THOMAS Malthus was wrong for one simple reason. Humans have survived his 1798 forecast that growing populations would not be able to feed themselves because innovation and productivity gains allowed them to produce more and more with the same amount of labour and capital: Irrigation, fertilisers, higher-yielding plant species and mechanisation have enabled farmers to grow five to six times the amount of grain from the same piece of land as a century ago. The problem is that similar productivity gains may no longer be possible — or effective.
There is general agreement about the factors that improve productivity. Investment in machinery and equipment increases production levels and quality. Education and training improve worker skills. New products, technologies, organisational structures and work arrangements — in other words, innovation — raise efficiency. A healthy climate for entrepreneurship and competition encourages the creation of faster, smarter businesses.
Unfortunately, there is also general agreement that productivity gains are flat lining. In advanced economies, productivity growth has fallen below 1% annually, significantly lower than the 3% to 4% common in post-war decades and even less than the 2% to 2.5% of the last decades of the 20th century. Similar trend lines are beginning to appear in developing nations. Combined with stagnant or declining workforces, slowing productivity gains are a key factor suppressing growth worldwide.
What no one can agree on is why this is happening. Some economists think traditional measures designed for manufacturing-heavy economies simply are not detecting productivity gains in services, or the effect of newer, information-intensive technologies. There is also a natural lag between the introduction of new technologies and their full effect. It may simply be too soon to see productivity improvements.
Yet such factors have always been present to some degree; they would also have affected earlier productivity estimates. The real issues are more fundamental — and intractable.
Take the shift from manufacturing to services. The latter may not lend themselves to improvements as easily as industrial processes. They cannot all be automated. Many are local and not globally traded, and so do not benefit from international supply chains. It is hard to improve on certain personal services. A one-hour massage always takes one hour. The non-routine and non-repetitive tasks involved in, say, healthcare and aged care cannot easily be sped up.
The immense gains in education and skills over the last 50 years may not be repeatable. Rising costs have placed higher education beyond the reach of many. They have also forced graduates to start their working lives with significant debts, undercutting the attractiveness of going to college. The rise in contract or part-time jobs has contributed to de-skilling, since workers have little incentive to invest in training. A lack of retraining means that the skill levels of older workers — a rising share of the workforce — quickly become dated.
Many “new” manufacturing technologies are already being extensively exploited. New energy technologies, such as fracking and renewables, are not breakthroughs comparable to the discovery of hydrocarbons or electricity itself; they require certain conditions, such as high oil prices, to be efficient. Many biotech, IT and financial innovations are focused on lifestyle, longevity, consumption and entertainment — all of which have limited productivity benefits.
In many ways and many places, it is becoming harder to start and grow businesses. Regulations and class-action lawsuits have made doing business more complex and expensive. Anti-competitive behaviour makes life tough for would-be disrupters, even in the technology sector. There is now one major chipmaker (Intel), a few hardware makers, two dominant computer operating systems (Microsoft’s Windows and Apple), two dominant mobile operating systems (Android and iOS) and one major suite of business software (Microsoft’s Office). Cloud computing is the preserve of Amazon, Microsoft and Google. The Internet is dominated by Google (search), Amazon (e-commerce) and Facebook (social networks).
Among established companies, the frequently short tenures of chief executives and pressure to show short-term results work against productivity gains. Financial engineering to boost share prices is favoured over risky, longer-term initiatives such as research and development or staff training.
And finally, since 2008, unconventional monetary policies have clearly distorted the economy. Low interest rates have impeded the shift of capital from inefficient to more efficient enterprises or industries, allowing unproductive businesses to live on. This has left capital tied up in marginal firms and restricted the supply of credit to smaller, often more innovative companies.
Even if productivity growth could be revived, it is not clear those gains would have as much of an impact on living standards as in the past. Simply being able to make more stuff is not terribly helpful in an era of excess capacity and also weak aggregate demand. Many innovations actually eliminate jobs and depress wages. They allow a few creators to capture large benefits but do not aid the majority of the population.
A much-quoted study from Oxford University found that 47% of all jobs are threatened by automation. In 1967, Boeing employed 400 workers per each aircraft produced. By 2015, that number had dropped to 113 workers per aircraft, a decline of 72%. The company believes that the worker-to-aircraft ratio can be reduced another 60% in the next 20 years.
Fewer workers mean even less demand. Given that consumption makes up 60% to 70% of economic activity in developed economies, productivity gains may thus depress rather than boost growth. Even if the world can solve this one conundrum, plenty more questions — about employment, income and inequality — await. — Bloomberg