Bryan Gould says policymakers should beware the temptation to run NZ like a business

Popular wisdom and what passes for common sense are not always the best guides to running a successful economy.

That is why businessmen who have a good practical grasp of what it takes to run a business are often wide of the mark when it comes to making policy for a whole economy.

An economy, contrary to what is often asserted, is not like a business.

Particularly in down times, the measures that might be required in the interests of an individual business are the reverse of what is needed by the economy as a whole.

Cutting costs, deferring investment and laying off workers will help to balance a single set of business accounts but are the last thing that a whole economy needs if it is to avoid continued recession.

Good economic management may often seem counter-intuitive. A case in point is what economists call the "lump of labour" fallacy - the belief that there is a fixed amount of work available and that the task is to decide how that is to be shared out fairly.

The fallacy is alive and well in the minds of even experienced policymakers. We saw shades of it in the "nine-day fortnight" that emerged as a counter-recessionary strategy from last year's job summit.

The idea, which not surprisingly had little practical impact, was based on the notion that if a fixed amount of work could be shared out more jobs would be created, or at least saved.

By diverting attention from what was really required - a policy which would increase the number of jobs - it actually hindered the fight against unemployment.

The fallacy rears its head in other contexts as well. In the perennial debate in developed countries about immigration, one of the main arguments advanced against allowing an inflow of newcomers is that they will "take our jobs". There is little recognition of the real possibility that a controlled rate of immigration could create jobs and expand the economy.

There are, of course, many considerations in determining what are appropriate levels and kinds of immigration. But we would no doubt reach better decisions on matters such as this if we could free our minds of intuitive fallacies and look at the practical evidence.

The economic success of Hong Kong was helped greatly by the constant inflow over many years of (often illegal) immigration from across the Chinese border.

The "lump of labour" fallacy also underpins an important current debate in our own country. The stubborn refusal of comparatively high unemployment to melt away has again prompted discussion of what the Government could or should do to "create" jobs.

However, the suggestion that something could be done has been greeted - even by experienced commentators - with the objection that "the jobs just aren't there". And that means, it is said, that there is nothing the Government can do.

If that were really the case, of course, the Government's push to get people off benefits and into jobs would be futile. The jobs cannot both be non-existent for the purpose of getting unemployment down, yet there waiting for lazy beneficiaries to take up.

And while it is true that there are strict limits to how far (if at all) governments should go to try to create jobs, that is not the real issue. The reality is that the number of jobs in an economy is not a given but is a function of the level of demand and therefore of economic activity. The number of jobs falls in a recession and rises in better times.

If we want to recover from recession, we need policies that will stimulate demand and purchasing power so that people will buy what producers make and retailers can boost sales. And so that employers can see that it is worthwhile to take on more staff and more people earning good wages will keep the virtuous circle going - so that the government's finances benefit as well through a higher tax take.

There is no mystery about this. And the level of demand is largely determined by policy. A government that provides stimulus to the economy through maintaining or increasing its own levels of spending and investment, as the Australians did, can achieve a great deal in avoiding recession and fighting unemployment.

However, if the policy priority is to get the Government's (perfectly manageable) deficit down, the outcomes are clear. We may comply with good business practice by pleasing our bankers in the short term but our economy will be smaller, unemployment will be higher and the recession longer.

If we want to please our bankers in the longer term, we should be growing the proportion of our resources devoted to production and exports. That will not be achieved by allowing a prolonged recession to close down parts of our productive capacity.

* Bryan Gould is a former vice-chancellor of the University of Waikato and member of the House of Commons.