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Computer operating systems are complicated things. “Starting MS-DOS… C:>_” was what everyone saw during the 1980s when they booted up their personal computers. MS-DOS was written and created in 1981 by Tim Patterson from Seattle Computer Products. It went through various incarnations, many of them dogs that were useless.
Other computer operating systems were introduced, such as SCO Open Desktop in 1989, which often blew itself up after crashing and inducing the entire system to memory dump (lose all data). Economic systems are also complicated things. While Windows 11 may have been a gigantic improvement from MS-DOS, our economic system seems to have improved, but a little.
It continues to lurch from boom to bust time and time again, creating havoc and destroying lives with it. These boom and bust episodes are a fundamental flaw in our economic system, which politicians have failed to address since time immemorial and a flaw that holds New Zealand back from a better standard of living.
Economies sometimes thrive… for a while. Unemployment is low, and everyone is happy… but sooner or later, they crash and burn. Big business and their owners get bailed out, and the wealthy are usually shielded behind financial tools like limited liability companies and trusts—it’s average Joe Kiwi that suffers the most. Don’t get me wrong, I have nothing against capitalism and free enterprise, but our economic operating system is screaming out for a major overhaul.
Since writing this article in March 2018, we’ve witnessed yet another dramatic boom-bust cycle. The COVID-19 pandemic triggered massive government spending and monetary expansion, followed by inflation peaking at 7.3 per cent in 2022. This forced the Reserve Bank to implement one of the most aggressive tightening cycles in New Zealand’s history, raising the Official Cash Rate by 5.25 percentage points between October 2021 and May 2023. The result? Economic contraction, rising unemployment, and New Zealand entering what the Treasury describes as a deeper per-capita recession than the global financial crisis.
Back in the good old days, Adam Smith, considered by many to be the father of economics, believed competition was the answer and that governments should never impose tariffs and taxes, other than to protect free-market competition. Karl Marx came up with another economic operating system called Communism, but that proved, arguably, to be a dog.
Then, along came Keynesian economics. John Maynard Keynes, in an attempt to understand the Great depression of the 1930s, advocated increased government spending and lower taxation to stimulate the economy and pull the world out of the global depression.
Milton Friedman then extolled the virtues of a free market economy with minimal government intervention. The previous National government was hellbent on reducing government spending, and now the current National-led coalition government under Christopher Luxon is implementing significant public sector cutbacks while providing tax relief—a familiar pattern that shows we’re still cycling through the same economic philosophies without addressing the root causes.
At the heart of the problem with the current economic system is that when the economy is booming, the Reserve Bank jumps in and increases interest rates to reduce the threat of inflation. This increases the cost of mortgages and the cost of doing business—we get punished for doing well, something I find rather perverse.
New Zealand relies heavily on exports to produce overseas income, and interest rate controls, through the Reserve Bank, have a major bearing on our exports. If the Reserve Bank increases interest rates to curb inflation, this pushes up the exchange rate. This, in turn, makes our exports more expensive to overseas buyers, so they purchase less, and exporters make less money.
The use of interest rate controls would therefore seem to be a very blunt and inefficient tool. It is also prone to time-lag problems. It is often a year or more before the desired effect happens, and even then, success is hit or miss.
The recent monetary policy cycle perfectly illustrates this point. After inflation returned to the RBNZ’s target range, they began cutting the Official Cash Rate in August 2024, reducing it by 1.75 percentage points to 3.75 per cent by March 2025. Yet the economy is only now showing tentative signs of recovery, and many households and businesses continue to experience financial stress. With over 70 per cent of mortgages scheduled to reprice in 2025, the full effects of this monetary policy rollercoaster are still being felt by ordinary New Zealanders.
An often forgotten, far more effective and efficient economic tool is full-reserve banking (100% banking), a concept first promoted during the 1930s by renowned US economist Irving Fisher. Legislation would require all banks to hold a cash reserve of 100% matching every deposit, thereby stemming the expansion of the money supply. Legislation, perhaps including a Pigouvian tax, would also be required to restrict shadow banking activities that generate negative externalities.
An independent National Credit Authority, outside the control of politicians, would also be required to calculate and administer how much new money is needed to be put into circulation (or taken out) as and when it was needed, free of debt. How this debt-free money is distributed or used is another debate.
Recent academic research continues to support the potential benefits of full-reserve banking. The International Monetary Fund’s analysis by Benes and Kumhof concluded that Fisher’s original Chicago Plan would deliver the benefits he claimed: the elimination of bank runs, better control of credit cycles, dramatic reduction of public and private debt levels, and more effective monetary policy. Various proposals for monetary reform along these lines have been debated in several countries, including Iceland after their financial crisis and Switzerland through their Sovereign Money Initiative (although this was rejected by voters in 2018).
Let me make myself quite clear here, I am not advocating the nationalisation of banks, only nationalising the monetary system—the lifeblood of our economic system. This economic approach would make it easier for the government to control inflation, or deflation, and the money supply—all without raising interest rates, which adversely affects exports and the economy.
The trouble is… does the current Finance Minister, Nicola Willis, or Prime Minister, Christopher Luxon, even realise our economic system has a problem, and if so, are they even prepared to do anything about it? Based on their economic policies so far—tax cuts funded by spending reductions, renewed focus on fiscal restraint, and continued reliance on the Reserve Bank’s traditional tools—it appears we’re stuck with the same old operating system.
Meanwhile, New Zealand continues to lag behind in productivity growth, faces persistent infrastructure deficits, and grapples with housing affordability issues that monetary policy alone cannot solve.
The current government’s approach of cutting public sector jobs (over 800 positions eliminated in a single day across major departments in 2024), while providing tax relief and hoping for private sector growth to fill the gap, represents the same cyclical thinking that has characterised New Zealand’s economic policy for decades. It’s like trying to run modern software on an outdated operating system—eventually, you need a fundamental upgrade, not just patches and workarounds.
Just as we upgraded from MS-DOS to Windows and beyond, our economic system needs a fundamental architecture change. Full-reserve banking offers a pathway to more stable money creation, reduced boom-bust cycles, and monetary policy that doesn’t punish success with higher interest rates. The question is whether our political leaders have the vision and courage to implement such changes, or whether we’ll continue cycling through the same economic philosophies while expecting different results.
The evidence from recent years—from the pandemic response to the current recession—shows that our economic operating system is still fundamentally flawed. It’s time for version 2.0.
Steve Baron is a New Zealand-based political commentator and author. He holds a BA with a double major in Economics and Political Science from the University of Waikato and an Honours Degree in Political Science from Victoria University of Wellington. A former businessman in the advertising industry, he founded the political lobby group Better Democracy NZ. https://stevebaron.co.nz