When smarter working comes from new ideas, it’s time we got some of it

Do you understand? Economic growth doesn’t come primarily from felling trees and digging things out of the ground – and the scientists are right to tell us we need to do less about looting the environment, our ‘natural capital’ – the largely stems from the use of human ingenuity to devise ways to produce more with less.

That’s why the report says that improved productivity is “the key to prosperity” and is based on “the spread of new, useful ideas”.

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More concretely, productivity is improved by people thinking about ways to improve the goods and services we produce, ways to make the production process less wasteful – more efficient – ​​and by inventing goods and services that are completely new.

This gives us a mix of new products, improved quality and lower costs.

For the past 200 years, since the beginning of the industrial revolution, the productivity of all developed economies has improved by a few percent almost every year. In our case, the average Australian’s economic output has increased sevenfold over the past 120 years, while the number of hours worked has steadily declined.

The problem is, the miracle of productivity improvement has been a lot less miraculous lately. Over the past 60 years, our productivity has improved by an average of 1.7 percent per year. In the decade to 2020, it has “decelerated significantly” to 1.1 percent per year.

It’s pretty clear that if we’re to achieve higher productivity gains again, we’ll have come up with new ideas to make the service industry more productive without sacrificing quality.

The report is quick to point out that much the same has happened in all rich countries. (It is noted, however, that the level of our productivity is now lower than compared to the levels the other rich countries have reached.)

This is significant. It suggests that the factors that have caused our productivity performance to decline are likely the same as those in the other rich economies. But so far none of them have pinpointed the root causes of the problem.

If they’re still working on the answers, so are we. So the report focuses on thinking about what? be able to cause the problem and where we should look for answers. Keep in mind that this is just the first of several reports.

So, unlike the rent-seekers and econocrats, it doesn’t offer magical answers. But it comes with a good explanation for at least some of the productivity slowdown: For most of the past two centuries, one of the main ways we’ve produced more with less is to use newly invented “labour-saving equipment” to replace workers by machinery in agriculture, mining, and then manufacturing.

The amount of goods we produce in those industries has never been greater, but the number of people employed to produce everything is a fraction of what it once was. And this accounts for much of the productivity gains we’ve achieved since Federation.

Because producing more with less makes us richer, not poorer – increases our Real income – total employment has increased rather than decreased because we have spent that extra income to hire more people to perform all kinds of services – from the subordinate to the highly skilled.

We (and all rich economies) have been so successful in shifting workers from making goods to providing services that the service industry now accounts for about 80 percent of everything we produce and about 90 percent of all employment.

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Do you see the problem? Services are primarily provided by people. So the economy is now almost entirely made up of industries where it is much more difficult to improve productivity simply by using machines to replace workers. It’s far from impossible, but it’s much harder than on a farm, mining site, or factory.

This is all the more true when you consider that two of the largest service sectors are health and social assistance, and education and training.

It’s pretty clear that if we’re to achieve higher productivity gains again, we’ll have come up with new ideas to make the service industry more productive without sacrificing quality. That’s the next in the Productivity Commission’s series of reports.

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