Productivity in question

An alternative view of economic progress
By Frank Stilwell

‘Productivity’ is an ambiguous concept, very hard to measure systematically and difficult to establish clear causal links. Undaunted by these ‘technicalities’, calls for higher ‘productivity’ regularly feature in speeches by business representatives and politicians from both major parties. The calls are routinely echoed in the mainstream media. We are encouraged to produce goods and services more efficiently, either by working harder or smarter, and warned that failing to do so would reduce living standards.

Professor Ross Garnaut’s widely publicised speech, delivered at Victoria University in May, is a recent example of a prominent economist giving legitimacy to this view. Garnaut warns that changing international conditions require Australian households to lower their expectations of living standards in the years ahead while the nation pushes for yet higher productivity – an awesome combination indeed.

The first public address by Peter Harris, successor to Gary Banks as Chair of the Federal government’s Productivity Commission, put a somewhat similar picture. Re-cycling the phrase ‘never waste a crisis’, Harris evidently relishes the opportunity for harsher economic medicine than the patient would normally find acceptable. He calls for a permanent institution to drive a ‘microeconomic reform’ agenda that continuously seeks to raise national productivity.  On this reasoning, Australia has a Reserve Bank to manage the nation’s monetary policy, and a Treasury budget process for fiscal policy, so we need an equivalent policy driver for higher productivity ‘on a continuous basis’.

Such rhetoric and advocacy requires critical consideration. What assumptions underlie calls for higher productivity? What policies are implied? Would they produce sustainable outcomes? Are there alternatives that would better serve society under the current economic and environmental conditions?

Certainly, we don’t want to be unproductive, any more than we would seek to be inefficient, but the deeper question is: ‘productive or efficient in doing what?’ Is producing more ‘stuff’ more cheaply the be-all-and-end-all of the economy, or do we need to consider what stuff Perhaps the more fundamental question is how economic means can best serve broader social ends: how could ‘productivity’ relate to creating a better society?

What is productivity?

That the meaning and measurement of ‘productivity’ is deeply problematic is acknowledged in a recent report by the McKell Institute on Understanding Productivity: Australia’s Choice and in some of the Productivity Commission’s own more detailed publications.

The conventional measure typically involves dividing the output of goods and services by the number of person-hours involved in making them. That is called ‘labour productivity’. However, it is obvious that this measure depends significantly on the amount of capital equipment with which workers do their jobs. In other words, the quantity and quality of ‘capital’ bears heavily on the calculated value of labour’s productivity.

Recognising this interdependence of capital and labour in most production processes, the concept of ‘total factor productivity’ is sometimes used. This measurement is also controversial though, because it is not independent of the market valuation of either inputs or outputs. Whereas inputs of labour may be measured in person-hours, inputs of capital are measured by the market value of machinery and equipment that is being used. And the value of diverse outputs can only be aggregated in terms of their market prices. So there is an inbuilt conservative bias towards current market conditions. 

This has considerable social significance. It means that, underlying the conventional measures of productivity is the assumption that producing more goods and services is always desirable in direct proportion to the market prices of those outputs. The question of whether the items produced are socially desirable is not considered. Nor are resource constraints and concerns about ecological sustainability. A narrow ‘productivist’ viewpoint dominates over broader social concerns about what is being produced, for whom and at what environmental cost.

A ‘low road’

This bias in the concept of productivity is magnified by its dominant interpretation in policy proposals. Neo-liberals focus on the labour market, typically emphasising the need for more ‘flexibility’.  Calls for higher ‘productivity’ thereby drive the ongoing campaign for right-wing industrial relations ‘reform’. The return of WorkChoices, or some variant thereon, is clearly favoured by many in the Liberal and National Parties, including repeal of unfair dismissal regulations, greater employer control over working hours and the substitution of casual and contract labour for permanent employees.

This is a low road’ to economic reform, using labour market ‘flexibility’, on employers’ terms, to drive national ‘competitiveness’. It actually has little to do with physical productivity, being more about raising profits by cutting wage costs. It also sets aside the very real concern that, for many forms of industrial production, Australian industries simply cannot compete with overseas producers, like China, where labour costs are a tiny fraction of those in Australia.

A ‘high road’

Rather more sophisticated is the emphasis on enhancing productivity through policies emphasising education and innovation. Here there is recognition that our economic future lies in specialised high skill ‘niche’ industries, where technological leadership and expertise are pivotal to Australia's international economic success .

This is more characteristically how the issue has been framed within the ALP, seeking a ‘high road’ for economic reform. Policy commitments toward building a ‘knowledge nation’ are thereby repackaged as productivity-enhancing measures. This is a significant advance on the neo-liberal approach, but it leaves other big questions unanswered. Does the rhetoric flow through into effectively funding higher and further education? And what of the view that education has broader personal and community purposes, beyond its instrumental effects on economic productivity? Some of the current rhetoric about creating an ‘enterprise culture’ effectively converges on the neo-liberal view that what is good for business is necessarily good for society.

A different direction

Digging more deeply into these concerns suggests the need for a paradigm shift. This was evidently the intention of national Greens leader Christine Milne when giving an address to the National Press Club in Canberra last year. She laid out a different way of thinking about what constitutes economic progress. Seeking to counter the view that Greens are universally opposed to economic growth, she emphasised those aspects of growth that enhance wellbeing, contrasting these with destructive or unsustainable forms of production. From this perspective, the primary focus for economic reform must be to shift our patterns of production and distribution in directions that are socially beneficial and compatible with environmental constraints.

Take the case of coal mining. This is a highly ‘productive’ industry in Australia, according to conventional economic measures – it generates vast outputs with relatively few workers. Yet, in the long term, it is an unsustainable industry. The nation needs a plan to restructure the economy, particularly in regions where mining is concentrated, so that green jobs replace unsustainable employment. While that would not increase short-term productivity as conventionally measured, the long-run pay-off would be substantial.

Another example is Australia's agri-food industry. To intensify biophysical productivity, farmers have increasingly adopted the products of agribusiness: mechanised equipment, insecticides, fertilisers and new seed varieties. These products aim to make nature work harder and faster to increase yields, reduce turnover-time and employ inputs more efficiently. Yet, nature is not necessarily compliant, as its biophysical characteristics often prove recalcitrant to intensification efforts.

Priorities for genuine productivity

The productivity debate raises key strategic issues about Australia's future wellbeing. However, instead of exhortation to more ‘competitiveness’ in order to enhance economic growth – essentially more of the same -  we need a change of policy direction.

Infrastructure investment must be a priority, building improved transportation systems and better-funded schools, universities and technical colleges. Public investments like these open-up potentials for long-term economic progress, often more effectively than private investments geared to short-term profitability.

A second priority has to be more equitable distribution of the fruits of economic progress. Indeed, establishing fair shares is normally a precondition for continuing co-operation. Without that, industrial relations become fractious, and productivity growth (however it be defined) becomes less likely. Moreover, there is now abundant international evidence that the more equal societies have fewer social problems and more contented populations than the most unequal ones. Evidently, the distribution of income and wealth is at least as important as the overall level of productivity if we are concerned with national wellbeing.

Sustainability is also fundamental. Unless economic policies reduce the use of non-renewable resources and environmental damage, any short-term effects of higher productivity would only be temporary, distracting us from the bigger challenges of fundamental economic restructuring.

Conclusion

The concern with ‘productivity’ is likely to persist, notwithstanding the obvious problems with the concept, its measurement and the kind of politics into which it normally feeds. It seems to be deeply ingrained in modern political discourse. The challenge therefore is to change the nature of that discourse – away from dodgy data, reactionary politics and narrowly defined business interests to a broader, more progressive agenda. That is where bodies like the Evatt Foundation can play a crucial role, in focussing on how economic reform can serve broader social goals.

It is always important to distinguish between means and ends when discussing economic issues. Economic means need to be assessed according to how effectively they serve social ends. This principle is violated whenever ‘productivity’ is treated as if it were an end in itself. The ultimate test should be what helps to create a more secure, equitable and sustainable society, in which the fruits of progress are shared not just as incomes but as more plentiful opportunities for leisure and more fulfilling lives.
 


Frank Stilwell, is emeritus professor of political economy at the University of Sydney and an executive member of the Evatt Foundation, whose most recent book is an updated edition of Political economy: the contest of economic ideas (Oxford University Press, 2012).This is the text of his address to ‘The Productivity Zombie’, a public forum hosted by the Evatt Foundation in association with Sydney Ideas at the Sydney Law School on 24 June 2013.