Analysis by Keith Rankin.
Labour Party Policies
Last month the New Zealand Labour Party announced two policies: a second sovereign wealth fund, and a capital gains tax on non-owner-occupier real estate. For me, both are worrying, representing further steps in the financialisation of an already over-financialised economy. Then yesterday, I heard a story (Report highlights benefits of Kids KiwiSaver scheme, RNZ 13 November 2025) about a group philosophically in tune with the Labour Party lobbying for compulsory KiwiSaver accounts for children; accounts to be opened at birth (and presumably, for those not born in New Zealand, from the date of their being granted permanent residence) and subsequently subsidised. Further promotion of KiwiSaver would be a third financialisation policy.
To understand the issues that I am concerned about – issues about capitalism as understood by mainstream western parties including, indeed especially, Labour parties – a useful metaphor is a ‘mansion’. Our mansion has four spaces: a downstairs commons, a mezzanine, an upstairs casino, and – at the top – a penthouse. The spaces become progressively less inclusive with their elevation.
We note that Aotearoa New Zealand has, since the mid-1980s, become the world’s poster-child for neoliberal finance capitalism. And many, including myself, would argue that New Zealand’s relative (and now absolute) economic decline since the 1980s has been due to its even greater commitment – compared to other western capitalist nations – to the neoliberal financial project.
The Mansion
Money circulates in the downstairs commons (the real economy where goods and services are demanded and supplied) and the upstairs casino (where existing assets are traded, and where derivative assets are created). The casino has an exclusive penthouse annexe – an upper casino – for high rollers.
To our metaphorical mansion we may add a mezzanine, consisting of the government and the banks. We can think of these as regulating the flows of money between the commons and the casino. Money is a special kind of asset – a liquid asset – which flows throughout the mansion, facilitating all the different kinds of trade which take place there. The mezzanine is an active mediator; a pump, a valve, and a sump.
Markets in the commons are primary markets; places where goods and services are produced and bought. Markets in the casino are secondary markets; the casino is a place of trading and speculative gambling. The mezzanine connects the two principal spaces within the mansion.
Though I’m mainly concerned here more about the normal casino, not the penthouse, there is a narrative common among many Labour policy people – many of whom are nine-percenter elites, people in the political class who are not one-percenters – that the ills of society can be placed upon the one-percenters, the penthouse dwellers. These Labour people want the penthouse to be super-taxed, regarding the penthouse as both a fount of grabbable wealth and a place of entitled behaviour. Tax the bads, not so much the goods; and tax capital, not labour. They say. Tax the high-rollers and the landlords. The one-percenters have become a scapegoat for capitalism’s economic failings, allowing the nine-percenters to bask in a bourgeois bubble of self-declared virtue.
Generally, a policy of taxing ‘bads’ for the purpose of raising public revenue must be a policy of supporting those bad activities in order to protect the bad revenue stream. (An ideal tax on bads will generate zero revenue, because it will eliminate those bads.)
While the mansion is a metaphor for a nation’s grand economy of outputs, markets, and money, we note the complication that money also comes and goes through the front and back doors; out of and into other nation’s economies. (While this complication is not unimportant, we can pull away from this by considering the global economy as a complex of commons, casinos, and mezzanines; but no entrances or exits. The global economy is a closed economy. For my purposes here, so is the mansion economy.)
Relationship between the Commons and the Casino
When inequality is high or growing, more money flows from the working classes to the top-ten percent – the ten percenters – than flows the other way; the casino grows faster than the commons. Much of that money being pumped upstairs is profits, royalties, rents; including managerial ‘profits’ in the form of oversized salaries and bonuses. This is income saved rather than spent, meaning it migrates from the commons into the casino.
A significant proportion of income goes into the mezzanine: taxes, savings, debt-repayments, interest payments. Banks and governments then make key decisions about cycling such income back (ie downstairs) into the commons – the economy – or forward (ie upstairs) into the casino. Or it may sit, parked, in the mezzanine.
Thus, the mezzanine has monetary conduits into both commons and casino. Governments spend and save and borrow. When borrowing, governments issue new bonds which are subsequently traded in the casino; but the money raised is generally spent, by the borrowing government, into the commons. Banks may lend to either the commons or to the casino. When, in the judgement of the banks, the economy of the commons is not looking too flash, the profit-seeking banks will lend less to the commons (meaning lending less for the purpose of spending, including genuine investment) and more to the casino (meaning lending more for the purpose of ‘investing in’ existing assets or new derivatives).
We note that, through the processes of production and commerce, economic wealth – useful stuff – is created in the commons. And through the processes of saving and asset trading, financial wealth is created in the casino. The two forms of wealth, commonly conflated, are fundamentally different from each other. Economic wealth – actual wealth – includes both hens and their eggs. (Not golden geese nor golden eggs!) Financial wealth is claims on actual wealth (or on other claims). Gold – except in its industrial and dental and purely artistic uses – is an example of financial wealth; a claim on economic wealth, as are all forms of money. Traded artworks, too, are financial wealth.
We note that employees within the finance sector themselves operate in the commons economy, selling and buying goods and services; albeit, financial services.
Circular Flow
In traditional economic description, the injection of investment spending (controlled mainly by banks) offsets the outflow of saving. And the injection of government spending offsets the outflow of taxation. This is known as the circular flow, and was modelled in the 1950s by the hydraulic moniac machine, invented by the economist Bill Phillips who had worked as a teenager in the early 1930s on the Waikaremoana hydroelectric scheme. (Detractors of descriptions of economies which emphasise the circular flow over the price mechanism, may refer to Phillips’ hydraulic Keynesianism.)
The main impetus to economic growth – growth of activity in the commons – occurs when injections slightly exceed outflows; creating excess demand. (This is refuted by the neoliberal advocates of supply-side economics, who believe that growth is natural regardless of demand, but may be hampered by price distortions and other cost impediments.)
Other injections into the commons from the mezzanine or the casino include dissaving – ranging from the withdrawal of money from savings’ accounts to the sale of assets for the purpose of buying goods or services – and new consumer debt. Consumer debt can take place through the wealth effect, meaning that people with increasing financial wealth are encouraged to borrow against that collateral in order to purchase goods and services in the commons.
Price inflation can stimulate the spending of money parked in the casino or the mezzanine. With inflation, the purchasing-power of money erodes, creating incentives to spend it ‘downstairs’. But inflation also creates incentives to deploy money ‘upstairs’, by buying non-money assets with expected returns above the rate of inflation.
Goods’ types
The ‘bread and butter’ of developed, industrialised, economies is the production of ‘wage goods’, essentially meaning the goods and services that working class people buy; indeed many fortunes have been made from selling wage goods, especially addictive goods, which enjoy economies of scale. The most important wage goods are food, rental housing, clothing, transport, basic personal services, and entertainment.
The wealth effect, however, tends to favour ‘bourgeois goods’ over wage goods; in that sense we may say that money from working-class taxes and savings is ‘laundered’ through the casino, re-emerging in the commons as discretionary middle-class spending. Another part of the economy, which connects the commons directly to the penthouse, is known as conspicuous consumption – ‘vanity goods’ – basically spending which can only be undertaken by aristocrats and other one-percenters; think the ‘gilded age’.
A fourth category of consumer goods produced in the commons are military goods, built by the military-industrial complex, and principally facilitated by governments.
A fifth category is ‘illicit goods’ – goods and services which are either illegal outright, or are otherwise disreputable; the most obvious examples are the consumption of illicit drugs and sexual services. An important and understudied aspect of this fifth category is the extent that elites and counter-elites – the ten-percenters – generate demand for illicit goods. Economic theory treats illicit goods as any other type of consumer goods.
In addition to consumer goods, in the circular flow there are investment goods, which are important for economic growth. Investment goods become, for general purposes, the built environment. The demand for investment goods is largely derived from the demand for wage goods.
The two main threats to the sustainability of capitalism are excess flows – net flows – from the commons to the casino; and spending flows from the casino to the commons which undermine the demand for – and hence production of – wage goods. Capitalism is at its healthiest when workers are also consumers; and when workers don’t have to incur debt in order to buy wage goods.
When outflows into the casino exceed injections into the commons
This is a state of systemic unbalance, likely to happen when wages fall behind productivity; ie likely to happen when the incomes of the upper income-decile increase the most. The casino gets more populated with money, with the commons less populated. More play for some, and less pay for others!
Such unbalance leads to a form of structural recession; a shrinking of the real economy as the financial emporium upstairs expands. In such a structural recession, the commons starve – or at least suffer malnourishment – whereas the casino bloats and inflates.
The attraction of the casino is ‘financial return’, which has two components. The first component is yield, which is revenue extracted from the commons by asset-holders participating in the casino. The second component is capital gain, which derives when demand for existing assets exceeds the supply of existing assets, pushing up the exchange prices of those assets. This quest for – indeed the gamble for – capital gains is the reason why it is appropriate to call the upstairs financial room of the mansion ‘the casino’.
Government policies which facilitate flows of revenue into the casino from the commons are policies which fuel the capital gain process, by generating excess demand for existing claims; in effect creating more claims by making claims more valuable. The capital gains process gives the illusion of wealth-creation; but it is really the creation of financial bloat or inflated wealth, of excess claims. It occurs when speculation gives – at least in the short term – better returns than investment in the commons. It increases the claims on real wealth of the casino class vis-à-vis the incomes of the commons class of mainly working people.
What happens most of the time, however, is that financial wealth is not spent on goods or services; rather it is left in the casino, to inflate. Inequality begets inequality. When capital gains are the norm, the casino operates as an alternative form of compound interest. Regular compound interest occurs when interest yields outpace consumer price inflation; interest payments augment financial wealth while draining the commons of demand for goods and services. Casino compounded interest occurs when capital gains exceed inflation. Leveraged compound interest occurs when casino punters borrow money to buy assets; while risky, the growth of financial wealth made possible substantially outpaces the more ordinary and passive forms of accumulating compounded claims. When leveraged compound interest is taking place, banks in the mezzanine look to upstairs-lending instead of downstairs-lending for more of their profits.
Capital gains, and Labour policies.
We in New Zealand have become most familiar with real estate as the asset class which generates capital gains; so it is that asset class for which there has been most agitation – especially from the established ‘Left’ – for a capital gains tax.
The Labour Party is proposing a capital gains tax on ‘investment property’ as a future revenue source. To achieve revenue from such a tax, there have to be such capital gains, and therefore that part of the casino needs to be nursed to convert this problem into a solution.
Yet, in the casino at present – especially in New Zealand – capital gains are being made from just about every category of financial assets other than real estate. And Labour has no plans to impose a capital gains tax on any of these others: shares, bonds, gold, crypto-currency being the main types. Labour also plans to exempt owner-occupied housing, creating disincentives to labour mobility (homeowners moving to other locations, renting out the family home). But they do not plan to exempt young aspirants to property-ownership who can most easily get onto the property ladder by buying (and letting) houses in towns or suburbs other than where they live and work.
NZ real estate is too overpriced relative to financial fundamentals at present and in the foreseeable future; substantial capital gains seem unlikely to restart so long as the commons is in the doldrums. Though it seems that northern European nations, which kept a lid on property prices in the 2010s, are now ‘enjoying’ the financialisation of housing.
An unremarked-on form of capital gain taking place at present is in the bond market, especially government bonds which are regarded in many jurisdictions as risk-free. When interest rates fall steadily – not too fast, not too slow – then bond prices increase for a period of years; especially the prices of ‘long-dated’ bonds. (Though New Zealand has a rather thin government bond market, given its official aversion to government debt. This chart shows yields on US 30-year bonds; these bonds can be expected to generate large capital gains when interest rates finally fall in the United States.) Falling interest rates do not necessarily restore the downstairs-upstairs balance, boosting consumer spending, as most commentators suggest. The revival of the commons needs to be kick-started by spending – such as government spending – not merely by cheaper debt. As well as stimulating the market for bonds in circulation, lower interest rates create the expectation that banks will lend more funds into the casinoand thereby further boost the prices of financial assets.
If governments tax some forms of capital gain, but not others, they simply distort the financial marketplace, creating more ‘investment’ in those classes of assets not subject to the tax.
Replenishing the Commons
Money that flows into the casino and stays there is effectively withdrawn from the real economy, so the commons need to be replenished by the mezzanine with new money. In essence, that process of replenishment is known as quantitative easing; it’s essentially a process of expanding government debt – creating new liabilities on governments’ balance sheets and new assets on banks’ balance sheets. The requirement is that the new money is lent into the commons, and in the process spent in the commons; not lent into the casino or left in the banks’ sumps.
Super-Inflation
In near-normal times, replenishing the commons depleted of money maintains that normality, and therefore minimises financial risks. It’s normally OK if money – effectively play-money – circulates in the casino, so long as that money doesn’t interfere with vital markets such as the housing market. But such monetary bloat acts like a Sword of Damocles dangling over the commons.
A super-inflation problem comes when there is a sudden and unexpected cascade of reactivated money descending from the casino to the commons. When there is panic in the casino – as there was in 2008 – the mezzanine may replenish the casino with money, in the hope that the panic will ease and the money in the casino will stay in the casino. That’s what happened at the end of the 2000s, indeed with a degree of deflation; yet there was plenty of scaremongering that dramatic inflation might be a consequence of the monetary easing which took place then.
The principal Sword of Damocles which we face today is the world’s corporate casino-dwellers – the many private and public pension funds, and sovereign wealth funds.
Sovereign Wealth Funds
Sovereign wealth funds are funds which ‘invest’ public savings in the global casino. Some such funds may have restrictions placed upon them; these are usually funds which seek to promote certain sectors of the real economy, and are sometimes nationalistic in nature. This is the kind of second fund proposed for New Zealand, and is similar to sovereign wealth funds promoted by Roger Douglas in 1973, and the fund promoted by certain elements of the First Labour Government in 1937. (New Zealand’s present sovereign wealth fund is commonly known as the Cullen Fund, a superannuation fund, and is scheduled for liquidation in the coming decades.)
Countries for which sovereign wealth funds are appropriate are mainly those with large stocks of in-demand export commodities. The obvious examples in recent history are those of the oil-producing countries, such as Saudi Arabia and Norway; these countries have had large trade surpluses. Another country famous for its sovereign wealth fund is Singapore, which also has had large trade surpluses. Singapore borrows money, in Singapore’s own currency, to fund its fund. Singapore has a huge pool of private savings, which are channelled into that country’s public ‘investment’ fund.
New Zealand is the very opposite; it’s a country with a very long history of current account and trade deficits. The New Zealand government, like the Singapore government, effectively borrows to fund its fund. The new Labour-proposed fund is intended to divert certain monies (profits of publicly owned businesses) into this new fund – money that would normally be spent into the real economy and thereby supportive of the commons – and shunt it into the casino. It has been conceived of as a magic-money tree – a compound interest scheme – which will create future financial wealth. In reality, it will simply augment the Sword of Damocles which is already hanging over the economies of New Zealand and like countries.
Likewise KiwiSaver, which is a set of private pension funds, made semi-compulsory, shunting lots of money into the casino, and funded by incomes which could otherwise be being spent into – supporting – the commons. KiwiSaver breaks two of the most commonsensical rules of monetary literacy. It requires working-class New Zealanders to save money while simultaneously incurring debt, and requires them to prioritise this building of casino assets over their paying down mortgage and other personal debt. In addition, it requires New Zealanders to hope that their KiwiSaver balances will outpace inflation; indeed the balances are outpacing inflation in part by policies which boost the casino at the expense of the commons – hence facilitating structural recession – and which require Kiwi savers to take on systemic risks in order to achieve those above-inflation returns.
Magic Money Trees?
For modern mercantilists, the metaphor for money – as a strictly finite commodity – is ‘gold’. (In the mercantilist epoch in the past – the era of merchant capitalism in the sixteenth to eighteenth centuries – the practical metaphor for money was silver.) The mantra of contemporary mercantilists is that “money doesn’t grow on trees” or that there is “no magic money-tree” or that there are “no money-making pixies”.
The mercantilists lampoon the idea of a magic money-tree, while themselves upholding their own implicit (compound interest) concept of a magic-money tree. (The different placements of the hyphen are so important here.)
The people who really promote the casino at the expense of the commons are the ones who believe that money has magic powers. In the end, money can only buy what is being produced at the time that it is spent. If there is a future cascade of casino-money landing in an economy which is in a state of collapse – and it was a near-run thing after 2008, and after 2020 – then saved money will become close to worthless. The only thing that will matter in a collapsed economy is the capacity of the commons to produce the necessaries of life.
The neoliberal financial project is a political programme of liberal-mercantilism; the conflation of private-property interests, governments that support those interests, and the fairy-tale view that wealth and claims on wealth are the same thing. This magic-money view is predicated on the idea that whole societies can become wealthy by destructively mining the world’s resources in order to create claims on the world’s resources. It is a project of linear economics in a world in which real and sustainable economies must, by the very nature of life, be circular. Money’s power lies in its circulation, not its extraction.
Intergenerational Equity
Intergenerational equity is not achieved by funding the casino and the magic-money tree of enhanced compound interest. This is what the ‘financial literacy’ industry claims. Through this approach, the young of today can only expect to be dumped-on tomorrow. Intergenerational equity is achieved by investing in a sustainable commons, not in magical compound interest.
The Global Arms Race
What seems to be happening is that, in addition to boosting the casino, western capitalism is becoming increasingly devoted to militarising the commons, and to forcing non-western countries to do likewise. A degraded militarised commons, with more guns and less butter, is – among other things – a second Sword of Damocles poised over us all. Yet our political classes are conspicuous in the lack of attention they are paying to the problems of militarisation and unsustainability, and most of the rest of us are too busy making ends meet or looking the other way.
Conclusion
The future of western capitalism depends on its investment in – support of – the commons, not the casino. While the casino may operate in parallel to the economy, largely as a sort of irrelevance, it also imposes a kind of severe danger – an avalanche risk, if you will – to the real economy upon which we all (including our elites and would-be elites) depend. The heightened risk is that the casino has been and is being supported by governments – indeed Labour governments – at the expense of the increasingly impoverished commons. The mansion depends on its lower floor; not its superstructure.
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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.
