Social Service Futures: What is productivity?

Dr Ben Spies-Butcher is a Senior Lecturer at Macquarie Unviersity

The Productivity Commission’s name suggests productivity is an uncontroversially good goal to which policy should aspire. Yet, within economics there is considerable debate over what productivity is and how it can be measured. More broadly there are questions over the implications of productivity, particularly for social provision.

A good example comes from recent history. In 2014 the Productivity Commission released its Productivity Update. The news was not good. Across a range of sectors productivity was falling. But look a little deeper and the reasons for the fall appear far less concerning than the headline figures might indicate. Take a few examples.

Mining contributed more to the overall fall than any other sector. During much of the 1990s mining productivity was increasing at roughly the same rate as the rest of the market economy. But around the turn of the century it started to fall off a cliff.

What happened? Surprisingly, the answer is the mining boom. That’s right – the collapse in mining productivity directly coincided with the biggest growth in mining profits.

How can that be? Productivity measures output per unit of input. Rising prices for ores mean harder to reach deposits become profitable. Expanding production to these deposits requires more resources per unit of output.

Shifting resources into mining does create real challenges – particularly if it comes at the expense of long term investments in industries like manufacturing. But to avoid a fall in productivity would have effectively required Australia to opt out of the mining boom – a very odd conclusion for mainstream economists to draw.

The same trend was evident in manufacturing. Here Peter Ferguson identified a perplexing insight, one he explores in an article in the Australian Journal of Political Science on the ‘politics of productivity’.

Part of the productivity problem in manufacturing, the report suggested, was a change in the composition of food manufacturing. In industries like bread making there had been a decline in factory made bread (which is capital intensive) and a significant increase in store made bread (which is labour intensive).

The report noted that the shift to store made and artisan bread reflected consumer demand, and that the resulting bread was likely healthier, including seeded breads and sourdoughs. Because store made breads are labour intensive, it also meant more jobs for bakers, and likely higher quality jobs with a greater sense of craft.

So Australia’s sliding productivity appeared to be due to a boom in profits and foreign exchange, and a job rich and health conscious shift in consumer preferences.

Neither cause could seriously be considered the result of a ‘trade off’ between economic and non-economic goals, or the cause of economic misfortune. Instead, productivity itself seems to have little to do with even ordinary economic evaluations.

Of course, the Productivity Commission is not ignorant of the problems. Part of the discussion in the Update was focused on exploring exactly these issues. But Ferguson points out the framework of productivity can undermine our ability to focus on more important goals.

Focusing on productivity confuses ends and means. Even for mainstream economists the goal is to maximise the satisfaction of consumer preferences. Under certain assumptions, productivity aids that goal. But under other assumptions (like changing consumer tastes or changing technologies) it might not.

The focus on productivity also distracts us from the real goal – the kind of society we want to live in. Economists explicitly ignore this question, assuming it is the province of other disciplines. But it is surely central to social provision. The Update shows productivity is a poor proxy even if you have policies goals set externally (by the government for example).

Focusing on what kind of society we want to live in has profound implications for our assessment. For example, we might prioritise supporting cooperation and care over competition, or ensuring people feel safe over promoting risk taking. We might prefer decent wages or more jobs to lower input costs, or greater equality to higher production. Many of these considerations simply disappear in most productivity analysis. Often important goals are actively subverted.

We do need more debate and discussion over social policy. Inquires can aid that goal by promoting careful consideration of evidence; bringing together those in the field, those that use services, advocacy groups and researchers; and media attention. Productivity Commission inquiries do attract attention and encourage debate. But framing such a discussion around productivity puts the horse in front of the cart. And it risks producing the kind of nonsensical outcomes the 2014 Update tried so hard to understand. 

This piece has been written as part of the Power to Persuade Social Service Futures Dialogue