Philip Stevens: We are all richer for innovation and productivity

OPINION:

In a busy rural practice, a doctor writes a script for antibiotics for an infected cut in a child’s foot. A century and a half earlier, the richest man in the world – Nathan Rothschild – died of septicaemia following an abscess. This phenomenally wealthy man did not cut himself playing barefoot rugby, but he died from something that today can be treated as a matter of course.

This is a story of the human impact of scientific advances. It is also a story about productivity and wellbeing.

Today the products and services that we make, buy and sell are not the only things that matter for our wellbeing. Money can’t buy you a starry night or an All Blacks victory, but it can get you a ticket to Eden Park or a holiday to Aoraki Mackenzie International Dark Sky Reserve ($100 million might buy you Van Gogh’s “Starry Night”).

More importantly, the staggering increase in productivity from innovation has brought us better products, like antibiotics or the Gilbert/Sportable smart rugby ball with instant 3D tracking.

Productivity is important. Keeping tabs on it and looking at ways it – and the lives of New Zealanders – can be improved is the job of the Productivity Commission. So how is New Zealand’s productivity? Our Productivity by the numbers publication looks at the latest statistics.

International data shows how most economies enjoyed large growth in productivity in the 1950s and 1960s. This was a positive period for New Zealand relative to what came after, but not compared with our peers. New Zealand saw nowhere near as much productivity growth after the Second World War as other OECD countries.

This meant the subsequent drop in productivity growth that occurred across the world during the 1970s and 1980s was less pronounced for New Zealand than its peers. We had less far to fall.

Work led by the English economist Angus Maddison helps us take an even longer view. That story is one of New Zealand being one of the most productive economies in the world at the end of the nineteenth century, alongside Australia and the United States.

The early twentieth century was a story of the US’s rise. Rapid industrialisation, innovation, investment in railroads, and the rise of Standard Oil in the nineteenth century saw the US pull ahead of the rest and surpass Britain as the largest economy in the world.

In the 1970s, New Zealand’s productivity performance started dropping behind Australia and Canada.

New Zealand’s economic growth in recent years has been largely driven by working more hours, rather than productivity or investment in capital. In New Zealand, we work longer hours and produce less in each of those hours than our peers.

In 2019, each hour that New Zealanders worked produced $60 of stuff – flat whites, pinot
noir, sleep apnoea machines and movies. Workers in the US produced two-thirds more every hour ($103) they worked than us. In the US they could stop work after 35 minutes and still produce as much as a worker in New Zealand in one hour.

These kinds of results lead people to emphasise the importance of New Zealand working smarter, not harder.

A well-functioning economy is an ecosystem that converts hard work and great ideas into products and services. It provides work for all who want it and ensures there is bread on the table, a warm home and Netflix to keep us happy.

Importantly, a well-functioning ecosystem also allows us to buy what we can’t make cheaply or easily ourselves, like medicines and TVs. This ecosystem relies on connections – between people and place, ideas and resources. For a small, distant economy like ours, there are fewer of these connections that bring skills and knowledge together.

It is unlikely that we can change the immutable facts of our geography, so improvements in productivity and wellbeing must come from businesses, large and small, governments and scientists, and people asking ‘wouldn’t it be better if we…?’

Nathan Rothschild never saw Richie McCaw clean out a ruck. He died ten years before John Collins Warren successfully performed the first surgical procedure with anaesthesia, so any dental work he received would have been pretty painful. One of the richest people of all time never ate a pavlova, jumped on a trampoline or received a vaccine.

We are all “richer” than Nathan Rothschild today because of improvements in innovation and productivity. But to enjoy these benefits will require continued improvements in productivity. We cannot afford to fall further behind.

How well we are able to convert our efforts and our ideas into goods and services will help us maintain and improve our wellbeing into the future.

– Philip Stevens is Director of Economics & Research at the New Zealand Productivity Commission Te Kōmihana Whai Hua o Aotearoa.

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