The last thousand years have been dubbed the ‘millennium of the market'. While the population of the world rose twenty-two fold over the last thousand years, world gross domestic product (at purchasing power parity) rose thirteen times as fast. Much of the economic growth occurred in just the last two centuries. The astonishing increase in population, output and incomes per head has no earlier parallels.

Financial Times chief economics commentator Martin Wolf – who is giving the 2004 Sir Ronald Trotter lecture for the New Zealand Business Roundtable (NZBR) in September – says in his new book Why Globalisation Works that “the historically unprecedented economic dynamism of the last two centuries and the divergence in performance across countries are the two most important features of the world we inhabit”.

The dynamism, he argues, results from institutions, practices and attitudes that first emerged in western Europe over an extended period. These cultural, social and political advantages combined with the proximity of coal and iron.

The divergence was the result of the uneven reach of rapid economic growth. Growth spread swiftly from Britain to the rest of western Europe and the former British colonies. Incomes converged strongly among these countries. Rapid growth also jumped from one end of Eurasia to the other once the United States forced Japan to open up its economy. Yet, as Martin Wolf states, “the overall picture of a world in which some countries have economies that grow more or less consistently while others do not is correct”.

If we are to ensure nations that have not had strong economic growth catch up, we must understand what the source of it is. Fellow British economist David Henderson – author of the forthcoming NZBR publication The Role of Business in the Modern World – has looked closely at the background to sustained high growth rates.

Henderson concludes that sustained high growth has owed little or nothing to direct foreign assistance, whether bilateral or multilateral, to public-spirited conduct by large international firms, or to collective resolutions and initiatives on the part of the international community.

Rather, David Henderson concludes, “everywhere the material progress of people, rich and poor alike, depends primarily on the dynamism of the economies in which they live and work”. The progress of workers does not chiefly depend on the activities of trade unions or the regulation of wages and employment. Such moves can make economies less dynamic. Advances made by lower income earners through the development of social services and income redistribution can be overshadowed by the gains which arise from economic growth.

Henderson believes the background conditions required for dynamic growth are: a stable government acting responsibly in matters of public finance and the control of the money supply, property rights that are well established and maintained, a system which leaves most economic decision-making in the hands of private individuals and enterprises, and an economy that is substantially open to transactions with the rest of the world.

His finding is consistent with the Economic Freedom of the World annual survey, of which the NZBR is a co-publisher. Recently released, the 2004 edition shows that the reforms of the 1980s and early 1990s continue to pay dividends for New Zealand, while latter day tinkering has slowed progress.

A large question remains: what is the source of economic progress, as distinct from the conditions? David Henderson answers: “the primary direct impulse to economic progress comes from profit-related activities and initiatives on the part of business enterprises”. As Henderson notes, this is true of countries everywhere, past and present, and rich and poor alike.

Henderson quotes economist Joseph Schumpeter, who wrote in 1942 that “the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates”. It is apparent that economic growth increases not just material wealth, but also opportunities for innovation. Technical and scientific progress can therefore be seen as part of a business-led process of change. In other words, invention and innovation are largely economic activities performed by companies to meet the demands of consumers.

Competitive pressure is another factor in the impressive performance of market economies. Businesses make investments, introduce changes and engage in innovation to exploit perceived opportunities and ward off threats to the bottom line.

Past history, especially of the past half-century or so, offers clear evidence of rapid, sustained and increasingly widespread improvements in material welfare. David Henderson believes:

There is good reason to think that profit-oriented ‘capitalist' business enterprises, operating within the framework of competitive market economies, have played, and are continuing to play, a large part in making such achievements possible. From an economy-wide perspective, as distinct from that of the individual firm, this is the primary role of business.

Thus defined, the primary role of business is not one that individual enterprises consciously set out to play. Within it, businesses are cast as agents of market-led change, but not because they have chosen to act as such.

From an economy-wide standpoint, business is instrumental to material progress – and its role has changed little over a millennium.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Advisor
Ph: 04 494 9101
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz