Presentation to Auckland U3A Meadowbank, 21 August
I have been asked to talk about New Zealand’s economic history and what we might learn from it which sheds light on the future of the economy. I shall have to be selective. Not in Narrow Seas: The Economic History of Aotearoa New Zealand is 250,000 words. In Open Seas, the book which updates it to 2023, is another 100,000. And some 200,000 words were cut out of the manuscripts. Presenting it all would take three times as long as reciting The Odyssey.
Actually, writing an economic history is a bit of an odyssey. You may know roughly where the journey ends up, but lots of things that happen on the way are unexpected and detain one. It is a learning experience. I cannot going to cover it all. Instead, I am going to focus on the biggest and hardest lesson I learned – one we all learn when reading or writing history: ‘the past is a foreign country; they do things differently there’.
Previous eras had very different cultures, values, technologies and behaviours from our own. It is very easy to impose the assumptions of today when we look at the past resulting in misunderstanding. The technical word for it is ‘presentism’.
What is extraordinary is how quickly the past becomes a foreign country. I illustrate this by a poem of seventy-odd years ago – when I was growing up. It was written by M. K. Joseph, an Auckland professor of English, who had been in Europe during the war and was despairing about how sleepy New Zealand seemed to be in the 1950s. Joseph was a devout catholic. Hence the title of the poem: Secular Litany. The first verse goes
That we may never lack two Sundays in a week
One to rest and one to play
That we may worship in the liturgical drone
Of the race-commentator and the radio raconteur
That we may avoid distinction and exception
Worship the mean, cultivate the mediocre
Live in a state house, raise forcibly-educated children
Receive family benefits, and standard wages and a pension
And rest in peace in a state crematorium
Saint Allblack
Saint Monday Raceday
Saint Stabilisation
Pray for us.
Almost everything in this verse and the rest of the poem which Joseph implies was sacred then, are hardly central to our lives today. I can identify but two items which remain significant today. One is that the All Blacks are still near the top of the nation’s passions; the other is that we still ‘worship the mean, cultivate the mediocre’ in intellectual affairs.
I could give many examples of recent extraordinary change in attitudes – relationships for instance – but let me say a few words about an example from the poem. The second verse prays that we may be preserved ‘from all foreigners, with their unintelligible cooking’.
Unintelligible foreign cooking is routine today. I regularly eat French, Italian and varieties of Asian food. I would be surprised if at one of my dinner tables there was not something which hardly anyone knew about those seventy years ago.
Joseph’s poem hardly mentions the economy. That is quite usual in New Zealand literature. It is often hard for an economist reading a contemporary novel to work out what the underlying economics is. People consume but their sources of income are often unmentioned, or some get-out-of-jail card is used; Kerewin, Keri Hume’s protagonist in Bone People, wins the lottery.
But the same enormous shifts we saw in Joseph’s poem have also occurred in the economy. Sadly, so much of the public discussion on the economy is about an economy which no longer exists, the one we grew up with. As we go into the future even the current economy will cease to exist and our public discussion will be even more out of date.
Allow me just one quantitative fact about the current economy. On average, your spending power is double that of your grandparents. That doubling pattern over a couple of generations has been a feature of the affluent Western economies for two centuries. Why it has happened and why it first happened in the Atlantic economies has long been investigated by economists. Many of the explanations are theories without much convincing scientific verification. The point here is not to damn the economics profession. At the frontiers of any progressing sciences there are vigorous disagreements warning you against being too certain about the future. There is even research which finds that the more certain you are, the more likely you are to be wrong.
Can we expect this economic growth to continue in the future? If the past is a foreign country, then so is the future. Many of the things we think of as normal today will seem quaint to our grandchildren in their retirement. We forecast the future with caution.
We usually measure economic growth by GDP (Gross Domestic Product) per person. I skip the technical refinements, but there are fundamental issues which need to be addressed before I discuss whether GDP will continue to grow.
GDP is a measure of market activity. It was originally developed to better understand what was happening to the market economy, especially about the rise in unemployment during the Great Depression. It was never intended to summarise all human activity. Not in Stormy Seas describes how for more than two-thirds of the history of the New Zealand economy, before the arrival of the European economy, there was economic activity but no markets nor money.
The book shows that one of the biggest changes which has happened since the arrival of the European has been the shift from non-market activity to market activity. That happened to Māori, but it also happened to Pakeha as they shifted out of subsistence farming to more market ones. Some shifts happened in our lifetime – especially the postwar urbanisation of Māori. I’ve written a whole book on that, Heke Tangata.
It also happened to many women when they re-entered the labour force, in a way their mothers and grandmothers did not. The story is developed in Not in Stormy Seas. Today you buy in many things which once were done at home. There are fewer vegetable gardens, fewer chooks, fewer clothes made at home, more processed food, more takeaways, more restaurants, more childcare happens outside the home. (Utilities and better design have made housework easier.) Such changes add to GDP. The shift from non-market to market activity means the GDP measure over-estimates the growth of all economic activity.
The environment and natural resources is another area where there has been a shift from the non-market to the market. The gold was always there, but when it is mined it appears in GDP. That is equally true for other resources, even in our lifetimes. We began extracting hydrocarbons from the 70million year-old Maui gas field in the 1980s adding to GDP.
Not in Stormy Seas has many other examples of this depletion – other minerals, seals, whales, native forests, other flora and fauna – which add to GDP but reduced non-market assets. Another such shift is when we discharge unwanted production into the non-market environment, generating polluted soil and water. How many of you have swum in places where you would no longer allow your grandchildren to swim?
Climate change arises from using the atmosphere as a sump for the global-warming greenhouse gases. Paradoxically that is adding to GDP, from shifting buildings because of rising sea levels responding to exceptional storm damage, and using air conditioning.
Economic activity can also be transferred from the market to the non-market. Not just at the environmental interface. Businesses often push costs onto consumers. How often have you had to fight a badly designed business website, the purpose of which is to reduce the costs to the business at the expense of your time and patience?
Many ignore these limitations which generates a ‘GDP fetishism’ which assumes that the higher material incomes that GDP per person is measuring, the greater individual wellbeing. They uncritically assume that the pursuit of higher GDP is necessarily a good thing. It appears even when sectors such as culture, the environment, healthcare, heritage, recreation and pure science argue their sector contributes to the economy. To the contrary they should be arguing that the economy supports their sector.
Surveys from many countries find similar patterns of reported life satisfaction by social variables such as age, gender, marital status, ethnicity, income, work status. They find that material income among the affluent has little impact on a life satisfaction. The effect of the social variables swamps the effect of economic variables, with the exception that unemployment is much worse any income loss.
It is true that those on higher incomes are likely to say they feel better off, but not by much. For example, doubling individual income increases life satisfaction by as much as being married.
These results apply only among the affluent. Those in the bottom fifth of the population appear to get a significant increase in life satisfaction with higher income. Which means that by reducing income inequality – reducing poverty – we increase average happiness.
Those with the GDP fetishism assume that a higher GDP per capita means a country has greater life satisfaction. The evidence is that it does not. Despite country X having a higher GDP than country Y, the inhabitants of country Y are likely to report as much life satisfaction as those in country X.
‘Affluent country’ refers to those with GDP per person like New Zealand’s and higher. However those who are at much lower levels find that higher GDP raises their life satisfaction. Once they join the affluent economies there is no increase. So economic development at first raises levels of life satisfaction but at some level of GDP, well below New Zealand’s, it no longer does. When back in the nineteenth century, economists adopted the assumption that equated higher incomes with higher wellbeing they may have been right. They are not today.
An even more puzzling research finding comes from long time surveys of US attitudes. Despite US material incomes almost trebling, the survey respondents today report average levels of life satisfaction similar to the levels being reported in the late 1940s.
I have thought a lot about to what extent I am better off than my father with an income which is about 50 percent higher than his. What the surveys seems to suggest is that he was as happy with his life as I am with mine.
Am I better off than Dad? My generation can expect more years of a healthy life and greater longevity, so we have more years of life satisfaction. I have had opportunities than Dad never had. He would have been a very good GP, but the Great Depression and a narrower schooling system never gave him the chance. The comparison suggests that benefits from the economic development are more years of healthy living and more life choices (although the New Zealand poor do not always have these advantages). One dimension where Dad may have been better off than me, is that in the immediate postwar era there was greater material security although both of us have had far more security than our ancestors.
It is pointless to compare myself with my mother. The experience of women has been so different: compare my daughter with her grandmothers. But there is a paradox. Women report higher life satisfaction than men. But over the 80 years of American data the margin between the genders has narrowed. Men are slightly happier than their fathers, women less happy than their mothers, which is a surprise given the health gains women have had and the far greater life choices.
The paradoxes from the life satisfaction surveys are so troubling that they have been barely incorporated into our social thinking. Instead, we promote GDP fetishism.
Rather than resolving the paradoxes, I suggest we think about economic growth in reverse. Perhaps the economic growth is not an end in itself, but a consequence of human activity. The growth occurs because humans strive, because humans exploit the environment and because of technological innovation.
Because striving and exploiting have been happening long before rising material standards, I focus on the technological change as the driver of modern economic growth. which has been only around for a couple of centuries; before, the world economy had been stagnant.
Technological change arises from human striving. Humans are intensely curious animals. As we seek understanding, we try to apply what we learned to our lives. Take quantum mechanics, one of the great achievements of human understanding (and yet one, which like economics, leaves us greatly puzzled). It seems a very abstract subject and yet already it has revolutionised our lives with applications which range from the GPS navigation system through to MRIs in the health sector and nuclear energy and nuclear weapons to the USB flash drive in your personal computer.
Does technological innovation mean economic change is inevitable, even if it does not greatly increase our life satisfactions? The answer is ‘yes’ but the increase may not appear in GDP.
There is a case that in recent years the GDP growth has slowed down. It is difficult to be sure because we need a lot of long-run data to measure it. Moreover, we have become so accustomed from the last two centuries to economic growth that it is hard to think through the possibility of ‘secular stagnation’ – the term economists use for sluggish economic growth over the long term. (It is a different meaning of ‘secular’ to Joseph’s.)
The aging population contributes to the per capita slowing down of GDP because the size of the workforce relative to the whole population falls. But observe that many of the retired do things like running voluntary associations and providing social support, which are vital to the wellbeing of society. Such activities are outside the market economy and not included in GDP.
There is also a view that the growth of GDP is slowing because we are running out of environment to exploit, or because we are now putting more effort into remedying past exploitation. A particular contentious example is that reducing greenhouse emissions is at the cost of GDP growth.
A more extreme version is a theory that a lot of economic growth is a kind of Ponzi scheme, in which we unsustainably consume now at the expense of later generations. There is no question that much of past growth has exploited the environment and some of the depletion and pollution is coming back to haunt us (or, in the case of climate change, to heat and storm us). But it cannot be the sole source of the two centuries of growth; if it was, any collapse would take us back to the material standards of the eighteenth century.
There is another kind of Ponzi scheme whose collapse may be more imminent; it will certainly be drastic when it comes. Currently the financial sector is reporting spectacular asset values. One does not have to be a financial genius to work out that these values cannot reflect future earnings and that much of that wealth is based on almost worthless financial paper. When market sentiment acknowledges that the market values are out of line with reality, the asset values will collapse and there will be turmoil in financial markets which will impact on the economy, as occurred in 1928 which led to the Great Depression and 2008 which led to its Long Recession.
Market justifiers currently cite AI – artificial intelligence – to provide the skyhooks holding financial markets up. The AI investment boom may be obscuring any secular stagnation. As far as I can judge, AI will in the long run raise the productivity of economies. But it is very hard to develop a business case in which has sufficient near-future profits to justify the current investment in the AI sector. Productivity increases do not necessarily generate profit increases. Such speculative booms may not be illegal, but they are painful when they collapse. Much of the 2008 Global Financial Crisis can be explained this way.
You also need to know that there are increasingly severe difficulties measuring conventional economic growth, as we shift from the product economy which once dominated to the service economy of today. So, GDP measure may be even less useful for medium-and-long-term analysis (but it remains a key element for short-term economic forecasting).
There are a number of mechanisms which result in a slow-down in the growth of material output (GDP). They include:
Many argue that the poor economic performance is the government’s fault. One version is that over-regulation is inhibiting economic growth. You see this critique in Shane Jones’ fast track legislation and David Seymour’s Ministry of Regulation. It might be that once their policies become effective, they will boost GDP. Allow some scepticism. We heard similar promises during the Rogernomics era but there is no evidence of a significant productivity boost. In any case, much of the purpose of the regulation is to redirect the economy in a different direction to the growth of material production, a redirection which may be understandable or even justified.
Alternatively, others point out that Government involvement has been critical in past economic development, a proposition evident in Not in Narrow Seas and any serious economic history of a successful economy. The argument goes on that we are no longer have the hands-together state. As a result governments under-supplies infrastructure which cannot be provided by the private market and neglect private monopolies with their power to inhibit economic welfare and growth as they pursue their short-term interests. That view is commonly held by the political left; it also reflects GDP fetishism.
However, it may be that the problem of secular stagnation among affluent countries is more structural and less amenable to policy interventions.
If growth is driven by technological change, it may be that discovering new growth-promoting technologies is becoming harder and more expensive. Economists believe in the law of diminishing returns which presumably applies to technology discovery as much as to the other factors of production – land, labour capital. This would explain why poorer countries are still growing. They are upgrading their technologies to rich-country ones. When they reach that level, they grow at the rich-country rates. It is very much the Japanese experience.
Another structural explanation is that of regional change. It is central to New Zealand’s history. At the beginning of the twentieth century New Zealand’s population centre was near Nelson; today it is nearer Hamilton. Regional shifts happen between countries. The industrial revolution may have started in England but it spread across Europe to Finland and Spain which grew faster and England grew slower. Today the shift is towards China, India and South-East Asia.
It is presentism to assume that because there was strong economic growth in many economies over the last two centuries that strong growth will continue in the future. Is secular stagnation in affluent nations important?
Arguably, secular stagnation may be changing the world order. Trump is a good example of someone who knows so little history that he does not understand the past is another country; he is wrecking the US future by trying to reimpose its past.
Secular stagnation also seems to explain some things about the New Zealand economy. Broadly, the economy seems to have been in a low-growth phase from as far back as the 2008 Global Financial crash – even earlier. It has been especially struggling since the COVID crisis. Recently big businesses, which we thought were integral parts of the economy, have been closing; the numbers of small businesses which have been closing have not been offset by small businesses opening; unemployment has risen to a post-COVID record level. Real wages have been falling.
You may not be surprised that the New Zealand government has been borrowing to sustain consumption, running down its wealth and compromising future generations. Government revenue has been insufficient to fund current government spending. If you are on the left you will say the unwillingness to tax means the government borrowing is funding private consumption; on the right you say it is funding government spending. The political slant does not matter here; in either case the government is borrowing to fund consumption. It has been doing this every year since the 2020 Covid crisis and it is projected to continue to do this through the next three years.
Ministers of Finance Rob Muldoon, Roger Douglas and Ruth Richardson also ran down public wealth. So did Bill English at first to deal with the shock of the 2008 Global Finance compounded by the Canterbury earthquakes. But English rebuilt the government finances back to a surplus by the end of his term. Grant Robertson did almost the same after the Covid shock but he was not there long enough to see whether he succeeded. (Bill Birch and Michael Cullen ran surpluses.)
Temporary borrowing for consumption following a shock is considered prudent if the government promptly returns to surpluses and borrows only for capital investment. We would judge a person who ran down their wealth in prosperous time as a ‘profligate’. Perhaps we should label governments who run down their wealth as profligate too.
The current government’s profligacy does not have the excuse of having to cope with a shock. Moreover, National is campaigning to promote a set of fiscal rules which would allow it to continue to squander the nation’s wealth.
I’ll leave others to provide the political analysis to explain the profligacy. Let me offer an economic one. If the medium-term growth rate is lower than what is expected, fiscal policy will tend to borrow for consumption. Most politicians and the general public, insensitive to the past being a different country as is the future, project that past growth rate forward ignoring the evidence that the times are achanging. There is a substantial commitment to GDP fetishism.
So what might the economic future look like? This lecture has looked at some of the frontiers of economic thinking and research which suggests two elements of redirection.
Before setting them out, let me emphasize this talk and these new directions are not a denial of economics. There will still be the need to manage the economy and, in particular, to deal with the external pressures which shape it.
The first redirection is to pay more attention to non-market economic (and social) activity. One word which captures the notion is ‘sustainability’. The way I think about is that I want to leave to my great-grandchildren as good a life as I have. I chose great-grandchildren because I, as yet, do not have any so I don’t know what they might choose. Therefore I am reluctant to limit their choice by squandering the future, be it by environmental depletion or by running down the capital of the nation.
The second redirection is to focus on the nation’s wellbeing in a wider sense rather than material consumption. Some of the wellbeing issues can be approached in the current policy frame. We can raise aggregate life satisfaction by redistributing income to the poorest 20 percent of the population. If that means raising taxes on others, so be it. We can pay more attention to minimising the stress of unemployment, by keeping it low and short. We can pursue the objective of a healthy nation.
More fundamentally, we need to must abandon the GDP fetishism of equating material consumption with wellbeing. Instead, we reframe policy to recognise the two are not the same and instead manage material production to promote the wider wellbeing, especially longevity, security and choice. That reverses the framework so that sectors like the arts, culture, education, the environment, healthcare, heritage, recreation and science ask about the extent which the economy is supporting them – not the other way around.
That approach has numerous implications. To focus on just one – taxation. Unlike the dominant conventional wisdom – driven by neoliberal thinking and the associated GDP fetishism – I do not advocate lower taxation. I do not particularly advocate higher taxation. My concern is purposeful taxation. Taxes should be sufficient to fund the activities necessary for wellbeing and, where appropriate, to deal with market distortions.
This is certainly not the way the current government thinks. It is focussed on lifting GDP, which it thinks involves reducing regulation, depleting the environment and heritage, lowering taxation and adding to social pressures. I am not sure what the opposition thinks. One was encouraged that when he was Minister of Finance, Labour’s Grant Robertson said he was prioritising wellbeing. The analysis was clunky, but it was a start. However, Labour did not mention wellbeing in its last election campaign nor has it while in opposition. It has promoted policies which would improve wellbeing – the government could make the same claim – but it has done so in the GDP fetishism framework.
I may be wrong. New Zealand may evolve in another direction – even one of divisiveness and bitterness. What we cannot avoid is that the Aotearoa New Zealand of the future will be another country with a different – and probably slower growing – economy. The good news is that we may be able to shape our future by understanding the past and the contemporary evidence; the bad news is that on current trends we are unlikely to do this. As Joseph said, instead we will cultivate the mediocre.