Why is Australian and Global Productivity Faltering?

Let’s start with a definition: At both the national and international level, productivity is defined as the efficiency with which a country transforms its resources into goods and services. The classic factors of production are land, labour, capital, and information (know-how/technology). Productivity depends on the quantity of these resources available and how effectively they are combined. There is a complex interaction between the four factors of production and productivity.

Land is natural resources

Land includes agricultural land, minerals and energy, water, forests and fisheries and even geographical location. Land related factors impact productivity in many ways. In general, rich natural resources increase output and create export opportunities while fertile land can improve agricultural productivity and access to ports and trade routes can lower transport costs.

There are limitations, of course. Having abundant resources does not guarantee high productivity. And there may be a downside as countries that rely solely on resources often experience slower innovation and economic diversification (Australia is one such). Australia benefits from minerals, agriculture, and renewable energy potential but is experiencing poor levels of productivity, whereas Singapore has limited natural resources but achieves extremely high productivity through technology and skilled labour. So, land provides the foundation, but productivity depends on how effectively resources are developed and managed.

Labour is human effort

Labour refers to the availability of workers, their level of skill, education, experience and their general health and wellbeing. These factors taken together have an impact on productivity. A more skilled and healthy workforce can produce more per hour, adapt to new technologies, solve problems effectively and deliver higher-quality products and services

These effects are highly visible nationally and internationally. Australia and other countries invest differently in education, vocational training, universities and healthcare. And those that invest more or more effectively typically experience higher productivity growth.

Labour is a critical factor at the international level as countries compete, at least in part, on the capabilities of their workforces. For example, Germany is known for advanced technical skills while Japan emphasises quality and continuous improvement and South Korea has invested heavily in education and technology.

The key to understanding the critical importance of labour, that labour determines how efficiently and effectively resources and technology are used.

Capital is tools, equipment, infrastructure and finance

It includes machinery, buildings, computers, roads, railways, telecommunications and of course financial capital. Capital is a multiplier of basic human effort. In terms of productivity, modern capital enables workers to produce more in less time.

For example:

Without Capital With Capital

Farmer using a shovel Farmer using GPS-guided machinery

Bookkeeping by hand Cloud-based accounting software

Paper filing Digital records management

At a national level, individual countries with strong infrastructure enjoy faster transport, lower business costs, better connectivity and higher economic output. Competitively, at the international level, nations with advanced infrastructure attract more foreign investment, skilled migrants and international business. In short, capital multiplies the effectiveness of labour.

Information and know-how includes technology and knowledge

This input to productivity is known by many names, such as human capital, intellectual capital, technological knowledge and innovation capability. It earns the label ‘capital’ because it grows by accretion, like financial capital.

Australia has not been able to leverage its vast resources by means of knowledge and knowhow. It is almost a truism that innovations arising in Australia are developed, and ultimately benefit, other countries.

Knowledge includes research and development (R&D), management practices, intellectual property, digital technologies, scientific knowledge and organisational learning all of which have a significant impact on productivity. Information and know-how determine how work is organised, how technology is used and how innovation occurs. Competitively, a country with superior knowledge can often outperform countries with greater natural resources.

Examples include artificial intelligence, advanced manufacturing, biotechnology, data analytics and efficient governance systems. At a national level, innovation increases productivity growth over extended periods. At the international level, knowledge-intensive economies such as the United States, Switzerland, Singapore, and South Korea gain competitive advantages through innovation rather than resource abundance. Even though knowledge is often the most powerful driver of long-term productivity growth it is underutilised in developing the Australian economy.

These four factors work together rather than independently. They interact.

Consider wheat production:

Factor Contribution

Land Fertile farmland

Labour Skilled farmers

Capital Tractors, irrigation, storage facilities

Know-how Precision farming, weather forecasting, crop science

If any factor is weak, productivity declines. Thus, good land without skilled labour limits output. Skilled labour without machinery reduces efficiency and modern machinery without knowledge of best practices wastes investment.

At the national level, productivity increases when a country develops its natural resources sustainably and improves workforce education and skills while investing in infrastructure and capital equipment. This encourages innovation and knowledge sharing which is why the most productive economies tend to balance all four factors rather than relying heavily on one.

A useful formula is ‘Productivity = Output ÷ Inputs’, where the goal is to increase output using the same inputs or produce the same output with fewer inputs, i.e. do more with less.

On the international stage, productivity and competitiveness enable countries to compete globally based on how efficiently they combine these factors.

When it comes to resource-based economies like Australia, Saudi Arabia and Canada each with a strong land/resources base, the biggest risk is vulnerability to commodity price changes.

In manufacturing economies like Germany, Japan and China, strength is to be found in their unique combinations of skilled labour and capital. The risk is in international trade and open markets.

The knowledge economies of Singapore, United States and Switzerland find strength in innovation, technology, research, and advanced services. These countries often generate more value from information and know-how than from physical resources. The risk for them is their weaker manufacturing bases and dependency on extended and complex international supply chains.

Let’s pull these threads together with a simple productivity model. Think of productivity as a multiplication effect: Productivity = Land × Labour × Capital × Information/Know-How

If one factor improves significantly, productivity rises. However, the greatest gains occur when all four factors improve together.

The current economic model for today's global economy is:

1. Land provides resources.

2. Labour applies effort and skills.

3. Capital provides tools and infrastructure.

4. Information and know-how determine how intelligently everything is used.

Of the four, information and know-how are increasingly viewed as the most important drivers of long-term productivity growth, because they improve the effectiveness of land, labour, and capital simultaneously.

Now here’s the rub, Artificial Intelligence impacts all of the four inputs to productivity at once. AI is a wild card, outside previous economic experience. AI artificially ‘increases’ the number of people available in the economy by producing copies through emulation and potentially robotics. AI can produce as many helping hands, thoughtful managers and skilled technicians as are required more or less on demand. AI can also exponentially increase the amount, accessibility, timeliness and accuracy of information, expertise and know how. And it pulls off these magic tricks by exponentially increasing demand for resources (land) and money (financial capital).

What is known regarding super abundance of goods and services, is that the value of those goods and services tends to zero as volumes increase. This happens in an absolute sense with electronic or digital copying such as for books, music and videos the market value of which is effectively zero if anyone can make as many copies as they like for free. The same process follows at a relatively slower pace for manufactured artifacts. Take socks as an example. The price of a pair of socks worldwide has crashed as the out put of ‘Sock City’ in China has increased. The last time I looked, Sock City produced around 14 billion pairs of socks per year – approximately two pairs for every man, woman and child on the planet. Following that trajectory, one can almost predict the date, down to the day of the month, when socks, worldwide, will be available for free.

And it’s not just AI, it’s Robotics, Quantum Computing, Fusion Energy, Bioengineering, Sustainable technologies, Nanotechnologies and along side all of that, worldwide population decline. Imagine what limitless electricity, super intelligent AI running on quantum computing platforms could deliver. In combination, these innovations may offer us almost infinite productivity and superabundance for a continuously declining worldwide population.