforms such as votes for women or indigenous representation, but certainly the elevation of radicals like Stout — contributed to growing fears, among conservative landed elements across the Anglosphere, that some kind of revolution was afoot and that they were in its crosshairs.
The fact that this revolution was more likely to be social-democratic than Marxist only made it more of a threat. And that was because the coming of social democracy at the ballot box was far more probable, in the Anglosphere, than a bloody uprising of all the workers against the joint forces of industrial and landed ownership.
Nothing like that was ever really on the cards in the sorts of countries that held regular elections. On the other hand, the prospect that the enfranchised masses might vote for social democracy was very real.
Land in a Technostructural Age
Some turn-of-the-century economists, such as Nelson Simon Patten, argued that while atomistic competition was the old ideal, the modern industrial economy was increasingly dominated by a degree of monopoly power.
Patten would surely have been familiar with depictions of what Drucker, as quoted in my Chapter 6, called the Standard Oil “octopus.” For Drucker didn’t coin that expression: it was the standard cartoonist’s trope of the time.
Such great firms, the founders of what Galbraith would later call the technostructure, were perhaps, as Drucker insisted, small by later standards. But they exercised significant monopolistic powers all the same.
Moreover, in ways that made them vulnerable to the critiques of Mill and George, the powers of the early technostructure were often concretely geographical. They were based on the control of railroads, pipelines, and other physical network infrastructures in ways that were bound up with adjacent land values and economic opportunities, a fact obvious to the people who lived on that land and depended on those opportunities.
In the words of one scholar, looking backward from 1934, in the late nineteenth century, the owners of America’s railways in those days:
… would get the best of coalmine operators, then having conquered them, would exploit the industries which depended on supplies of coal. Or syndicates owning grain elevators or slaughterhouses would enter into collusion with the railroads to exploit the producers of grain and of cattle; oil-refiners would exploit those who drilled for petroleum, then would conquer or combine with their erstwhile opponents to exploit the underlying consumers altogether.
(Matthew Josephson, The Robber Barons, Harcourt, 1934, from a longer quote in Jonathan Tepper (with Denise Hearn), The Myth of Capitalism: Monopolies and the Death of Competition, Hoboken NJ, John Wiley & sons, 2019, pp. 139–140.)
It was against this background that Stout’s political colleague, the still more famous Julius Vogel, argued for the permanent state ownership and control not only of New Zealand’s railways, but also, of a “railway estate” of public lands alongside:
Meanwhile the railway estate will develop, and in the course of time become enormously valuable. . . . Look at the value of [private enterprise] railway systems where fighting and competition go on in every direction over almost every mile, and then ask what must be the value of a [state] system in which the costly warfare will of necessity be absent. Twenty years hence the railways of New Zealand will be enormously valuable. . . . The Government which divested the colony of its contingent profits derivable from keeping the railways for the benefit of the State would, in my opinion, deserve to be hung. Scarcely less should be the punishment of a State which sacrificed the public lands which those railways make every year more valuable . . .
This letter can be found online as ‘Sir Julius Vogel and the New Zealand Railways’, text of a letter of 21 April 1881, posted from London to Mr Oswald Curtis of Nelson and reproduced in The Press, Christchurch, 15 June 1881.
Against those who wished to nationalise much of the technostructure along with the land to which it gave value, Patten strove to fend off such radical proposals by insisting that private ownership of land, though a form of monopoly itself, was a positive equaliser in the face of technostructural monopolies.
It was true that land was a monopoly in the sense that each location was unique and immobile, and that favoured locations gained value in a windfall-like manner from the growth of surrounding communities.
Nonetheless, because the ownership of land was more widely distributed in the lands of settler colonialism than in aristocratic Europe, the ability to capture windfall gains in land value gave the multitudes of settlers what Galbraith was later to term a ‘countervailing’ monopoly power against big business and its emerging technostructure.
Or so Patten claimed, at any rate.
Up to a point, radical policies aimed at breaking up forerunner estates were consistent with Patten’s defence of private property; but only if the estates were then parcelled out to small freeholders, who would also be encouraged to invest in shares in monopolistic companies.
As long as the majority of ordinary people could afford a home and benefit from modest increases in the value of the land (and their shares), the problem of class conflict could be avoided even in a society dominated by big business, wrote Patten.
What he called ‘the conflict theory of distribution’ could be swept into the dustbin, the countervailing monopolies balancing each other out as if by some new version of the invisible hand.
Patten’s insight would be hugely influential on the Anglophone centre-right for the next eighty years. Above all, the centre-right would support widespread home ownership as the foundation of what it came to call a ‘property-owning democracy’.
But that was then, and this is now. Under neoliberalism, the centre-right would, thereafter, abandon the Patten formula in favour of the engineering of excessive land price rises and, as such, the dwindling of homeownership and the probable return of the conflict theory of distribution: the aforementioned three-body problem that so vexed the dismal science, from Malthus and West to Marx and George, by way of Ricardo and the Mills.
A graph by the economists Shamubeel and Selena Eaqub shows how house prices to household incomes have slipped out of control in neoliberal New Zealand, in ways that are actually worse than the graph suggests because household incomes would typically have been those of one earner in 1960, but are now typically the earnings of two.
The all-consuming rent, indeed.
The Neoclassical Reaction
Like the proverbial bumblebee, Patten’s kludge, whereby the power of big business would be balanced out by widely distributed and modestly appreciating suburban homeownership, wasn’t very elegant.
As with the flight of that furry insect, about the only thing Patten’s formula for a successful centre-right had in its favour was that it seemed to work.
It delivered a fair degree of economic and social stability in times when homeownership was genuinely widespread, and a good run of electoral victories for centre-right parties as well, at least until the landed interest and the banks that financed it began to get greedy.
But others would have nothing of Patten’s scheme for balancing the competing private interests of land and capital to the benefit of labour, provided that it was the labour of a suburban homeowner.
And not merely those to the left of Patten, who proposed nationalising both the railways and the land alongside, but also free-marketeers to his right, who thought that all this talk of countervailing powers in a monopolistic big-business economy seemed like too much of a compromise with the left.
What next? Was Patten going to stick up for trade unionism as a social equaliser against the power of big business, too? For that was the logic of his allegedly centre-right position.
As far as Patten’s foes to the right, fearing precisely such an outcome, were concerned, the more aridly atomistic economics became — if only ‘for the sake of argument’ and ‘in theory’ — the better.
The more the economists could argue about the details of their mathematical equations, and the less about countervailing powers, the better.
From that point of view, it was time to take the politics out of political economy for good.
And for that matter, to erase the classical distinction between the money-capital that vests itself in land and the money-capital that vests itself in machines: to reduce everything to purely abstract exchange instead, including the ‘human capital’ of labour.
Labour had formerly been regarded as separate from land and machines in the classical system, because it had families and belonged to communities and therefore could not be viewed quite so instrumentally as either land or machines. But all that sentiment was jettisoned along with the adjective ‘political’ in the new, neoclassical economics.
There is a revealing account of the influences weighing on the mind of one of the most eminent founders of neoclassical economics, John Bates Clark, after whom the American Economic Association’s Clark Medal is named. In 1927, a younger economist, Frank Fetter, wrote, retrospectively, in an essay called ‘Clark’s Reformulation of the Capital Concept’, which Fetter contributed to a festschrift in honour of Clark’s eightieth birthday, that:
Events were just at that time crowding each other fast in the single tax propaganda. Progress and Poverty was translated into many languages and was said to have had a larger sale than any other book ever written by an American. In 1886 George was nominated and ran for the mayoralty of New York City, and of the three candidates he polled the second-highest number of votes. In 1887 George was a candidate for the Secretaryship of New York State but was defeated. No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty.
At this moment Clark stepped into the arena of discussion armed with a new weapon, a valuation, or investment, concept of capital. His little monograph wears the mien of pure theory, and lingers for a time as its author himself says “in a region of abstract thought.” But having in mind the circumstances just described, one can hardly fail to see on almost every page reflections of the contemporary single-tax discussion. In the brief preface is expressed the hope that “it may be found that these principles settle questions of agrarian socialism.” Repeatedly the discussion turns to “the capital that vests itself in land,” declared to be “a form of investment neither more nor less lucrative than others.” On the ethics of confiscation Clark concludes that morally as well as legally “pure capital when invested in land, has the same rights that elsewhere belong to it.” And as to confiscating all land values by the single tax, he exclaims: “would it be robbery? No; it would be the quintessence of robbery.”
Instead of treating capital as productive improvements that are distinct from unimproved land and natural resources, Clark treated capital as money that was looking for a place to be parked, and indifferent to where that place was as long as it yielded a good return.
The purely monetary view of capital is characteristic of neoclassical economics, as opposed to classical political economy. It does, of course, reflect the fact that in everyday practice ‘capital’ does have two forms, namely, machines and money. Classical political economy insisted on the realism of the former, while neoclassicism ended up taking refuge from reality, and the condemnation of landed speculation as unproductive, in the latter.
The price neoclassical economics was to pay for completely immunising the real estate speculator from criticism was that it would, understandably, end up with no realistic theory of investment of the kind that develops the economy, as opposed to merely acting as a ‘liquid’, that is to say, easily sold off store of existing wealth like land or for that matter cash, gold, old paintings, aged whisky (a popular investment outlet these days), and so on.
Many economists are aware of this defect: as one of their number, Brad DeLong, has written, neoclassicism makes no intrinsic distinction between the social worth of potato chips and computer chips; nor indeed, as it would seem, casino chips.
An important aspect of the neoclassical blindness to thedistinction between investment and what the great British economist John Maynard Keynes called ‘hoarding’ is that capital investment in the old-school, classical sense, always involves an element of commitment.
This classical distinction is normally upheld by government statisticians, even if it is ignored by most economists.
Basically, if you buy a bag of concrete, that will not normally be considered an investment from the government-statistician point of view as long as the concrete remains in the bag. But if you mix the bag with some water and watch it go hard, suddenly the money you spent does become an investment after all.
In other words, there has to be the actual construction of some improvement, a material change in the world that cannot feasibly be reversed, for investment to count as the real thing.
This kind of commitment may be contrasted to the position of a hoarder, speculator, or collector who produces nothing.
To use the term favoured by financial writers, the hoarder, speculator or collector is more ‘liquid’ than the committed capitalist: more liquid in the sense of having ready money on hand or being able to on-sell assets in a hurry without too much of a markdown (as opposed to jackhammering up the concrete of our previous example and paying someone to take it away.)
As Keynes noted in his General Theory of Employment, Interest, and Money (1936), there is a tension between investment in the classical, government-statistician sense, and liquidity, insofar as steady economic progress depends on the former while private advantage, and the ability to take advantage of emerging situations, often favours the latter, indeed to the point that liquidity can become a “fetish” in financial markets in which the ownership of shares, and everything else that might yield a return, is traded as if in a casino. In Keynes’s words, from Chapter 12 of the General Theory,
Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
Such are the criticisms that can be made not merely of the financial markets but also of neoclassicism’s blurring of the distinction between capital and land in the their former classical sense, or between investment and hoarding.
However, having said that, neoclassical economics’ influence on the thinking of most practical people was nonetheless quite limited until recent decades.
Taming the Technostructure in the Twentieth Century, Part 1: The Socially Beneficial Corporation
For the idea of organisation was hard for practical people to ignore. In another Patten-like acknowledgement of the new realities, an economist named Frank Knight noted, his 1921 book Risk, Uncertainty, and Profit, that an increasingly organised economy required investments to be made, not against the nicely calculated less and more assumed by the neoclassicals, but, in reality, against radically uncertain knowledge of future returns: “the dark forces of time and ignorance” to which Keynes would later refer in his General Theory, and on which he would elaborate in a 1937 follow-up article with a similar title, ‘The General Theory of Employment’:
By “uncertain” knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed.
The ability to forge ahead with gigantic commitments in the face of uncertainty was something that Marx had already referred to as the ‘salto mortale’m meaning death leap, like that of some daredevil.
That is to say, the daredevil commitment of the sort of entrepreneur who bore the stamp of Brunel, whose Great Eastern was six times larger than any ship that had ever been built previously.
Marx actually saw that sort of fearless capitalist as quite admirable. But he also took that view that such types were also, for the most part, doomed to over-reach and go broke, to the benefit of “the most worthless and wretched kind of money-capitalists,” who would get the innovator’s assets and patents for a song.
To paraphrase Monty Python, the innovator’s martyrdom would inspire future generations. Brunel, perhaps the most famous case in point, had indeed pretty much gone broke by the time he died, essentially from overwork; but then again, an engineering school would later be named after him.
According to Knight, because the capitalists— in the classical sense of the word — were making all-or-nothing commitments in the face of an uncertain future, they deserved to keep all the profits.
Predictably, though, others pointed to the way that the other stakeholders in large and complicated enterprises were also drawn into webs of commitment.
In a 2020 New Yorker article about the inhabitants of a mostly white-collar Connecticut commuter town named Greenwich, later woven into his book Wildlands, the American business journalist Evan Osnos observed that:
In 1927, Owen D. Young, a Greenwich resident who was the first chairman of General Electric, gave a speech at Harvard Business School, in which he scolded businessmen who “devise ways and means to squeeze out of labor its last ounce of effort and last penny of compensation.” He encouraged them instead to “think in terms of human beings — one group of human beings who put their capital in, and another group who put their lives and labor in a common enterprise for mutual advantage.” Rick Wartzman, a longtime head of the Drucker Institute and a historian of corporate behavior, told me, “This really was beyond rhetoric. We were much more of a ‘we’ culture than an ‘I’ culture.” On Young’s watch, G.E. became one of the first American companies to give workers a pension, profit-sharing, life insurance, medical coverage, loans, and housing assistance.
The management writer William Janeway has since argued that such firms were moving away from the old profit-first ideal toward a new, half-formed ideal of the ‘socially beneficial corporation’.
While we should not over-idealise such developments ourselves, it can be said that one very significant consequence was the rise of the idea that the firm should be managed for a principle of sustainability, for its own survival as a ‘going concern’, rather than for maximum profit, which, in view of future uncertainty, would always be maximum short-term profit, thereby ruining the stake everyone else had in the system.
As Drucker put it in his Concept of the Corporation,
In the social reality of today, however, shareholders are but one of several groups of people who stand in a special relationship to the corporation. The corporation is permanent, the shareholder is transitory. It might even be said without much exaggeration that the corporation is really socially and politically a priori whereas the shareholder’s position is derivative and exists only in contemplation of law…. the essence of the corporation is social, that is human, organization. (1946 edn, pp. 20–21)
It is worth noting that while crafting The Concept of the Corporation Drucker, after whom Wartzman’s institute is named, was sponsored on a full salary for two years by General Motors and allowed to attend its high-level meetings. His was an orthodox view at the time.
Getting down to brass tacks, the idea of the corporation as a going concern or ‘socially beneficial’ institution ultimately boiled down to the levels of investment that were deemed necessary for long-term viability, and, indeed, the extent to which long-term viability figured in investment decision-making.
It is generally easier to assess technical viability, of what will and won’t work twenty years hence on current trends, than future commercial profits, which are the difference between two large numbers and thus more volatile.
The maintenance of viability thus tends to focus on technical matters more than commercial ones. It rests on a belief that as long as the technical underpinnings are healthy, with plenty of continued investment in such things as research and development, the future firm will be, at least, in a better position to compete than it would be otherwise.
(A response to commercial uncertainty that privileges the maintenance of a viable system is a lot like saying that we can’t guarantee that an athlete will still be winning races in a few years if they are still fit and strong, but that we know for a fact that they won’t if they are half-starved.)
In large, complicated technostructures, webs of enterprise and stakeholder communities, there would always be a tension between the amount of investment needed to maintain the system’s long-term viability, and the fact that short-term profits, being the excess of earnings over expenditure in any given year could often be boosted by failing to make long-term investments in future viability.
The same applies in the public sector, except that there the issue is that of opportunities for tax cuts. Otherwise, the issues are pretty much the same.
That such a tension existed between investment on the one hand, and short-run profitability and the temptation to hoard cash on the other, lay at the heart not only of some of Marx’s ideas but also of the British economist John Maynard Keynes’s more successfully social-democratic insistence, in the 1930s, that the modern capitalist economy needed what came to be known as ‘pump priming’.
Keynes argued that in a modern complex economy, the levels of investment dictated by purely commercial considerations would often be inadequate and that the state needed to intervene to boost private-sector investment, in addition to resisting its own, equivalent tendencies toward false economies.
In the 1930s, Keynes was concerned with the immediate issue of getting the economy going again in the aftermath of the Great Depression. Keynesian pump-priming is often viewed through that lens. Nonetheless, he also argued that investment could be structurally inadequate for much longer periods of time and that this was perhaps even the norm under a hands-off economic policy.
Indeed, that insight has been confirmed under neoliberalism, where short-run profit maximisation has become the norm (along with tax cuts in the public sector), at the expense of investment and corporate sustainability.
In the UK, upon which New Zealand continues to closely model itself as the old country’s faithful mini-me even today, with nearly every newspaper headline about the Brexit-era UK having its New Zealand equivalent, an upsurge of investment in the 1980s had more to do with developing North Sea oil and gas — in our country, in the same era, Māui oil and gas — than with industrial growth.
As we know, Britain was then de-industrialising. After which it has all been down, down, down.
Here are a couple of deeper dives into the woes of the UK, in the first of which, the above graph appears roughly halfway:
Of course, a lot of money has been ‘invested’ in buying and selling real estate in the Anglophone countries over the last forty years. But as we have seen, as long as this ‘investment’ does consist purely of buying and selling, it is not officially counted as investment.
An increasing tendency to skimp on investment in favour of cash-on-hand helps explain, for instance, the recent troubles at Boeing.
And to a certain extent also, the collapse of Kodak (remember Kodak?), the subject of an overview by the excellent Asianometry channel.
Here in New Zealand, we have many examples of investment shortfall, of which one of the most spectacular is to be found in our contemporary electricity system.
Originally intended, in the twentieth century, to aid the industrialisation of New Zealand by means of low-cost renewable energy, our electricity system is now run on an extractive basis, with the world’s highest wholesale electricity prices (or nearly so) killing off downstream business.
A 2022 report called Generating Scarcity (to which an update was added in 2023) made the point that since New Zealand’s electricity generation and retailing (‘gentailing’) system was partially privatised during John Key’s premiership (2008–2017), dividend payouts by the gentailers had exceeded profits — themselves ample — by 74%:
Since the partial privatisation of Genesis, Mercury and Meridian, the gentailers (including Contact Energy) have distributed $8.7 billion in dividends to shareholders, $3.7 billion more than they earned in profits over this period. This has starved the network of the investment needed to fund new generating assets while keeping existing gas and coal-generating facilities on life support. (p. 5; note reference deleted)
Paying out 174% of profits to shareholders is the very opposite of a sustainable strategy. It is, instead, the sort of scenario for which the fable of killing the goose that laid the golden eggs could have been invented.
There is, of course, a spectre haunting our for-profit electric power system, namely the spectre of cheap renewables from windmills and solar panels. But as the preceding quote suggests, the gentailers have done their best to see off that prospect by paying out huge, self-crippling dividends, actually liquidating their capital in preference to investing in modern renewables, the myth of ‘clean green Aotearoa’ notwithstanding.
That there is a tension in capitalism between actually investing on the one hand, and keeping plenty of cash or other ‘liquid’ assets on hand (or paying out this cash as dividends and tax cuts), and the fact that institutional incentives often favour the latter over the former, is the mighty contradiction at the heart of capitalism that Keynes identified.
Along with the peril of the all-consuming rent that West and the other dismal scientists of the nineteenth century identified, Keynes’s arguments reinforced the idea that the state had to tilt the so-called level playing field of the market away from short-term-profit maximisation and real estate speculation and in favour of investment.
Ironically, though it began as a reaction against all those who made such claims, the neoliberal experiment has, in fact, vindicated their case.
The Big Push: Coordinating Investment for Maximum Output
Keynes’s idea that the investment pump needed priming was taken further, in 1943, by Paul N Rosenstein-Rodan, who came up with an theory he called ‘the big push’, a forerunner of the paradox of implementation.
In Rosenstein-Rodan’s view, if several firms each held a piece of a technological jigsaw, the state might need to intervene to bring them together and get them to cooperate fully. And all the more so, if the state and its research institutes held some other pieces of the puzzle themselves.
The experience of World War II provided many examples of the relevance of Rosenstein-Rodan’s big push idea. In a 2008 technical article that includes an interview with an authority on the development of synthetic rubber during World War II, Henry Inman, we read that:
“You would never see in our lifetime, and even our grandchildren’s lifetime, the collaborative efforts that took place at that time with the synthetic rubber program,” says Inman. “You have the government, private enterprises and academia all working towards one objective sharing patents and agreements and operating these facilities on behalf of America.”
As the saying goes, teamwork makes the dream work, an insight which is very poorly reflected in standard textbook economics (in fact, not at all).
And the dream did work. According to the same article,
Production of GR-S, the equivalent of Germany’s Buna-S, was estimated at 3,271 long tons (3,323 tonnes) by mid-1942, and by 1945 it increased to 756,000 long tons.
. . .
By 1945, synthetic rubber output exceeded 830,000 tonnes/year with the US government financing the construction of 15 SBR plants, two butyl rubber plants, 16 butadiene production facilities and five styrene plants costing about $750m, according to the IISRP.
Thereafter, once things reached a certain level of maturity, the state could step back. In the same article, we read as follows:
“Supply was seven times greater than Germany’s peak production in 1943,” says the IISRP’s managing director and CEO James McGraw. “Between 1946 and 1955, most of the plants were later sold to private companies. The next evolution was the rapid expansion in the post-war period, which continued through the 1960s.”
Another such example was that of penicillin, which languished as a laboratory curiosity right through the Depression and was only made into an accessible commodity drug by a similar wartime programme to that by which synthetic rubber was made generally available.
And that is without getting into more familiar examples of World War II-era technological kickstarting such as jet planes, computers, large pressurised aircraft, computers on large pressurised aircraft (as per the last chapter), nuclear technology and the atomic bomb, radar, the proximity fuze, polythene, acrylic moulding, silicone rubbers, and other other foundations of the subsequent, post-war economic expansion.
One of Britain’s leading wartime scientists, Sir Henry Tizard, who led a famous 1940 mission to the United States to enlist the Americans in the mass-production of a number of recent British inventions, was later to say that “one can make almost any scheme work if there is a general desire to do so” (in Ronald Clark, Tizard, 1965, p. 76).
Such collaborative accounts of modern economic history and industrial progress tend to appeal the more to readers, the more that they know about science and technology.
On the other hand, those who do not know very much about science and technology are more likely to retain Smithian and atomistic illusions, including the similarly discredited idea that most breakthroughs are made by the ‘lone inventor’.
Unfortunately, and paradoxically, no detailed knowledge of science or technology is required of the budding economist; whose usual position in regard to modern industry is therefore rather like that of a mediaeval doctor forbidden to study anatomy and, as such, largely confined to prescribing a course of leeches.
Nor, for that matter, is any such knowledge required of the budding politician. Just think how few scientists and engineers there are in a typical congress, senate, parliament, or cabinet in the English-speaking world (it is a bit different in places like Taiwan).
But to the extent that it is upheld, the collaborative view of modern science and technology also tends to put the politics back into political economy, in ways against which the neoclassical tradition has long struggled.
This is true not only with regard to the tension between land and capital in the classical sense of those words, or, in Keynesian terms, between investment and ‘liquidity’.
It is also the case that to privilege long-term system viability and, even in the shorter term, its turbocharged expansion and growth for social purposes, over immediate shareholder returns and the strategies that might be most profitable, does constitute a first step on the road toward dethroning the financial owner, or those who claim to be carrying out the wishes of diffused shareholders.
A first step toward dethroning the owner or, increasingly, these days, the corporation’s cloud of short-term absentee shareholders — something that is actually worse from the Keynesian point of view — from a position of absolute investment sovereignty, which is often exercised for short-term or extractive purposes, to something more like that of a constitutional monarch overseen by a parliament of supervisors, representing all others with a long-term interest in the viability of the system.
I will have more to say about this institutional evolution, which was actually witnessed in Continental Western Europe after World War II, though not in the English-speaking countries, in the next chapter.
