Monday, May 31, 2010

A "knowledge economy" for New Zealand?

Andrew D Atkin

From a casual perspective you would think that the countries that support those expensive factories that push out all those high-tech products must be the main countries that are very rich. However, it doesn't quite work that way because mass-production must still bow down to the laws of competition and market saturation.

If you build a mass-production plant for, say, $100m and it provides an impressive yield of, say, 30%, then other capitalists are going to get excited and build their own production plants to compete with you - they want a piece of that pie too. So in time, your yield as a ratio to your original capital investment will come back to a more 'normal' 10% for as soon as you and your competitors saturate the market, as will happen.

The effect? Goods dependant on intensive mass-production become 'just another industry' serving the market. The great riches only come to the early adopters and for only a temporary time (that was their reward for taking a risk with something new). And in turn, in time, you might be no better off investing in coffee shops than in high-tech products - or anything!

My point is that New Zealand should not try to pick winners with respect to "the next big thing", at least not by looking at what other countries are doing. (If you're playing catch-up, then you're probably already too late!).

Market saturations always bring new products and services into line with other products and services, in time. This is why New Zealand should not be talking about a "knowledge economy" as such - the world has PLENTY of knowledge, especially emerging from the human capital giants, India and China.

Where New Zealand should be focused is in the products and services that it has a natural edge over other countries with. In a global economy, I think the future for New Zealand will (or should) mostly be in tourism and lifestyle property development, in conjunction with its well-established agricultural industry. This is a good and highly secure place for New Zealand to focus its capital.

-7-3-13: A good article relating to my point.


Note: Outsourcing and free trade:

Having free-trade links to China is seductive because their labour is so cheap, giving us cheap products to import. But the problem is that with unprotected outsourcing you can find yourself outsourcing the very thing that makes your country a rich country in the first place - that is, your industrial base. So for a short-term pay-off of cheap imported goods, you can nonetheless end up with a serious long-term decay of real wages (purchasing power) of the citizenry.

Capital located in a rich country must, substantially, share the fruits of its profits with its workers. Indeed, the real (nationally relevant) profit of an organisation can be measured not only in final business profits, but paid wages included. With free-trade you can undermine that process; the capital owners can (and do) share less of their fruits with the workers. Outsourcing to cheap labour effectively threatens to concentrate nearly all profits from capital-output to the capital owners - progressing towards the situation of lower wages, and bigger business profits. Import tariffs naturally protect against this process by making it less feasible for capital to relocate overseas where there is cheap labour, because the tariff functionally replaces the savings obtained from the exploitation of cheap labour, and therefore undermines the advantage of outsourcing.

So outsourcing at its worst can lead to a diminishing returns. You can develop into a society made up of very rich capital-owners but with a universally poor(er) working and middle class; that is, the wage-earning classes.

Luckily, New Zealand is somewhat immune to (potentially) catastrophic outsourcing, because the country's capital is literally locked to the nations ground: New Zealand is heavily invested in agriculture and tourism. However, because New Zealand is so openly linked with China, it should continue to focus its capital investment towards these "protected" areas so as to ensure that its capital stays in the country, and likewise translates to sustained gains for the wage-earning class.

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