Australia’s productivity problem part 1, the big issue – by John Sheridan

Australia faces major economic problems, with boosting productivity foremost. Here, in the first part of a two-part series, John Sheridan identifies the major issues.

Former Treasury boss Ken Henry said ‘something is desperately wrong’ with Australia’s economy, which is beset by ‘structural deficiencies’ that cannot be fixed by interest rate cuts or government largesse.

Dr Henry argued the main reason productivity was declining was a lack of business investment in new technology and equipment that increased the efficiency of the workforce.

Henry said: “Business investment today as a proportion of gross domestic product is almost as low as it was in the depths of the early-90s recession. The reason why Australia celebrates a current account surplus today is because business investment is so weak we should not be celebrating this. This is sending us a signal that there is something desperately wrong in Australia.”

Indeed, something is desperately wrong in Australia – not enough investment in new technology. Software, robotics, automation, AI, the tools that extend ‘arm, eye and brain power’ to help us achieve more.

It’s not about people working harder or longer, it’s about people working smarter using the 21st century tools we now have, with them focused on our productive industries.

Our productive industries

And they are – manufacturing, agriculture, smart trades, mining, professional services, ICT, creative industries, education, media and communications.

Most of the other industry sectors are service and support industries for our productive industries – they help and catalyse the production of goods and services, but they don’t make them.

Of the 13.5 million Australian workforce, our productive industries represent roughly 4.5 million workers across eight industry sectors. These are the industries that generate wealth and exports, providing a platform for future prosperity.

The demand for more ‘productivity’ is regularly delivered by the Business Council of Australia and a variety of business spokespeople, and used to criticise the Australian workforce as a whole, claiming they need to be more productive to justify wage increases.

But statements like these do little to advance solutions to the issues Ken Henry rightly outlines.

There are two things to consider.

One is the lack of business investment in new technology. And the other more nuanced issue stems from what productivity is, how it is measured and what it means in today’s digital economy where well over half the working population is not involved in the production of wealth creating goods and services anyway.

We don’t live in the 19th century any more. We don’t all work in factories, mills, farms and building sites making things to be bought and sold, few of us write books, plays, films and software, paint, design and create, and most of us don’t dig holes in the ground or drill for oil and gas.

What the majority of us do is service and support workers in productive industries as best we can.

And productivity shouldn’t be the only goal, for in many cases, increased productivity can be viewed as counter-productive:

• How do we make teachers more productive, bigger classes?
• How do we make musicians more productive, bigger audiences?
• How do we make politicians more productive, longer speeches?
• And how do we make nurses more productive, more patients?

Doing more isn’t always a good thing.

According to the Productivity Commission,: “Productivity is a measure of the rate at which output of goods and services are produced per unit of input (labour, capital, raw materials, etc.)

“Productivity is a measure of the efficiency of a person, machine, factory, system etc., in converting inputs into useful outputs.”

A useful definition for the industrial revolution, but not so useful now.

The ABS calculates productivity using a measure of output called gross value added, which is the value of the output produced by the firm minus the intermediate inputs used (materials, services and energy used in production).

But what factors do you include in your multivariate data analysis that make real sense today?

What is ‘labour productivity’ in the middle of a digital revolution when many tasks and even job roles are fulfilled by software and technology in its many forms.

While we continue to accept these definitions as ‘truths’ we will continue to suffer the impacts of the malaise Ken Henry rightly outlines.

Should we see productivity as working harder to get more pay?

The intrusion of software into every aspect of our economy makes nonsense of this measure of input.

Estimates of productivity are increasingly pure guesses from the ranks of ‘economists’ cloistered within a variety of government institutions.

How does anybody credibly measure the impact of software on our economy, given its multi-national, interconnected and integrated role not just in single organisations but across sectors and supply chains, and its role in information exchange between organisations of all kinds.

Software increases efficiency. It also automates many activities, processes and functions that historically were performed by a person and measured by hours worked and outputs per hour.

And once you add the automation of physical tasks and the management and control of machinery through software and robotics, the issue of measurement becomes more confused.

Inputs and outputs can be measured, but what role does a person play in that equation to be rewarded for increased productivity by employers. In fact, removing the person makes measurement easier.

Add the automation of software (AI) into the mix and we will diminish the role a person plays in outputs even further.

Where does the work take place in an increasingly interconnected and integrated world, in the data centre, on the device?

Where do we deliver the increase in wages for increased productivity? To the robot? To the AI? To the software developer? To Google? To Microsoft? To Amazon?

This conundrum will become even more complicated over the next decade and beyond.

We lack the tools to measure what is happening and the means to understand it or control and manage it. Which is a problem.

It is the 21st century not the 20th any more, and our thinking needs to match the changes imposed by the digital revolution not lag light years behind.

Government always lags technological change. And the government organisations that should be serving our interests, aren’t, and can’t.

The Productivity Commission, Jobs and Skills Australia, the ABS and all departments of industry and development – they follow technology developments. They don’t and can’t lead.

By default, direction for government is offered by “big tech” and consultants of many flavours. It’s one of the reasons government spending on consultants has gone through the roof.

Picture: University of Sydney

Tomorrow: Australia’s productivity problem part 2 – Where to focus and what it means for the individual company

About John Sheridan: After twenty years in advertising as a creative director working for multinationals in three countries, John Sheridan co-founded Digital Business insights to help organisations leverage the benefits of the new digital economy. He is the co-creator of the RED Toolbox, an innovation platform for Australia’s productive industry sectors.