It is interesting times in economics and politics. The big ideas are simply not there. Parties on the right advocate austerity and a reliance on market forces and low interest rates to achieve economic recovery. Parties on the left call for governments to borrow or print money and spend to stimulate the economy. There is an underlying unease that neither approach offers long term solutions.

The first approach, which New Zealand has adopted, requires private individuals to take on more debt to spend our way out of this mess. The Reserve Bank has lowered interest rates to encourage this. This approach suggests that markets and the pursuit of profit will eventually ensure growth and achieve full employment with a little help from monetary policy. So far, the main result has been to rekindle housing inflation. The leftist approach requires governments to borrow and spend to stimulate the economy. Both approaches result in more debt and little sustainable growth.

Developed economies, such as New Zealand, are at, or near, their technological frontier. Developing countries such as China or India have yet to reach this frontier. Their high growth rates are largely based on throwing readily available resources, and technology, borrowed from developed nations, at producing more output. They can maintain spectacular growth until their cheap resources, such as labour, dry up.

In the post war period, developed countries experienced annual growth rates of around 3 per cent. This growth was based on the application of new mass technologies such as refrigeration, plastics and chemicals, automobiles, air travel, farming methods, containerisation, television, and whiteware. Post war prosperity in much of the West was based on the application of these broad based technologies assisted by Keynesian demand management policies.


Over the past 40 years this technological progress has slowed, despite high profile developments as cell phones and the internet. Our daily lives are not that removed from the early 1970s, as compared to the early 1930s. It is technological progress in inventions and production methods that creates new wealth for a developed nation.

There are some interesting implications of this thinking that supersede the traditional markets versus government debate. Debt-fuelled recoveries driven by the public sector or private sector offer no long-term solution, just temporary alleviation. Paying corporate managers and financiers exorbitant salaries is also not the solution. They are often administrators rather than innovators. They are not the real wealth creators. Fear of losing their services should not be justification for colossal pay disparities. Excessive income inequalities add to the economic malaise. The rich often put their excess funds into existing assets such as shares or property creating asset inflation rather than new output and employment. The remaining majority lack the funds to create the general demand that drives the economy towards full employment. Large income inequalities are socially divisive but also economically inefficient.

Technological progress has historically come from innovative and independent thinkers rather than the corporate elite. We should be teaching and encouraging skills in science and engineering and enterprise. The emphasis should be on applying these skills to improving agricultural productivity. This is where our natural advantage lies. It is ideas, innovations and enterprise that drive sustainable economic prosperity.

Peter Lyons teaches economics at Saint Peter's College in Epsom and has authored several economics texts.