Professor of Resource Economics
Economies are like large machines – they are big, complex things that we have created to do work for us. We have to design them, foster them so they deliver the outputs, incomes, consumption we seek. Like a large machine, an economy can produce much more than can humans by muscle power or ingenuity alone, because they deploy vast amounts of capital. The New Zealand economy produces about $150 billion dollars worth of output each year as measured as Gross Domestic Product (GDP). It can produce that much output because for each worker in the economy there is about $250,000 worth of capital available lifting our productivity, raising our incomes, increasing consumption opportunities.
What does it take to get an economy to grow? GDP is created by workers using capital to produce output, and the more capital available the more workers can produce each year. Where does the vast amount of capital come from? Firms, governments, and individuals invest in machinery, roads, milking sheds, planes, technology and add to the capital stock. Investment is essential for continued economic growth. The right signals are needed to ensure there is sufficient investment each year.
Capital makes humans more productive and the more people who can work with capital the more output can be produced. If labour force participation rates can be increased that will help the economy to grow. Reduced unemployed rates mean a greater proportion of the labour force is producing output. We earn wages or salaries when we are employed and they provide us incentives to deliver work. People respond to incentives and economies have to provide strong incentives for more people to join the workforce, work effectively, produce more output.
Of course a worker is much more than just labour, and skilled workers are more productive than are untrained workers. Education, training, skill development, know how, experience all help create a more skilful and productive workforce. An economy can grow if its labour force invests in skill development and increases the stock of human capital. An economy needs specialist institutions to support skill development. Schools, universities, polytechnics, ITOs are essential institutions for skill development.
Earthquakes and other disasters have recently alerted us to another essential item for economic growth. Infrastructure be it roads, airports, electricity supply, internet, water supply, sewerage systems support economic activity. Weakened infrastructure hampers growth, and plentiful infrastructure supports it.
All economies trade goods and services, swap finance on a vast scale. Economies that are integrated with many other countries can prosper and grow. Economies that retreat behind trade or other barriers, ossify and fall behind more internationalist countries. Reducing barriers to trade and investment flows can help an economy grow.
Information is the elixir that brings a spark to economies and without it humans are ineffective, capital likely to be inappropriately used. Economies rely much more than we realise on rich flows of high quality information. We need excellent information flows to support economic growth.
What does it take to get economic growth? Strong incentives to invest in capital stock, infrastructure, and skill development. Strong incentives to participate in the labour force. Integration with the world’s finance, goods and services markets. Rich flows of information to provide insight, and enable sustained productivity growth.