Roger Kerr: The Lever of Riches

The Lever of Riches

By Roger Kerr who is the executive director of the New Zealand Business Roundtable.

The human body has many amazing features that enable us to create wealth. We can labour with our limbs and muscles. We can manipulate objects with our hands. We can use our brains to reason, imagine and invent. And we can use our spirit and individual talents to comfort, inspire, create and entertain.

The work we all do, the way – and how well – we use these attributes is the key determinant of the country’s productivity, and thus how well we live. By ensuring as a nation that we’re doing what we do best and trading for the rest, we improve productivity and our standard of living.

Productivity, described by American economist Joel Mokyr as the “lever of riches”, is a hot topic these days, and rightly so: it’s the single most important contributor to reducing poverty, increasing leisure time and meeting health, education, environmental and cultural needs.

That’s why New Zealanders should react with alarm to the news last week that the rate of growth in labour productivity (that’s the amount of goods and services produced from each hour of a worker’s time) was the lowest on record. Whereas we had strong growth in productivity (2.7% a year on average) following the reforms of the 1980s and early 1990s and up to the year ending March 2000, in the last six years that figure has fallen to an average of 1.2%, and an all-time low of 0.4% for the year ending March 2006.

What drives productivity? Trade and competition play a powerful role. Open markets force businesses to perform better. Resources shift to their best uses. Through trade, firms can access cheaper inputs, tap into larger pools of capital and technology, expand their markets and take advantage of economies of scale. The scope is limitless.

Low taxes and the absence of stifling regulation also encourage productivity growth. They give people the incentives and capabilities to be entrepreneurial and improve their lot.

Improving worker training and knowledge, having better technology or more capital to work with, making best use of natural resources and inventing new ways to do things increase productivity. Henry Ford’s development of the assembly line in 1931 is a popular example of a spectacular productivity leap: it reduced the number of hours required to make a car from 17 to one and a half, dramatically cutting the cost of production and making the car affordable.

Ford’s invention effectively pushed his workers up the ‘hierarchy of human talent’. With the creation of machines and tools that can perform tasks better and cheaper than human muscle and basic brain power, people move to jobs that use other, more sophisticated human talents like creativity and people skills. At the same time, manual jobs like sewing machining, assembly line work and telephone operations shift to lower-wage countries where workers can perform them more cheaply. In this way the economy sheds ‘lower order’ jobs, and adds ‘higher order’ jobs like nurses, lawyers, chefs, recreation and hospitality workers, designers and architects, hair stylists and beauty therapists, financial advisors, tourism operators, and so on.

Such changes in the talent hierarchy inevitably involve turmoil. It’s not surprising that many people cling to the status quo and want to preserve old jobs at all costs. But if society is to reap the gains from productivity and enjoy a rising standard of living, it has to endure the upheaval.

In 1800, 95 of every 100 Americans were needed to feed the country. By 1900 it took 40. Today it takes just three, and the United States, with less than one fifth of the world’s population, produces almost 25% of the world’s food.

New Zealand has a similar story. At the close of the twentieth century, with a vastly reduced share of the labour force, we produced 2000 times more butter, 40 times more lamb and 500 times more beef than we did a hundred years before.

There were wrenching changes for American and New Zealand families caught up in the exodus from farming back then. But long hours of toiling in the fields have given way to shorter work weeks in a dizzying array of new jobs, producing an equally dizzying array of goods and services. And no one today would seriously advocate ditching tractors and other farm machinery and returning to shovels and hoes, any more than we’d want to go back to old-style telephone exchanges or typewriters. Work would be harder, prices would be higher and wages would be lower.

So why the fall-off in New Zealand’s productivity? It’s clear that, despite its stated goal of lifting productivity in the interests of raising New Zealand incomes to the top half of the OECD, the government’s strategy is not working. High government spending and taxation, increasing regulation, more restrictive employment law and many other interventions are hindering the changes that are the lifeblood of productivity. Countries, like New Zealand, that impede the ‘lever of riches’, not only fall behind in the race for competitiveness and productivity but in the living standards of their citizens.

ENDS

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