2B RED: Productivity isn’t everything, but …🍋

NZ agonises over its poor performance. A look to the past offers some useful ideas.

New Zealand constantly agonises about its poor productivity performance. The handwringing is ongoing, but the way forward remains at best an ill-defined hodge-podge of regulatory, investment, trade, labour market, infrastructure and innovation policies, the sum of which just might, hopefully, pull us out of the slump. The evidence to date is pretty thin, to be generous.

Productivity performance is crucial for living standards, as Paul Krugman famously concluded that

“Productivity isn't everything, but, in the long run, it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

The Treasury has addressed the NZ productivity question in countless reports over the last three decades. A recent and comprehensive piece, by John Janssen, Margaret Galt and Giles Bollinger, is New Zealand’s Productivity Performance: Taking a Broader View.¹ The authors make a valiant attempt to paint a rosier picture than is usually depicted, with some judicious adjustments to the measurement of productivity; but in the end are forced to conclude that even these fail “to restore New Zealand’s past productivity or income relativities against high-income OECD comparators.”

New Zealand pipit Anthus novaeseelandiae. Dave Heatley

Arthur Grimes and Shine Wu focused on consumption rather than labour productivity as a measure, and in a similar vein provided alternative productivity measures in Reinterpreting Productivity: New Zealand’s Surprising Performance or The shortcomings of an engineering approach to productivity measurement.² The authors concluded:

“When we measure productivity based on this approach we find that New Zealand had very low productivity growth from 1970 to the early 1990s. Since then, however, New Zealand’s performance has been impressive and is stronger than for most other developed countries.”

Whew — at last, some good news!

Let’s back up 200 years …

Perhaps if we were to delve into history for a bit, we might see some clues. Just what was behind the enormous rise in productivity and living standards starting in the 18th century?

After all, we don’t have to add too many great greats to those with European ancestry before we are back in a time where lives were short and brutal. But in the space of 200 years real incomes rose many fold from the grinding poverty and stagnant growth of the medieval ages.

Jenny Uglow has written a significant book detailing the lives and work of an outstanding group of people whose work and findings arguably underpinned much of the productivity growth we observed in the west from the second half of the 18th century: The Lunar Men: The Friends Who Made the Future, 1730-1810 (Faber, 2011). First a word of explanation for the title of the book. These friends were a group of men who got together in Birmingham on a Monday evening close to the full moon, reputedly so the moonlight would illuminate their walk home (after a few brandies?). So, who were these chaps?

A founder of the group was Erasmus Darwin, a physician and inventor and evolutionary theorist, laying the groundwork for the subsequent work of his grandson Charles Darwin. Other members included Joseph Priestly (who discovered oxygen), James Watt (the steam engine), Josiah Wedgewood (potter), Matthew Boulton (toy-maker), John Whitehurst (clockmaker), James Keir (chemist) and Richard Edgeworth (inventor – and father of 22 children from four marriages!)

A surprising number of these were Scots. Being of direct Scottish descent — my father was a migrant from Scotland — I am reminded of Arthur Herman: How the Scots Invented the Modern World: The True Story of How Western Europe's Poorest Nation Created Our World & Everything in It (MJF Books, 2001), which even discounting the hyperbole in the title, is a worthwhile read. But I digress.

The friends were almost all from modest backgrounds — none were academics, all were self-taught. Adam Smith had noted that mill-wrights, artisans, mechanics and toy-makers were responsible for many improvements in industrial processes. However, substantial advances needed “a man of observation”, one whose whole trade is not to do anything — rather just observe — essentially in today’s parlance, to think outside the box. The Lunar Men virtually all encompassed both dimensions, that is, they were thinkers and doers.

James Watt epitomizes this dual role: “he loved puzzles – he had a craft background and was not afraid to get his hands dirty.” But he did not just rely on trial and error experiments. “He was concerned with the principles of his subject, the laws of hydraulics and hydrostatics, the findings of variable temperatures and pressures, and the application of mathematical theory.”

Many disciplines were involved – mathematics, medicine, chemistry, astronomy and mechanics to name but a few. And typically, any one of these people had a command of more than one area. This led to a great deal of cross-disciplinary research. It is also notable how they shared information and worked together (the Monday night social gatherings doubtless facilitated the interchanges). That sharing eventually led to exchanges with a much wider group from different locations who were not necessarily attendees of the Monday night club. People such as Benjamin Franklin and Joseph Banks were amongst this wider network, which extended to Germany and France.

As is so often the case, technical advances have flow on effects and new institutional arrangements emerge. (Douglass North developed these concepts in Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1991). In this case, Josiah Wedgewood was improving and expanding the output of his pottery factories. But getting fragile crockery and ornaments to the domestic markets, and to ports for shipping to export markets, was a challenge; the roads were poor and the carriages carrying the goods were slow and constantly jolted, so that breakages ran as high as 30%. Working with others Wedgewood was instrumental in developing canals. New institutional arrangements were needed for the operation and management of canals. And as constructing canals required a large investment, new finance arrangements emerged.

In addition to their constant search for a better understanding of the underlying theoretical principles, the Lunar Men relied on experimentation and observation. Today’s scientists would surely envy the fact that these early pioneers were unfettered by writing research proposals for grant funding, obtaining academic tenure, and building a publication record.

Could it be that in the highly specialized, compartmentalised world of science today, we have lost some of the key elements that underpinned the outpouring of advances, both theoretical and practical, that came from the Lunar Men?

By Grant Scobie

»»»» Previous issues of 2B RED.

Coromandel Range. Dave Heatley.

1. The Treasury: Analytical Note 22/05.

2. Paper presented to New Zealand Association of Economists conference, Wellington, June 2021.