State intervention: a hand-out to capital

by John Edmundson

The election of the fourth Labour government in 1984 is regarded as something of a watershed in New Zealand politics.  The rejection of nine years of right-wing populism under Muldoon was expected to herald a period of more ‘caring’ government under the anti-nuclear, left-leaning Labour Party.  What in fact occurred was the dismantling of many of the state institutions traditional Labour supporters and others on the left held dear.  In the years following 1984, successive governments, both Labour and National, oversaw the privatisation of an enormous part of what was the state sector, from railways and telecommunications to housing, home mortgages and banking institutions.

One direct response to this process was the emergence of the NewLabour Party and subsequently the Alliance, as Jim Anderton and disaffected members of Labour’s rank and file abandoned the party they saw as having betrayed its socialist and working class roots.

The prevailing view amongst members of the nationalist left is that such institutions as railways, state housing and state-owned banks in some way represented socialism.  But in order to make such a claim it is necessary to demonstrate that these institutions represented a serious threat to the capitalist system.  In fact, these edifices only ever bolstered the capitalist system and never represented a progressive force in the struggle to build a socialist society.

There are two forms of state intervention in the economy which have become the focus of left nostalgia.  The first is where the state intervenes to provide a service essential to the development of capitalism – for instance, investing in projects which demand a huge commitment of funds which will not see a profitable return in the short to medium term and are therefore unattractive to, or beyond the capacity of, private capital.  This is particularly evident in a pioneering economy such as nineteenth century New Zealand.

Little infrastructure existed in the form of transport and communications and the establishment of railways to serve such a small population, while necessary, could not be made sufficiently profitable to appeal to private investors.  In any case, these private investors probably did not have the necessary capital.

Vogel’s railways

Railway construction was first seriously undertaken by Julius Vogel in the 1870s.  New Zealand needed to develop a modern transport system in order to maximise profits through a reduction in the turnover time of capital, in particular through reducing the circulation time of commodities.  The quicker the products can be moved to markets, and raw materials brought to factories, the more efficiently capital can reproduce and expand.  Shortening turnover time can mean higher profit rates.

The railway construction programme was undertaken through heavy state borrowing, with the intention that public works would encourage settlement and cultivation, and so achieve in ten years what might otherwise have required decades of development.  Private contractors were recruited from Britain and, when offers of payment in land were rejected as insufficiently secure and immediate, payment was made in cash.  Some private lines had been built, particularly in Otago, but these rapidly fell back on hard times, largely through lack of capital.  As in the case of the Waimea Plains Railway Company, these were bought by the government and the shareholders were bailed out.

A land speculator and businessman himself, Vogel was hardly any kind of socialist.  In a certain sense he was carrying out a programme similar to Bismarck in Germany at around the same time.  Engels noted of this programme and the response of socialists to it:

“of late, since Bismarck went in for state-ownership of industrial establishments, a kind of spurious socialism has arisen, degenerating, now and again, into something of flunkeyism, that without more ado declares all state ownership even of the Bismarckian sort, to be socialistic.  Certainly, if the taking over by the state of the tobacco industry is socialistic, then Napoleon and Metternich must be numbered among the founders of socialism.”

Vogel believed that the working class would eventually become the dominant force in politics but still viewed a clear separation on class lines as essential to progress and social cohesion.  Workers, he believed, should use their power responsibly, ie in the interests of capital:

“There will be a portion of them willing to go to great extremes, and another portion intelligent enough to know that capital is the best friend of labour, and that if the rights and privileges of capital are improperly attacked, they will be killing the goose that lays the golden eggs. . .  That to my mind is the conservative radicalism of the future.”

If the establishment of the state-owned railways in New Zealand had only ‘conservative radicalism’ as its ideological force, the state’s ‘capture’ by a Labour government in 1935 offered no more real hope for the left.  At no time in its 14-year tenure in office did the first Labour government introduce any serious anti-capitalist measures which pointed to the establishment of a socialist society.

The second major form of state capitalist intervention about which the left remains dewy-eyed is reformist welfarism, but again this is essential to capital accumulation.  As the basic wage is set by the cost of the reproduction of labour-power, any drop in the cost of living has the effect of allowing the minimum levels of pay to be lowered (I’m not talking here about the legal minimum wage, but the wider lower levels of pay).  It is here that state housing became important.

State housing

The state has a role in balancing the competing needs of different groups of capitalists for the benefit of capitalism as a whole.  In the case of state housing, private landlords’ interests had to be sacrificed to the needs of industrial capitalists and other employers.  The need for more housing was real enough and state housing filled that need.  It also provided employment in the construction industry during depression times.  But this is a far cry from socialism.  Houses were built by private contractors, many of whom could expand into significant capitalist firms in their own right.

When Labour came into power in 1935 it had no new initiatives in housing policy.  It supported the previous Liberal and Reform programmes and affirmed its commitment to state lending.  While an extensive survey of the state of the nation’s housing was undertaken shortly after the party took office, with some of the findings being published in 1939, housing policy had already been established and was not significantly influenced by revelations of overcrowding.

The priority was the utilisation of a large-scale, state-directed building programme as an engine for capitalist economic recovery.  The ceiling of targeted building loans for example, set at £6 per week, was raised, not to increase the accessibility on the basis of need but, as State Advances and Finance Minister Walter Nash said, “to give effect to Government policy of encouraging the erection of houses” (which, of course, meant more profits for the private contracting firms).

When it came to the actual construction of the state houses, the Labour Party was ambivalent.  Remits at the party conference in 1920 had advocated that “the state should limit all elements of private profit from building” and called for the extension of state-owned saw-milling etc.  But given Labour prime minister Michael Joseph Savage’s assertion that the state was incapable of undertaking the building programme itself, the government turned to private enterprise in the person of James Fletcher.

The first, somewhat unrealistic approach, took the form of an offer to buy his company and leave him in charge but he refused to sell.  In fact, there was a marked disinterest from private enterprise to get involved.

However, a subsequent proposal to tender contracts out was more acceptable to Fletcher and he commenced a large-scale construction programme.  The initial contracts, however, did not prove to be big earners for Fletcher, who at one point actually threatened to pull out if organisation was not improved.  Where Fletchers did benefit  was in becoming recognised as one of the country’s leading construction firms.  Fletcher also benefited personally with his appointment in March 1942 to the newly-created post of Commissioner of Defence Construction, responsible directly to Labour prime minister Peter Fraser.

The trade union movement opposed ‘their’ government’s eagerness to do business with private enterprise, becoming increasingly critical of the close links with James Fletcher.  Labour, having no confidence in worker control of the project, rejected the union case.  Left-Labour MP John A. Lee in particular believed that the unions should confine themselves to negotiations with private capital and the widely-held Labour view was that worker control would lead to chaos.

One compromise proposal which was taken up was the establishment of worker co-operatives to tender for the work.  In 1937, such an approach was initiated in Wellington by the Amalgamated Carpenters, Joiners, Machinists and Machinists Mates Union.  Typically with such ventures, the company, which successfully tendered for the construction of 21 houses, failed through a lack of capital and the houses were completed by Fletchers.

The study of the development of state housing in New Zealand reveals that socialism played no part in Labour’s housing policy.  Even worker participation in the scheme was discouraged and marginalised.  But, more importantly, housing construction on the basis of human need was only incidental.  Much more important to Labour was the stimulation of the (capitalist) economy.  Provision of state housing was an electorally-acceptable means by which the state could intervene to accomplish this.  While a section of workers, including many on low incomes, were to gain access to improved housing through this programme, the biggest beneficiaries were the construction companies, for whom state housing was a huge boost at a time of stagnation and ‘overcapacity’ in the industry.

Furthermore, provision of state housing was closely tied to the conservative notion of the nuclear family.  The government did ban the over-zealous demand by Housing Corporation officials that pregnant women provide medical certificates in order to qualify for housing assistance, but nevertheless eligibility and social conventionality were closely connected.  Such social control was a useful tool for government in the turbulent pre-war years, through the war and continued into the affluent and conservative post-war era.

BNZ nationalisation

The nationalisation of the Bank of New Zealand by the first Labour government was hailed at the time as a great victory for the left.  State control of the financial institutions was seen as a crucial step in the reformist programme of Labour ‘socialism’.  Yet the bank simply became a state-owned vehicle for the advancement of credit to capitalists.  Langstone, the mover of the Labour resolution which led to the nationalising of the bank, described his motivation at the time:

“All new credit money should be so created and issued as to keep the internal price level constant at a point that is fair and just to producer and consumer, and that creates a stable internal economy and a decent standard of living with full-time employment for everyone willing to work.”

It was the interests of capitalists and consumers that were identified as important, not those of workers.  Furthermore, while for many grassroots Labour activists the BNZ was expected to be the vehicle for a socialist programme, for the Labour leadership the ambition was much more orthodox.  The preamble to the Act, passed in November 1945, described the role of the state-owned bank as “facilitating the post-war reconstruction and development of New Zealand, the rehabilitation of returned servicemen, and the provision of reliable, prompt and economical banking facilities, and generally for the purpose to promote the economic welfare of New Zealand.”

The bank’s role was further elaborated on in an informal guarantee by the minister of finance when he stated that “all rights and immunities now enjoyed by the customers of the Bank of New Zealand will remain exactly as at present. . .  In all administrative matters the Bank will remain under its present management and the day to day conduct of its business will, as hitherto, be governed by the principles of sound banking practice.”

In other words, the bank was to remain a capitalist organisation, lending within the framework of a capitalist economy, to capitalist businesses.

Over the following decades the BNZ operated more and more like a typical capitalist bank, eventually being sold in the 1980s to private interests.  Here too the state helped out big business, for instance selling it through Michael Fay who was allowed to cream several hundred million dollars from the sale.  When the share market crashed in 1987, the extent to which the bank had been exposed by loans to investors on the share market was revealed.  As Ian Wishart and others showed shortly afterwards, massive credit had also been advanced to board members, most notably Fay himself.

The reality, of course, is that no such financial institution could operate in a capitalist economy without itself being capitalist in nature.  Historically, the BNZ was simply a mechanism for the providing of funds for capitalists and, in the end, for the enrichment of the most parasitical.  Even then, when the bank went bust a second time, the government bailed out private investors to the tune of hundreds of millions of dollars more.

Serving capital

The history of the state sector under capitalism, of which only three examples have been examined in this article – there are many, many more! – reveals that all such activity by government, whether of a conservative or social democratic bent, has one important thing in common.  It serves the interests of capital.

Development of transport infrastructure is essential for the development of an advanced capitalist economy, where commodity production is the norm and any reduction in the turnover time of capital has a significant impact on the realisation of surplus-value.  Consequently any benefits to society as a whole, and such do clearly exist, are of secondary importance and incidental to the benefits they provide to capital.

Likewise the provision of housing by the capitalist state always had an ulterior motive.  Stimulation of the capitalist economy was the goal.  State housing was the means.  The entire state housing programme represented a massive transfer of resources from the state to the construction industry at a time of crisis in the economy.  Again, the nationalisation of the BNZ simply represented the desire of the state to be in a stronger position to have direct involvement in the management of the economy, but clearly this would continue to be a capitalist economy.  (In fact, the rate of exploitation rose under the first Labour government, as did the capitalist share of national income.)

In terms of the conflict between capitalism and socialism, the ‘mixed’ economy is a myth.  The ‘mix’ has always consisted of whatever was necessary at the time to guarantee the conditions for capital accumulation.

It is in the nature of reformist politics that it can only deliver ‘solutions’ affordable under capitalism.  Once the postwar boom ended in the early-mid 1970s, reformism could deliver less and less.  Despite the difference in surface appearance, in the end Labour in the 1980s did the same as Labour in the 1930s: take whatever steps were necessary to restore profitability.  In other words, during the two major periods of capitalist crisis in twentieth century New Zealand, it has been Labour – not National or some other openly Tory party – which has saved the day for the ruling class.

While Labour’s 1980s ‘free market’ reforms and full-scale assault on the working class took much of the left by complete surprise, all it really showed was that any attempt to equate capitalist state ownership and Labour parties with anything resembling socialism is, in the final analysis, an exercise in self-delusion.

This is a slightly edited version of an article which first appeared in revolution #4, Oct 97/Jan 98.  See also: Capital and the state: a Marxist view


  1. I agree with the analysis, except to make the point that most of us don’t care too much whether particular institutions of state strengthen, temper, or even undermine the capitalist system. As ordinary workers, we are concerned as to whether they make our lives better, easier, and more secure. The state institutions generally did that, and their removal has, generally speaking, had the opposite effect, though at the same time the loss of state assets has shifted the balance of power within the regime, narrowed iits base and left it fundamentally weaker.
    The point now is to recognise that the era when the colonial state could be rationally perceived as the friend and defender of the people is drawing to a close, and we have to create our own institutions to provide those things which, in the past, we have looked to the colonial regime to provide, including order, security, health, education, economic progress and justice. This is a big task, but more practical, and certainly more satisfying than complaining, pleading or lobbying the regime to continue providing for the needs of te tangata.

  2. If the left was “taken by surprise” , that is no fault of those who drove the privatisation programme. In the late 1970s I attended a meeting in Christchurch at which Rod Deane, then a Treasury official, outlined the entire privatisation programme. I wrote a summary of Deane’s speech, and added my own opinion that Deane’s policies would become the default option for New Zealand capitalism because of the failure of the left to come up with any plausible alternative strategy. The late Bruce Jesson then published my review in his Republican magazine, which meant that it would have been brought to the attention of a significant number of leftists. However even I did not anticipate that Deane’s programme would be implemented by a Labour government. In hindsight, given my personal acquaintance with Lange, Prebble and Douglas, I should have.

  3. I think the bulk of the left failed to foresee this for several reasons:

    * Philistinism: the left in NZ was about ‘doing stuff’ rather than studying and analysing and doing. Even today you’d be hard-pressed to find people who are more hostile to Marxism than much of the ostensibly Marxist left. (They prefer left versions of keynesian economics and social-democratic politics). So very few on the left had any idea about Marx’s crisis theory, let alone being able to apply the tools to the NZ reality and therefore work out what an incoming capitalist government would need to do to deal with the crisis. (Part of this philistinism was having their eyes too fixated on Muldoon and not looking at the ruling class, either.)

    * Auto-Labourism: the CPNZ was an exception, but most of the ostensibly Marxist left, however much they differed on other things (SUP, SAL, WCL) thought there was a qualitative difference between Labour and National and that Labour was some kind of workers’ party; they supported voting for it at election time and, in 1984, they believed that the key thing was to get Muldoon out and that Labour would just be a mixture of some progressive things and some not-so-progressive things.

    Put those two weaknesses together and you’ve got quite a cocktail. A woeful lack of understanding of the state of the NZ economy, the measures required (from the point of view of the ruling class) to fix things, and the fact that Labour, as a party of managers of capitalism, could and would do the job better than Muldoon did. Most of the left didn’t even notice that the ruling class had itself shifted away from Muldoon and towards Labour, especially towards Douglas and his closest mates.

    As you say Geoff, it wasn’t like the ruling class was making a secret of what was on the agenda.

    There was one small Christchurch-based group which was an exception to the philistinism and the auto-Labourism. A little outfit called the Revolutionary Communist League. They consistently warned about what was coming and attempted to organise against it. Early on in the 4th Labour government they even managed to pull together a national conference of about 100 people in Christchurch, but the other left groups couldn’t overcome their political weaknesses/handicaps. (Subsequently, the RCL evolved towards the “Fourth International”, which was itself moving deep into the auto-Labourist camp; the RCL faded away a few years later.)

    There was also a prominent ex-CPNZ leader, Ray Nunes, who was undertaking a critical review of the history of that organisation in order to develop a more consistent revolutionary approach, particularly around the Labour Party and NZ as a junior imperialist and not a neo-colony or semi-colony (another issue that parts of the left were confused over).


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