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Danyl McLauchlan: Unjarndycing the State

The dogmatic political left invests its faith in the bureaucratic state; the dogmatic right trusts oligopolistic free markets – leaving New Zealand with crumbling infrastructure and corruption


Last week the heads of Kiwirail appeared before the transport and infrastructure select committee where they revealed they’d spent $424 million on the project to replace the Interislander ferry and port, most of it on planning, design and project management. The project has now been cancelled because of the astonishing cost blowout. This has become a familiar story in New Zealand politics: builds vital to the national interest being cancelled after long delays and incredible costs without anything being delivered: Auckland Light Rail, Let’s Get Wellington Moving, the Lake Onslow Hydro scheme. Here’s the same problem on a smaller scale:

A frustrated Dunedin principal says there is nothing to show for the $750,000 spent planning new classrooms over the past five years by the Ministry of Education . . . Andersons Bay School principal Pauline Simpson said her school was promised a four-classroom teaching block and hall and that was cut back to two classrooms and a hall with a design change at the 11th hour.The change would mean the build was back to square one, she said. A ministry spokesman said it had already spent $750,000 on the project on costs for planning, design, consents and investigation works. Ms Simpson said Andersons Bay’s project was at the consent stage and all the planning had been done. All that was left was the build itself. "I feel like there is an incredible amount of money being spent on our project to date and there is not a single thing to show for it."

I suspect this era will take a place in the storied political mythology of the nation, alongside the hubris of Think Big and the ponzi scheme of the Rogernomics share market. “Oh yes, the 2020s – that was when the country’s infrastructure was literally falling apart and instead of rebuilding it they just wasted billions of dollars on bureaucracy.” And I feel despair whenever I see Labour and Green politicians defending these projects and demanding more funding. Obviously, the state has to build things – LOTS of things – but right now, infrastructure investment feels like a scam: the funds get spent, nothing gets built, no one is quite sure where the money went and the auditor-general keeps issuing blistering reports about the terrible political processes and terrible reporting across the state sector. These seem like important problems to solve before pouring more cash into the Cook Strait.


In Bleak House there’s a famous literary legal case called Jarndyce v Jarndyce. It’s a long-running probate dispute contesting a large fortune:

Jarndyce and Jarndyce drones on. This scarecrow of a suit has, over the course of time, become so complicated, that no man alive knows what it means. The parties to it understand it least; but it has been observed that no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause; innumerable young people have married into it; innumerable old people have died out of it. Scores of persons have deliriously found themselves made parties in Jarndyce and Jarndyce without knowing how or why; whole families have inherited legendary hatreds with the suit. The little plaintiff or defendant, who was promised a new rocking-horse when Jarndyce and Jarndyce should be settled, has grown up, possessed himself of a real horse, and trotted away into the other world. Fair wards of court have faded into mothers and grandmothers; a long procession of Chancellors has come in and gone out.

The case ends when the lawyers have consumed the entire estate via their legal fees. Dickens isn’t just hating on the legal profession here: he’s describing a phenomenon political scientists refer to as “the principal-agent problem.” The lawyers are agents who are supposed to act in the interests of their clients – the principals – but of course, they act against them to maximise their own gains.


Modern politics is riddled with principal-agent problems. When I talk to people about Let’s Get Wellington Moving – the doomed, now cancelled $7.4 billion mega infrastructure project that only delivered a pedestrian crossing while it spent $100,000 a week on consultants – they describe a very Jarndyce-like process. Endless rounds of consultation and engagement between the regional, city and central government and other stakeholders, all facilitated by private sector providers gorging themselves on those consulting fees. The principals were the ratepayers and taxpayers, who wanted their rates and taxes to go towards building stuff – but this wasn’t in the interests of the agents managing the rounds of consultation and planning. They benefited by keeping the Jarndyce loop rolling.


One of the reasons people on the left believe states outperform markets at allocating resources is that there’s lots of zero-sum competition in free market economies. Everyone is wasting money conducting marketing campaigns against one another, suing each other, new inventions can’t be shared because inventors want to protect their copyright. Under socialism the state can just put all its resources into creating value. But a classic right-wing critique of the state is that if a company in a free market makes bad decisions and destroys too much value they’ll fail and go out of business, whereas badly run public sector organisations can just fail, and fail in perpetuity – they always have the resources of the state to draw upon to fail some more. New Zealand seems to have found a way to combine both failure modes simultaneously: public sector organisations locked into zero-sum processes that destroy value – they spend a fortune on marketing! – but can’t ever go bankrupt.  


Identifying principal-agent problems is associated with public choice theory, a branch of economics that takes the assumption of the neoclassical models – everyone and everything is a self-interested rational actor – and applies them to politics. It’s popular on the right: for the public choice theorists government agencies maximise budgets the same way private sector companies maximise profits. But unlike the private sector, they have no incentive to minimise costs. In the same way a consumer-facing company tells customers they need to buy their product, public sector agencies release reports, deliver briefings and leak to media, warning that they desperately need more funding – a LOT more – because terrible things will happen if they don’t get it. 


Left-wing economists hate the public choice theorists. The prevailing left-wing model of state entities is that they’re Weberian bureaucracies: efficient, rational, rule-bound, professional, meritocratic; a universal class dedicated to serving the nation. If you looked at the under-examined assumptions behind Ardernism I suspect a strong belief in the infallibility of state bureaucracies would lie at the heart of it: any problem can be solved if you give the experts running the relevant ministry more money and tell them to be kind. Maybe this framework used to be credible, but it’s hard to look at our modern political ecosystem: the torrents of campaign donations, the lobbyists, the corporate structures of our agencies, the consultants advising them, the (invariably well-connected) private sector providers that deliver the services, the regulatory capture, the revolving door between industry and government, the pervasive secrecy, the lack of targeting or meaningful reporting – and think “What a perfectly efficient and infallible Weberian bureaucracy.”


One of the reasons our neoliberal revolution failed to generate the wealth its advocates promised is that markets aren’t magical. They need regulation to function properly: otherwise, you just wind up with an economy dominated by monopolies and cartels, ie the New Zealand economy. It feels like the left has wound up in a similar space: assuming that its preferred mechanism for value creation is magical rather than contingent on good governance and proper oversight. A left-wing political operative recently pointed out to me that the Labour government gave Oranga Tamariki everything they asked for, everything that was recommended, and the organisation seems worse than ever – which makes sense if you assume a profound gap between what agencies want, and what they need to perform well. Public choice theory doesn’t mean you can’t have an effective state sector – that’s how some right-wing politicians like to interpret it, but we live in a nation whose infrastructure was built by the state. Good things are obviously possible. But as states become larger and more complex the principal-agent problem becomes dominant. This makes it harder to do things – but politicians who pretend it isn’t there seem to find they can’t do anything at all.


Danyl McLauchlan writes about politics, economics, science and philosophy – mostly for the Listener, for whom he’s their weekly political columnist. He is also the author of two novels and a recent essay collection, Tranquillity and Ruin.


This column was first published at the Democracy Project

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38 comentários


Wellington city was full-up in 1951. I had to stand between trams to cross the road.

The city was built on the foreshore with the CBD being on boats tied to the hills that go straight up. Later the smart made money by filling in the sea bed and put skyscrapers on them and water mains below.

As for tunnels through Mt Vic where have they room to operate on the other side?


Curtir

How about a new Ministry, led by the most competent Minister/Associate Minister pairing that can be found in the new Government and staffed by the cream of the Public Service - a Ministry of Works? It worked 75 years ago.

Curtir

Danyl; our "Commerce Commission" was a generally good idea. Government should act against monopoly "economic rent" by ensuring that market-led competition exists. Not by trying to "Plan" some alternative. But there is a lot of failure to understand that the only true real free market is one where there are no barriers to the entry of new suppliers. It is still not a "free market" when a second supplier is granted "license" by government to set up and compete with an existing monopoly.

It is even true that myriads of seeming "suppliers" who nevertheless are protected against NEW entrants, can find a price-charging equilibrium well above that where there is no barrier to new entrants. The crying example of this…

Curtir

Here is a CLASSIC "Jarndyce" situation that infests NZ. The LGA (2002) enabled the charging of Development Contributions by Councils; the fees were required to be transparently based on a calculation of the cost of new infrastructure planned by the Council that would benefit a given location, divided by the number of "Housing Unit Equivalents" also zoned for that location under the Plan. In reality, Councils just drew up DC "price lists" as a law unto themselves, and refused to co-operate with "showing their working".

Can someone please refer me to a lawyer who will take a case against a Council in this situation of charging of illegal DC's? I have yet to find that any lawyer has taken up…

Curtir

Really insightful, thanks.


Certainly explains how and why Labour’s ‘throwing money at the problem’ approach was so ineffectual.

Curtir
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