Economic thought and policy advice in New Zealand : economists and the agricultural sector circa 1918-1939

Abstract

This study examines the history of New Zealand economic thought on agriculture, focusing on interwar agricultural policy. A sociology of professions framework is employed to demonstrate that New Zealand economists adopted the external (professional society, specialist journal) and internal (common language, set of common practices) dimensions of the Marshallian orthodoxy. A survey is undertaken of economists' contributions to the Economic Record. New Zealanders endorsed the Marshallian emphasis on analysing, wherever possible, practical issues of the day. Thus, they concentrated attention on applied economic topics, in particular agricultural economics and economic fluctuations, rather than on pure theory. Economists perceived themselves as having an important role in policy debate and therefore actively prescribed solutions to agricultural problems. In order to assess the extent to which New Zealand economists adopted the internal dimensions of the Marshallian orthodoxy we examine their ideas on agricultural finance, exchange rates, agricultural support policies and international trade. Economists' arguments are presented and evaluated with reference to modern economic theory. Credit rationing literature and a combined accelerator-residual funds agricultural investment model are used as a conceptual framework to compare and contrast opposing arguments on agricultural finance. A finance market was described in which fully competitive equilibrium did not obtain: excess demand, interest rate stability and incomplete information for lenders and borrowers were evident. Further, economists identified interest rates, confidence, initial cash holdings and farmers' expectations of sales as important determinants of investment. An income-expenditure model of the Depression is developed and a national income identity is used to formalise and evaluate ideas on exchange rates. Before the 1930s, a fixed exchange-flexible price version of the quantity theory of money was generally accepted. However, post-1932 most economists had adopted Cambridge liberal monetary ideas and advocated currency adjustment as a tool of economic management. Microeconomic thought on marketing boards is evaluated in light of contemporary developments in the theory of the firm. Modern commodity price stabilisation literature is then used to interpret economic thought on the economic effects of a sliding-scale tariff. On international economics, there was a dynamic dimension to New Zealand economic thought which, in particular, contained a classical Smithian notion that the country must grow in an unbalanced way via expansion of the agricultural sector. Overall, we show that economists made successful, although ad hoc, use of orthodox Marshallian analytical tools. We also identify broader English classical and some vestigial American institutionalist themes in their interwar writings. In addition to assessing the pedigree and logical structure of New Zealand economic thought on agriculture, this thesis derives some modern economic indicators in order to evaluate its empirical content. For example, financial leverage and farm activity ratios demonstrate that the economists, while often constrained by inadequate data, had an intuitive grasp of farm indebtedness. In general, we find their policy proposals were based upon an accurate understanding of economic indicators. They strove to formulate what was believed to be realistic analysis of economic phenomena and keenly utilised available empirical evidence as a guide to economic conditions.