Tuesday, September 08, 2015

Productivity and technology in a globalised world

This morning's post is triggered by Winton Bate's recent summary post, Will future technological advances provide widespread opportunities for human flourishing?, drawing together some of his recent writing and thinking. It seemed an appropriate point to use Winton's arguments to draw together some of my own arguments and thinking. None of my points are especially profound, they are just points in the evolution of my own thinking.

I have chosen as my entry point this conclusion of Winton's: "Technological innovation is likely to destroy a substantial proportion of current jobs, but it will not necessarily be more disruptive than it has been in the past."

Looking at history, I have to agree that technological innovation is unlikely to be more disruptive of existing activities than in the past. To illustrate my point, consider the impact of the internal combustion engine and, more specifically, the motor vehicle. In two decades, entire industries were largely wiped out, while the very pattern of human life in developed countries began a process of reshaping that is still working its way through.

I put existing activities in bold for a very specific reason. In the case of the motor vehicle, more jobs were created than lost. They were in different places and involved different people, but the net employment gain was still positive.In the current case, that outcome is less clear to me. I note that Winton has considered this issue. I am just less sanguine than he.

In considering the case of gains versus losses, we need to make a distinction between the wealthier countries and the rest of the world. So far as the world as a whole is concerned, improvements in transport and in computing and communications technology makes it easier for activities to shift to take advantage of differences in factor prices and especially labour. This suppresses labour price increases in certain countries while increasing incomes in other places. Whereas trade used to be the transmission mechanism, we now live in a world where entire industries or economic activities can shift.

If we now turn to the wealthier countries, I can see no a prior reason based on economic theory why we should assume that wealthier countries will (or can) continue to get wealthier. I would have thought that the most that they can hope to achieve as a group is to hold their own, to maintain current income levels with zero or low increases.

Demographic factors contribute to this result. Many developed countries face declining populations and work forces Their challenge is just to maintain GDP. If they can do that, per capita incomes will increase, if slowly. Japan can be taken as a case in point. Japanese economic growth has been relatively stagnant, but per capita incomes have actually increased.

Beyond the demographic challenge is a more fundamental one. How do you continue to grow, even maintain income standards, if other countries can do things things more cheaply? We talk about this in the context of productivity. We must raise productivity so that we can compete, to continue to grow. But what happens if those productivity increases have the effect of suppressing wages? In this case, productivity improvement becomes the device necessary to assist a country to adjust to its decline in relative and perhaps absolute incomes.

We speak of the hollowing out of the middle, the way that structural change in developed countries has created a gap between the top and bottom.  My history of New England maps this for an area, tracing the decline of middle income jobs. In Australian terms, this is seen as as an inevitable and indeed necessary result of structural adjustment. Jobs lost in New England are replaced by jobs created elsewhere in Australia. But what happens if Australia is New England writ large?

If we look globally, there are more middle class jobs now than there have been at any time in human history. I stand to be corrected, but it seems to me that the hollowing out of the middle class in wealthy Western countries is a localised phenomenon. For every middle class job lost in Australia or the US, one or more is created elsewhere. Those jobs may be paid less, but that is part of the adjustment phenomenon.  

I have spoken before about the way boundaries affect thinking.We should not assume that technological advances will lift average real wages in high income countries.The key issue is the way that technological advances create prosperity across the globe. The adjustment processes in a country like Australia. a political construct, will be determined in large part by those global trends.


Evan said...

Is it possible to separate (in economists' terms) utility maximisation and income?

What if we adopt the Bhutanese Gross National Happiness rather than GDP?

Jim Belshaw said...

Winton might actually be inclined to agree with you, Evan! But we do need broader measures.

Evan said...

Yes, I think we do; and that right quickly.

2 tanners said...

I sometimes shake my head in despair. Trained economists have for years pointed out that inequality lowers development, growth of national income etc. (This is not about economic jealousy, BTW, I'm decently well off, although nobody is going to argue ownership of my superyacht when I die.) The point is, that to use the fashionable percentage, the more that the one percent prosper the worse off are the other 99 percent.

So the one percent can afford patronage politics and the rest. What is the mystery? Well, it's why anybody would accept that patronage in a more and more restless democracy which can throw them out of power at any stage.

The last Labor government was good at passing bills, and infighting. I won't insult your intelligence by continuing here.

2 tanners said...

And separately, all happiness measures rather depressingly seem to be measures of how well you are doing compared to your immediate neighbours. The less inequality the better, obviously, but it's still a testament to ego.

Anonymous said...

Personally I like Evan's idea: if we are underperforming as to the GDP 'ruler' why not simply adopt a different measuring stick? Or maybe change back to imperial measures where we had 20s to the lb - not 10c to the $.

Basic psych: the bigger the number, the better one feels :)


Jim Belshaw said...

It's not just the 1%, I think, but the geographic distribution of that 1%. I have the strong impression that the spatial distribution of income and wealth has become much less even.

I wonder how one might better assess the distributional effects?

Evan said...

That would be very interesting to know Jim. Perhaps studies of concentration of wealth in the drift to the cities and particular suburbs in them?

Jim Belshaw said...

It's possible and indeed its been done to chart some of this stuff. - poor towns etc, variations at electorate level, the previous state of the region reports. My feeling is that one needs to drill down to be able to chart changes over time. I also have the feeling that we are, perhaps, asking the wrong questions of the information, being too one dimensional.

Evan said...

Entirely agree about being too one dimensional.

Jim Belshaw said...

Just to try to illustrate. Schooling. Options available to people depend on the combination of location with money. Some people have very good school options, some not so good, some downright bad. Its not always private v public, there are some very good public schools, but they also tend to be location specific.

Shifts between public and private have affected composition of student bodies in a variety of ways. Now education is usually measured by a combination of averages and aggregates. From the viewpoint of a parent, the weighting placed on education. the satisfaction attributed to education is highly influenced by the choices available to them. The aggregates and averages as such have no meaning.

It's quite possible to have a situation in which "standards" are apparently improving but also one in which an increasing proportion of the population are worse of in educational terms.

Winton Bates said...

Sorry I missed the discussion. I support indexes of well-being like the OECDs Better Life index, that encompass a range of considerations. As it happens, most of the factors included are highly correlated with income, or life satisfaction, or both.

kvd: China needs you. It looks like they will need to see some big numbers to keep feeling good.

2 tanners: Don't get too depressed. Such comparisons are not always about envy etc. The evidence from some of the countries in Eastern Europe is that people feel better when their reference group experiences higher incomes. The reason seems to be that it is indicative of the opportunities that might be available for themselves.

My bottom line, after looking at the happiness literature for a few years now, is that we should view subjective well-being measures as indicators of one component of wellbeing. They don't measure all the things that are important. It can be rational for people to sacrifice some life satisfaction to obtain other things important to them such as more education, or more wealth to give their children better opportunities.

Anonymous said...

Winton, I don't think China needs my help in generating big numbers:


- from a book by historian Vaclav Smil, as reviewed by Bill Gates here:


- which no doubt you've read :)


Winton Bates said...

kvd: The big numbers on cement production leave me feeling cold. I remember the Soviet Union used to look pretty good in terms of power generation, steel production etc. I liked the point about using less aluminium per can in the reference you gave.

I must comment on Jim's point about there being no reason to expect wealthy countries to continue to get wealthier. In per capita terms most economic growth stems from technological progress i.e. the advance of knowledge. Governments will have to mess things up fairly extensively to stop the innovation process.

Anonymous said...

Winton I did not say I admired the concrete statistic either; more just that it was (bl--dy) big. Regarding the cans, you would also have noticed that although there is less per can, the total aluminium used in can manufacture had in fact increased. Not sure where that leaves us...

But of more interest to me was a reference in one of the comments on the Gates book review to a fellow called Russ George. Google him for interests' sake if nothing else.


Jim Belshaw said...

Winton. Glad I drew you. What makes you think Australia will benefit from technological change? Why shouldn't Australia be as to the world as Northern NSW is to Australia?

Winton Bates said...

kvd: I looked up Russ George. It was strange that I had not heard of him before. I guess he knew what he was doing. It looks like the results of his experiment have been positive.

Jim: Technological change reduces the cost of producing resource-based exports. Farmers in Northern NSW who adopt advanced technology will obtain a higher return on their investments. They might employ a few UNE graduates and spend some of their income in local towns.

Australia benefits if technological change further improves transport and communications. We become less remote.

I think major benefits will flow if Sydney develops as a high tech centre to sell services to Asia. I tried to discuss the issues involved here: http://wintonbates.blogspot.com.au/2015/08/will-sydney-become-internationally.html

Anonymous said...

So I looked up Northern NSW's economic contribution (GRP), and see that it is (or was in 2012) 1.7% 0f NSW's gross state product (GSP) - i.e. not a lot. And so, I'm finding it very difficult to imagine any tech advances which might 'move' this contribution more than a pimple on a gnat's bum - as it were.

Of course this is given that:

a) any such tech advance is somehow denied to other, competing, regions - and,
b) Jim will not launch into an interminable arguement about the 'definition' of the 'GRP' bounds :)


2 tanners said...

I think it will depend a lot on the execution. Taking the NBN as an example, we are pouring dollars into a project with an implicit goal of making us less competitive than our neighbours. Or even the US. It's probably because it was turned into a political football and parties were trapped into positions. In my jaundiced view it should have been marketed before commencement not as a technological advance but as a great exercise in national building, unparalleled since the copper wire roll-out under the PMG, all those decades ago.

Resources I'm less convinced about, due to the vast repatriation of profits overseas. Farming, OTOH, seems to be a good example, although I'll point out that technological advances usually work (when they do) by economically displacing labour or by increasing production value with the same inputs.

In my normal Pollyanna frame of mind, I think the possibilities are endless and the outcome quite unpredictable. Virtual reality trips to Australia's iconic areas, anyone? Some inventive use of our timezone maybe? I remain hopeful.

Anonymous said...

In my jaundiced view it should have been marketed before commencement not as a technological advance but as a great exercise in national building

Check back to that time on this blog and you will see (almost) unanimous agreement over a spectrum of otherwise disparate political viewpoints that this would have been 'a good thing'. It needed competent execution, not marketing.

And also, pretty much everything depends upon 'execution'. And that's why we are all pretty much stuffed.


and further, a spade is a spade.

Jim Belshaw said...

Hi all. A few responses while I'm cooking dinner. Roast beef. I'm hungry! More later.

kvd first. What definition of Northern NSW are you using?

Winton, you haven't addressed my question, at least not fully. Accepting that technological change can improve global living standards, what makes you think that i will improve Oz living standards?

Oops, the stove calls.

Jim Belshaw said...

Dinner still a little way of. I am trying to challenge an implicit assumption that, or or so its seems to me, is built into current thinking. Essentially, technological change favours competitors as much as it favours Australia. I think that income levels in Western countries have peaked and, at best, can maintain current levels if with a struggle.

Winton Bates said...

Technological progress pushes out the production frontier. It isn't a zero sum game where people can only win at the expense of others. Everyone gains from the superior goods produced and the higher productivity resulting in lower costs of production. The greatest gains tend to go the the innovators. The countries with highest rates of productivity growth gain the most.

Winton Bates said...

A way to answer your question more specifically with regard to Australia would be to re-run the projections in the Intergenerational Report assuming a zero rate of growth in labour productivity. The difference in outcomes under the two scenarios iwould be a measure of the benefits to Australia of technological progress.

Anonymous said...

Jim, just to answer your query, see here:


- page 2 shows the region and Sec 4.1 the "gross regional product" contribution to the State.


Jim Belshaw said...

Thanks, kvd. Thought you were talking about that statistical region.

Broadly, I accept that technological change increases incomes and choice by reducing costs and providing new products. I am not a luddite.

My argument is partly about the distributional effects of the process. Jobs created, incomes raised, jobs lost, incomes lowered occur in different places and with different people. Working with a global economy, I see no reason why the West or Australia should expect the process to work in its favour. Indeed, I expect the opposite.

Now it maybe that parts of Australia, Winton's metros, may benefit. Then what about the rest? I note that the idea of Sydney, for example, as a global metro levereging its strengths, has been around since the 1980s. There have been multiple strategies since then, most short lived, intended to capitalise on this. None have worked.

Sydney today is less important in global terms than it was is 1985. It has fallen back.

Australia has held up better, better than I expected because of the resources boom, but its relative decline is inevitable. So far globally, the country has retained a relative global ranking about equal to that held by New England North West in Australian terms in 1900. By 2050, its ranking will be equivalent to New England North West today in NSW terms. As kvd says, a pimple.

In writing, I am trying to break the mental bounds created by boundaries, by the assumption that things will get better, by the statistical constructs which we use to measure.

I go back to my earlier question to Winton. Why should we expect structural and technological change to allow Australia to maintain its relative and indeed absolute position in a world of which we are a tiny part? As kvd says, a pimple.

Winton Bates said...

When you refer to relative and indeed absolute position relative to the rest of the world, are you referring to aggregate GDP, or per capita GDP, or some other measure.

I am prepared to argue that Australia's per capita GDP will more or less maintain its current relative position as long as our economic policies remain relatively favourable to growth (by comparison with most of Europe). Our political institutions are not in great shape, but they are probably in better shape than those in most of Europe in terms of ability to change direction to avert an economic crisis. Australia, NZ, UK and Sweden are among the few countries with a track record of implementing economic reforms. I am still inclined to see Australia's resource endowments and location as an advantage rather than a disadvantage.

Jim Belshaw said...

Good morning, Winton. Projections suggest that Australia's share of world population and of GDP will decline significantly over the next sixty years. We are roughly 2.6% now, falling to perhaps 1.7%. That's why I laughed at kvd's number!

Our better performance during the GFC and the subsequent mining boom slowed the process a little, but the trend remains.

We may be able to maintain or increase average per capita incomes. However, there is an assumption built into much of the analysis that the combination of our location with resource endowments will, somehow, lead to that outcome. I don't accept that.

Our economy is less diversified today than it was in the 1980s. We missed the chance then to bring about diversification. It was already clear in the 1980s that new new computing and communications technologies had increased locational mobility of economic activity. That process has continued. Jobs are being cleaned out in Australia. We lose some jobs through automation, some through relocation.

Our resource base has given us a boost, of course, but here a number of key sectors including iron ore and coal are under a degree of threat from other competitors as well as structural change.

The country is suffering population drift among its increasingly globalised young attracted by opportunities elsewhere. The number of Australian expatriates passed a million some time ago. They may retain their links with home and come back from time to time, but their homes and core focus are elsewhere.You can see this in the Indian and Chinese communities, but its true for the Anglos as well. The big businesses established, for example, by Chinese Australians are not located in Australia.

The relative efficiency of our systems of governance and the rule of law are clearly advantages, as is security. This can attract some activities so long as the underlying economics are okay and also means that the country is seen as a safe haven. Having an Australian passport and some assets in Australia can be a useful precaution in an unstable world.

Is location an advantage now? Yes and no. We are clearly less disadvantaged than we were, but we remain at a locational disadvantage in many activities. Tasmanian apples going by sea to North Asia now compete with Polish apples that can come by train. Australian iron ore has a present transport cost advantage over Brazilian supply, but Australian coal competes with Indonesian supply. The patterns shift all the time.

We need productivity improvement just to stand still. Cost cutting in the mining sector means fewer miners being paid less. That's necessary, but its also productivity improvement with job and income implications.

What I am trying to understand how all this might fit together.

Anonymous said...

Projections suggest that Australia's share of world population and of GDP will decline significantly over the next sixty years. We are roughly 2.6% now, falling to perhaps 1.7%. That's why I laughed at kvd's number!

Pleased to see it struck some sort of chord, Jim - but you miss the point that the 'base' of that 1.7% will probably have expanded geometrically in absolute terms, if the past is any indicator. Would you rather participate in 2.6% of $1,000 or 1.7% of $1,000,000?

In any event I am finding it hard to get exercised about (using your above figures) a 60 year projection of a downwards shift of 0.9% Wake me when we get there; or maybe my unborn great grand kids :)


Anonymous said...

Geometric: http://www.smh.com.au/business/banking-and-finance/japan-deal-lights-path-for-australian-banks-towards-14-trillion-20150911-gjkd2i.html

If Australia increased its offshore funds under management to Hong Kong's levels, GDP would increase by $4.2 billion by 2029 and 10,000 new jobs would be created, according to the FSC

All pie in the sky stuff, but makes me wonder about 60 year projections; the need therefore.


Winton Bates said...

kvd: As you know already, some projections are better than others. Population projections can be more reliable than most. I guess the purpose of the pie in the sky projections is to get people thinking outside the square. If spruikers can use that kind of communication to induce wealthy people to invest in risky enterprises in Australia, good luck to them - and the investors! I hope they succeed beyond their expectations and become extraordinarily wealthy because this will provide some (modest) benefits to other people in Australia.

That brings me to diversification and the lost opportunities "we" missed in the 1980s

Jim: Looking back now, there are a few high tech companies that I wished I had invested in during the 1980s. However, when you say that "we missed the chance then to bring about diversification" I expect what you are saying to mean that the government missed the opportunity to put a lot of taxpayers'and consumers' money at risk by investing in pie in the sky projects. I am very glad that "we" didn't do that.

At the same time, I wonder how different the future of the vast masses of the people - Joe Hockey's everyday Australian's (as distinct from those who are only Australians on weekends?) - would look if "we" had managed to encourage a large highly profitable high-tech firm to establish here and sacrificed an equivalent slice of the mining boom in terms of exports generated. We would have more diversified exports, but my guess is that nothing much would have changed for most people who live in this country. In both cases we are talking about industries that don't directly employ many people.

In his book "Average is Over", Tyler Cowen suggests that ordinary people in America are losers from the advent of intelligent machines, despite the existence of major centres of innovation in that country. He had me worried, but I think he over-states the problem. I wrote about it here: http://wintonbates.blogspot.com.au/2015/07/is-average-over.html

Anonymous said...

Winton, I never argue with your prognoses - haven't the depth of education, or reasoning, for a start. It is just that I wonder sometimes about the here and now utility of concerning myself with what the world might be like in 60 years' time.

I remember back in the day reading Barry Jones' "Sleepers Awake" which sticks in my mind as one of the first, slightly positive, views of what the future might hold. (That's after many years of the less than optimistic writings about 'the future') Of course he was wrong, but then, all were and are wrong, thus far. You say population projections are more robust? I guess that's true if you ignore blips like 'the black death' and 'the flu' (then) or entirely possible nuclear war, or pandemic (now) as being potential reset mechanisms.

Now we are here, and soylent green became koolaid, and the Holy Trinity - God, Yahweh and Allah - rule our fortunes more closely than ever. I guess economic extrapolations serve some sort of 'use' but, just sometimes, with some of them, it is hard to see much 'utility'.


Winton Bates said...

kvd: You are right, of course. Small changes in birth rates or migration rates can have a huge impact on population projections. The uncertainty is much greater when people try to make projections of things like public debt levels and climate change.

If we ask ourselves what the intention is behind long term projections for public policy purposes it must be to be able to change course if there is a substantial risk that current policies will lead to very bad outcomes within a decade or two. Unfortunately projection exercises are not usually designed to do that.