Our politicians go populist at their peril

If I were an Australian politician I'd think hard about the ascension of Donald Trump before I drew conclusions for local consumption.

When someone so unattractive surprises us by winning, it's tempting to conclude he must have done so because of a massive surge of anger over immigrants, Muslims and jobs lost through trade agreements.

We connect this with the Brexit surprise and the resurrection of One Nation and conclude we're witnessing a worldwide populist uprising against globalisation and "neo-liberalism".

Pollies on both sides wonder whether they should protect their backs by reverting to more protectionist policies, rejecting more Chinese investment and shouting louder about Australia-first.

But such a reaction much exaggerates the popularity of populism in America – as is clearer now more of the vote has been counted.

First, note that Hillary Clinton got over a million votes more than Donald Trump did. He actually got fewer votes than Mitt Romney in 2012 and John McCain in 2008.

How is such a wide discrepancy between the popular vote and the electoral college result possible? Because the many smaller states get a disproportionate number of votes in the college.

So Trump won because he got more votes in the right places – three or four smaller "swing states" in the midwest Rust Belt, which normally vote Democrat.

It's true Trump won these states because enough white males without college educations found his plain-talking and promise to "make America great again" – that is, bring jobs back to the Rust Belt – more attractive than establishing a Clinton dynasty.

But let's not kid ourselves America is seeing a nation-wide upsurge in populist protectionism, any more than One Nation's ability to exploit an ill-judged double dissolution represents an existential threat to Labor or the Coalition.

Next, remember populist sentiments can't be satisfied. They're about the expression of emotion – anger, frustration, envy, fear of foreigners, resentment of city-slickers and the better-educated – not about rational choices.

They're about wishing the world hadn't changed and wishing some saviour could change it back.

Populism is about ignoring the things that have changed for the good – such as much lower prices for clothes, groceries, hardware, electronic goods, cars and much else – and assuming we can reverse the changes we don't like without losing the benefits we've come to take for granted.

Populism is about explaining the decline in employment in manufacturing, and the shift in economic activity from the Rust Belt to the Sun Belt, solely in terms of free-trade agreements – which were made by governments and so supposedly can be reversed – while ignoring the much greater role played by technological change, which happened in spite of governments and can't be stopped by governments.

It's perfectly possible for America to make no further trade agreements, but only an American could delude themselves that their government could tear up longstanding agreements with other countries while those countries sucked it up.

Protectionist moves lead to retaliation by your trading partners. That leaves both sides worse off.

Consider all the wild promises Trump made to con the Rust Belt's white male workers into voting for him: a wall along the Mexican border, a 35 per cent tariff on Mexican imports and 45 per cent on Chinese imports, plus renegotiation of the North American free-trade agreement.

Assuming he wanted to, he can't actually do these things. Assuming somehow he could, they wouldn't fix the problem the way his dupes imagine, while introducing a new set of problems.

This says it won't be long before the Rust Belt's plain talkers realise they've been conned.

Add to them the majority that didn't want him in first place, and the many who held their nose and voted Republican because they couldn't stomach any Democrat, and it's not hard to see Trump setting records for the time it takes a president to become thoroughly on the nose.

Sound like a winning formula for our pollies to copy? Since populism fosters aspirations that can't be satisfied, it's suited to new, minor parties, but a high-risk tactic for parties that stand a chance of getting to government and having to deliver on the expectations raised.

None of this says the Rust Belt revolters don't have legitimate grievances.

A small group of business heavies and well-educated city-slickers has grabbed almost all the benefits from the structural change that's so disadvantaged the rust-belters, without governments – even Democrat majorities – doing much to oblige the winners to share with the losers.

For once in their lives, rather than going lower when they see the Yanks go lower, our pollies should, to quote Michelle Obama, "go high when they go low".

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Herald's move to explanatory journalism is its future

How has the Herald changed in 185 years? How should I know – I've been working for it for less than a quarter of that time. But I dare to claim that, of all the change since 1831, most of it has occurred since I started in 1974.

A few years back, at a staff function to celebrate those of us who'd hung around longer than could reasonably be expected, someone had the idea of presenting us not with a pen or a watch – I'd already had one of each – but with a framed copy of the front page of the paper on the day we started.

Sorry, but it was an uninspiring present that showed how far we've had to travel. It was grey in every sense. That was long before the Herald moved to colour printing, but not before our subeditors had abandoned their sacred duty to drain the colour out of every story before allowing it to be seen by the public.

The Herald stuck to "objective" reporting of the facts – "just the facts, ma'am" – and anything that remotely resembled an opinion – it was a beautiful sunny day, the prime minister seemed distracted, the accident was horrific – was verboten.

It was years before journalists attended university journalism courses, to be reminded that at its core the journalistic task involves subjective judgments: which events get reported and which don't; which facts get used and which don't; which stories get run and which "hit the spike"; which are reported at length and which in brief; which lead the front page and which go up the back somewhere.

It was because journalism was mere description of facts that readers didn't need to know the journalist's byline. They needed to be told only that a story had been written "by a Staff Correspondent" – that is, he (and occasionally she) had been trained by the Herald, and so could be trusted to get everything right.

Nothing of any great interest had happened the day before my first day on the job. The front page was nonetheless terribly busy, as editors crammed in as many stories as they could fit. To modern eyes the page was messy and uninviting.

That was only a few years before the Herald abandoned the unachievable struggle to be a "paper of record". Much better to focus on a smaller number of more interesting or important events – preferably ones other media didn't have – and do justice to them, illustrating them and laying them out on the page in a visually attractive way.

One thing that issue of the paper did have going for it, however: its price was 8 cents. Of course, in those days it didn't have lift-out sections on TV programs, food and restaurants, travel, health and fitness, and gig guides.

Apart from Column 8, still signed by Granny, there were few opinion columns in the paper of the mid-1970s. Comments or analysis sitting beside news reports were rare to non-existent. There were a few bylined feature articles, but for the most part opinion was restricted to unsigned editorials – or "leaders" – written on behalf of the editor.

It was only a little over two years before I was moved from economic reporting to opinion writing. At first my job was to write a leader a day, but by 1980 I was writing three columns a week. I'm still writing those columns, on the same days and the same parts of the paper.

Having checked with the Herald's historian, Gavin Souter, I think I'm safe in claiming to be the longest-serving columnist in the paper's 185 years.

This may tell you something about me, but mainly it says something about how the paper and the world in which it exists have changed. In relatively recent years the Herald – on paper and online –has become chock full of all manner of columns, comments and analyses.

Why? Partly because our marketplace has become ever more competitive. Journalists tend to focus hardest on competition from rival newspapers, but more intense competition has come from the electronic media, radio and television.

This competition started from the moment in the 1930s that radio networks began reporting their own news stories rather than reading out stories from the papers. Eventually radio began delivering news bulletins on the hour, but not before television channels made their nightly news bulletins the chief means by which Australians caught up with the news.

With so many of our readers already having heard the bare bones of so many of our news stories, is it any wonder newspapers had to change their news offering? We tried harder to find our own exclusive stories, provided greater detail and more background information, asked "the next question" – what happens now? how will the authorities react? – as well as adding more commentary and analysis, including the pure opinions of columnists and in-house experts.

For much of the past 185 years there were two things you could do after you got home from work, had dinner and wanted to relax: sing songs round the piano or read the paper. Then came radio and its serials and then the all engrossing idiot box.

On a wider level, therefore, newspapers have long faced greater competition from an ever-expanding array of ways to spend your leisure time. More reason to change our product.

The advent of the internet has added greatly to that array, as well as multiplying rival digital sources of news – not just from other cities and states, but from English-speaking news providers around the world.

By contrast, it's allowed the Herald and other papers to use their websites to get back into "breaking news" – news within minutes of it happening – for the first time since the 1930s.

These days, however, digital sources of breaking news are so plentiful and so freely available –literally – as to greatly diminish the commercial value of ordinary news. How are we to pay the wages of our journalists?

Online advertising is far cheaper than it is in newspapers and free-to-air television. What's more, online advertising is dominated by Google and Facebook, not the traditional news sources.

We need something more than ordinary news, some way of adding value to a product we can ask readers to pay for, preferably by subscription.

The material standard of living of people in the developed economies has risen many times since the Industrial Revolution. This remarkable achievement has been the result of two main factors: technological advance and ever-growing specialisation within occupations.

The inescapable consequence, however, has been to make the workings of our economy and many other aspects of our lives infinitely more complex than they were. There was a time when car owners did much of their own routine maintenance; today, many hardly dare lift the bonnet.

When I joined the Herald it still subscribed to the notion of the "universal journalist" – any Herald-trained journalist was capable of accurately reporting any story on any subject. I doubt if this was true then; it's become less true with every passing year.

Since I became economics editor in 1978, I've worked to ensure that all economic reporting is done by journalists with economic qualifications. Ideally, legal reporters have law degrees, science reporters have science degrees and so forth.

With the growing complexity of daily life has gone an ever-rising level of educational attainment in the workforce. The Herald has always had a better-paid and better-educated readership, but it's never been better educated than it is today.

This means a readership far keener to know how and why, not just who, what, where and when.

But not all "advances" have been for the better. Governments have become bigger, ministers' staffs have become bigger, politicians are far more adept at marketing, more focused on perceptions and appearances, and unceasing in their attempts to "manage" the media.

At the same time, the lobbying of government by business and myriad interest groups has proliferated. A small industry of "economic consultants" has grown up in Canberra just to produce modelling that purports to prove the rightness of lobbyists' claims.

If keeping governments and power-holders honest is one of the primary responsibilities of the quality press, never have its services been more sorely needed.

A more complex world requires more explanatory journalism from more specialised and qualified journalists. The blizzard of information assailing us requires more trusted guides to what's worth worrying about and what isn't.

A world of more active lobbying by powerful interest groups and more manipulative and secretive governments requires more investigative journalism, not just by dedicated investigation teams but also by more specialised journalists who do more than meekly report the claims of politicians and lobbyists.

This is what I've tried to contribute with my "comment and analysis" in my time at the Herald. It's needed far more today than when I started. I confidently predict the need will only grow.

It's why I hope to see the Herald meet the challenge of digital disruption, making whatever adaptations are needed to ensure it continues to serve readers and contribute to the nation's good governance.

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Why governments should subsidise innovation

What can governments do to encourage innovation? Well, as we learnt this week, Malcolm Turnbull can think of $1.1 billion-worth of things to do.

His "national innovation and science agenda" involves 24 mainly small spending or tax concession programs, grouped under four headings.

Culture and capital, to help businesses embrace risk and to incentivise​ early-stage investment in start-ups.

Collaboration, to increase the level of engagement between businesses, universities and the research sector to commercialise ideas and solve problems.

Talent and skills, to train Australian students for the jobs of the future and attract the world's most innovative talent to Australia.

And government as an exemplar, to lead by example in the way government invests in and uses technology and data to deliver better quality services.

Will all those programs prove to be money well spent? Who knows? The safest prediction is that some will and some won't.

At present, the government is spending almost $10 billion a year on research and development. This involves about $2 billion on government research activities (mainly the CSIRO), almost $5 billion on grants to university and other research institutions (including medical research), and about $3 billion on tax breaks to business to encourage them to engage in R&D.

We do know a fair bit about the effectiveness of schemes to subsidise business R&D activity, whether in Oz or other countries.

And last week we saw the Australian Industry Report for 2015, produced by the chief economist of the Department of Industry, Innovation and Science, which reported the results of a new study of the effectiveness of the government's R&D tax concession scheme.

But first things first. This week's innovation statement tells us "innovation and science are critical for Australia to deliver new sources of growth, maintain high-wage jobs and seize the next wave of economic prosperity".

Which is nice, but what exactly is it? "Innovation is about new and existing businesses creating new products, processes and business models."

Ah, so that means innovation is just the latest business buzzword for what economists have always called technological advance. That means we can believe the happy chat about how wonderful innovation is.

Economists have long known that most of the rise in our material standard of living over the decades and centuries has come from advances in technology, which include better knowhow as well as better machines.

R&D, the industry report informs us, is the main vehicle for innovation. You wouldn't know it from the cost-cutting efforts of Treasury and the Department of Finance over the years, but economists have long accepted that there's a good case for government spending on R&D and for government subsidy of business spending on R&D.

A business engages in R&D in the hope that it leads to new or improved products and processes which will allow it make more bucks. They don't do it because they're nice guys but, even so, the rest of us benefit from their contribution to technological advance.

This means R&D has the characteristics of a "public good" – a good (or service) that's "non-excludable and non-rivalrous". You can't exclude me from using it (which means you can't charge me for using it) and my use of it doesn't interfere with other people's use of it.

Trouble is, public goods are a major instance of "market failure". We obviously benefit greatly from public goods  – particularly because they're non-rivalrous  – and so would benefit from them being produced in large quantity.

But we can't rely on the market  – profit-motivated businesses  – to produce as much of them as we'd like. Why not? Because they're non-excludable. Because too many people can use them without paying.

Economists call this the "free-rider" problem. They also say public goods generate "positive externalities"  – benefits that go to people even though they weren't a party to the original transaction between seller and buyer.

Where market failure can be demonstrated, you've made the case for government intervention in the market to correct the failure by "internalising the externality"  – always provided the intervention doesn't end up making matters worse, which these days is called "government failure".

So economists have long accepted the case for government to subsidise private R&D because this will benefit all of us, not just the business that gets the subsidy.

Of course, this is just theory. It's worth checking to see if our government's R&D tax concession really does produce positive externalities. Does the knowledge generated by the subsidised firm really "spill over" to other firms? And, if so, what can we learn about how this works?

To answer these questions the Industry department made available to Dr Sasan Bakhtiari and Professor Robert Breunig, of the Australian National University's Crawford School of Public Policy, data from its administration of the R&D program.

The program began in 1985, but the data used was from 2001 to 2011, during which time the number of participants grew from less than 4000 firms to more than 9000.

The program was open to firms in all industries, but the main industries using it were manufacturing, professional and scientific services, mining, and information media and telecommunications.

The researchers found evidence of significant spillovers of knowledge to particular firms from firms in the same industry, their suppliers, their client firms and from universities. Significantly, these spillovers came from outfits located within 10 km of the receiving firm, except in the case of suppliers, which were located more than 250 km away.

This leads the researchers to conclude, in line with other research, that knowledge spillovers from competitors and client firms mostly occur through face-to-face contacts between the R&D staff of the two firms.

So now you know why firms in the same business tend to cluster together, why that's a good thing and also, perhaps, why more and more of the nation's economic activity happens in or near the central business districts of our capital cities.

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How digital disruption affects jobs and wages

A lot of people worry about the bad economic consequences of the digital revolution. Among the worriers is Dr Andrew Leigh, the shadow assistant treasurer and a former economics professor at the Australian National University.

Leigh made his concern clear in the "distinguished public policy lecture" he delivered this week at Northwestern University in Chicago.

But whereas most people worry that the digital revolution will lead to mass unemployment, Leigh's concern is that it will make our incomes a lot more unequal.

It's not surprising that people observe all the workers whose jobs are taken by computers and worry about widespread joblessness. As Leigh observes, this concern has been around at least since 1811, when disgruntled Nottingham textile workers wrote to factory owners under the pen-name of Ned Ludd, threatening to smash machines if they continued to be used.

But economists soon learnt not to worry. Why not? Speaking to an audience of economists, Leigh regarded it as too obvious to need explaining.

But let me fill you in. New technology leads to increased productivity – more goods and services produced per worker.

This constitutes an increase in the community's real income. When that increased income is spent, more jobs are created.

So whereas non-economists see only all the jobs that have been lost as industries X and Y digitise, economists understand this is just the most visible part of a more complex process in which jobs aren't so much destroyed as "displaced" – taken from some industries and moved to others.

This is why, after 200 years of labour-saving technological advance, we're still only up to having 6 per cent of the labour force unemployed (or about twice that if you add in underemployment).

Of course, this is the economy-wide outcome. The new jobs being created elsewhere in the economy may be very different to the jobs being lost. So this still leaves a problem for those individuals whose skills fitted the old jobs but not the new ones.

This is where Leigh comes in with his concerns about the effects of a newer idea – "skill-biased technological change" – on the unequal distribution of income between workers and, hence, families.

This is the idea that digitally driven technological change tends to disadvantage workers with less skill, and advantage those with more skill. It tends to lower wages for those with less education and raise wages for those with more education.

But the story's a bit trickier than that sounds. Research by David Autor, of the Massachusetts Institute of Technology, suggests jobs can be divided into three categories: manual, routine and abstract.

Abstract jobs – which typically involve problem-solving, creativity and teamwork – tend to be paid a lot more than manual jobs, with routine jobs – occupations such as bookkeeping, administrative support and repetitive manufacturing tasks – in between.

Autor has found that, over the past 30 years in America and the past 20 in Europe, it's routine jobs that have shrunk most. Why? Because they're the jobs that can be done most easily by a computer.

It's turned out that manual jobs – such as cooking, cleaning, being a security guard or providing personal care – are much harder for computers to do. For instance, the problem of shape recognition means that, a best, it takes a robot 90 seconds to fold a towel.

Robot hairdressers do a job similar to what you'd do if you drank a bottle of tequila and tried cut your own hair without a mirror, Leigh says.

He says the job characteristics that are hardest for computers to mimic include those involving communicating clearly with co-workers, showing empathy to clients and adapting to new situations. A lot of manual jobs require these skills.

Many studies – including some Australian ones – show that recent decades have seen a polarising or "hollowing out" of employment. There are a lot more abstract jobs (particularly managers and professionals) and modest growth in the number of manual jobs, but many fewer routine jobs in the middle.

But Leigh says this loss of mid-skill jobs doesn't mean the pain has been greatest for mid-skill workers and middle-income families.

Why not? Because what happens to wages is a product not just of the (declining) demand for mid-skill workers, but also of the supply of workers willing to do low-skilled manual jobs. And as job opportunities have declined for mid-skill workers, more of them have become willing to do manual work rather than be jobless.

So it's been wages at the bottom that have grown most slowly, not wages in the middle. (Because our wage-fixing system is more regulated, this is probably truer in the US than it is in Oz.)

At the top, Leigh says, it's altogether a different tale, with technology actually adding to the skills of the most skilful, making them more productive and so adding to their pay. A top surgeon, for instance, can use technology to do a better job and do more operations per day, thus adding to the demand for his (rarely her) services.

This may partly explain why chief executives' pay is rising, according to Leigh. The biggest firms have got bigger in recent years, and this is partly explained by better technology making it easier to manage larger and more far-flung businesses. As companies get bigger, the boss's pay gets bigger.

This is skill-biased technological change. Technology also helps explain the rise of "winner-takes-all" job markets for such people as actors, pop stars and top sportspeople.

People want to see the very best, much more than the almost-as-good, they'll pay more to do so and technology makes it possible.

At a time when technology is working to make the rich a lot richer and the poor only a little less poor, should we be "reforming" the tax system in ways that add to this income inequality or reduce it?

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We're not doing too badly on productivity

Rummaging through the media's rubbish bins this week, I happened upon some good news. According to the Productivity Commission's annual update, the productivity of labour improved by 1.4 per cent in 2013-14.

And get this: in the 12-industry "market sector" of the economy, it improved by 2.5 per cent in that year and by 3.7 per cent the year before.

To give you an idea, the 40-year average rate of market-sector productivity improvement is 2.3 per cent. So, despite all the worrying we've been doing in recent years about our poor productivity performance, it seems we're now doing quite well.

In which case, how come no one wanted to tell us? I can think of three reasons. First is the media's assumption that good news is of little interest to their customers.

Second is that the Productivity Commission's preference is for brushing aside the labour productivity figures and getting us to focus on the figures for "multi-factor productivity", which show an improvement of just 0.4 per cent in 2013-14 and 0.4 per cent the year before. This compares with the 40-year average of 0.8 per cent a year.

Third is that the nation's economists are engaged in a campaign to persuade us we need a lot more micro-economic reform so as to raise our rate of productivity improvement and, hence, the rate at which our material standard of living is rising.

They'd make the same argument whether our productivity performance was good, bad or indifferent, but it helps the selling job if they leave us with the impression our recent performance is poor.

Anyway, let's take a closer look at the commission's new figures. Productivity, which compares the growth in the output of goods and services with the growth in inputs of labour and capital, is a measure of the efficiency of our production. When outputs grow faster than inputs, the economy – the economic machine, so to speak – has become more efficient.

The simplest (and probably least inaccurate) way of measuring productivity is to take the increase in the quantity of goods and services produced during the year and divide it by the increase in the total number of hours worked to produce the stuff.

The main way to increase the productivity of workers is to give them more machines to work with. But the commission believes a more revealing measure is multi-factor productivity. You calculate this by dividing the increase in output by the increase in labour inputs plus the increase in capital inputs (use of machines and other equipment).

The main thing causing an increase in multi-factor productivity is technological advance – the invention of better machines plus improved ways of running businesses. But also improvements in "human capital" – the rising education and skill of the workforce.

That's all fine in theory, but it gets pretty ropey in practice. For a start, we have no way of measuring the productivity of the public sector (healthcare, education and public administration) because, for the most part, it doesn't sell its output in the market.

The market sector covers the financial services, mining, construction, manufacturing, transport, retail trade, wholesale trade, information media and telecommunications, electricity gas and water, agriculture, accommodation and food services, arts and recreation services, rental hiring and real estate services, professional scientific services, administrative support services, and "other" services industries.

That's 16 industries – though, for reasons it doesn't explain, the commission's 12-industry measure of market sector productivity doesn't include the last four industries on that list. Even so, the 12 industries account for 65 per cent of gross domestic product.

A much more serious problem is that the measurement of multi-factor productivity is quite dodgy. It's measured as a residual, meaning that any error in measuring the three other items in the sum will (and does) make the measurement of multi-factor productivity wrong.

More particularly, economists have no way of accurately measuring capital inputs. Just one of their problems is that they can't distinguish between more machines and better machines, meaning their so-called measure of multi-factor productivity excludes much of the technological advance it purports to measure.

The besetting sin of economists is the way they confidently quote their figures to a trusting public, without breathing a word about the data deficiencies and dubious assumptions that lie behind their calculations. When they fail to issue a product warning, it's the duty of the conscientious economic journalist to call them out.

In such circumstances, the commission's results need to be treated with scepticism – particular when, as was true in the noughties, they were so unprecedentedly low as to be implausible.

But let's look at the commission's breakdown of the latest year's supposedly weak result of 0.4 per cent. Half of the 12 industries – all of them in the services sector – achieved remarkably strong improvements, ranging between 1.1 per cent and 5.4 per cent.

Three industries – mining, construction, agriculture – had growing production but marginally declining multi-factor productivity. We know the problems in mining and construction are temporary. Agriculture's poor performance came mainly from drought.

The last three industries – utilities, manufacturing and transport – suffered declining production but lesser declines in inputs, meaning their multi-factor productivity deteriorated quite significantly.

We know the utilities, particularly electricity and gas, are coping with major structural changes, not helped by the earlier misregulation of poles and wires. We know manufacturing is still recovering from the high exchange rate caused by the resources boom. Whatever transport's problem is – we're not told – it will get over it.

That's the trouble with the supposedly worrying figures for multi-factor productivity. Apart from the ropiness of their calculation, when you investigate the stories for the particular industries involved you can't find anything major to worry about.

I'd say that, despite all the barrow-pushers wanting to use poor productivity figures to bolster whatever cause they're promoting, we're not doing too badly on productivity.

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Econocrats doubt our ability to grow

So, how fast can we expect the economy to grow over the next 40 years? And, more to the point, where's that growth supposed to come from? That's a doubt you expect from people without the benefit of an economics education, but the intergenerational report reveals the econocrats are going through a crisis of confidence about growth.

First, a disclaimer: not being as materialist as the economists, I don't see maximising our material standard of living as the ultimate objective. I worry more about what climate change and resource depletion will have done to the economy in 40 years' time, and the social price we'll be paying for our obsession with the material.

But back to the dominant paradigm.

The report projects that growth in real gross domestic product will slow to an average rate of 2.8 per cent a year over the next 40 years, down from 3.1 per cent a year over the past 40.

A third of this decline is explained by slightly slower population growth, leaving average growth in real GDP per person falling from 1.7 per cent a year in the past to 1.5 per cent a year in the future.

I trust you're suitably shocked and dismayed. This projected decline is explained essentially by the ageing of the population, leaving the average rate of improvement in the productivity of labour unchanged between the past and the future at 1.5 per cent a year.

So, where will the growth be coming from? Exclusively from improving productivity: from the economy's output of goods and services growing faster than its inputs of labour.

It's productivity the econocrats and other economists are so pessimistic about. So how did they estimate that productivity will grow by an average of just 1.5 per cent a year?

They didn't. They simply followed previous practice and plugged in the same figure for the coming 40 years as for the past 30. Since it's impossible to know what will happen to productivity in the future, this neutral assumption is better than any other you could make.

But that hasn't stopped some economists from claiming that 1.5 per cent a year is overly optimistic. Really? This tells you something about the reigning mood of pessimism among economists.

But if income per person is driven by productivity improvement, what drives productivity? If you rely on the things economists say in public, you could be forgiven for not knowing that overwhelmingly – and for the past 200 years – it's technological advance.

Every economist knows that's true but they rarely say so. That's partly because they know little about how technological advance works and partly because they believe there's little they can do to affect it.

But in recent years, some leading overseas economists have lost their faith that rapid technological advance will continue lifting material living standards. Two centuries of innovation have hit a dry spot, we're told.

It seems Treasury agrees. It admits a fact rarely included in economists' unceasing sermons on the evil of our low rate of productivity improvement in recent times: "Australia has not been alone among advanced economies in experiencing slower productivity growth over the 2000s, which suggests that the rate of growth in technological advance . . . may have been slower than in previous decades."

So if we can't rely on a continuing stream of new technology to keep our living standards growing at a rate economists find acceptable, what does Treasury suggest? It was hoping you'd ask because it's got just the solution we need: more microeconomic or "structural" reform.

For several years, all right-thinking economists have been badgering us to pressure governments for more micro reform. To bolster its argument that micro reform is the missing elixir, Treasury says "the increase in productivity growth rates seen in the 1990s is widely attributed to significant policy reforms of that decade and the 1980s".

But even if you believe this (I'm sceptical), it's hardly a great advertisement for the benefits of reform. You can make the most sweeping reforms – reforms which, having been made, can't be repeated – and all you get for your pains is four or five years of improved performance before lapsing back into mediocrity.

Reform, we're asked to believe, is only a fleeting fix. To maintain an acceptable rate of productivity improvement, reform must be unceasing (and defy the law of diminishing returns).

This portrays our economy as hopelessly inefficient and unproductive, despite all our efforts. Other countries can grow satisfactorily without continuous reform, but we can't.

Really? Such a view is so deeply pessimistic as to verge on economic apostasy. It's also bizarre.

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Why manufacturing in Australia has a future

Few things about the economy are worrying people - particularly older people and those from Victoria and South Australia - more than the decline in manufacturing. But many of our worries are misplaced, or based on out-of-date information.

For instance, many worry that, at the rate it's declining, we'll pretty soon end up with no manufacturing at all. And everyone knows that, unlike other states, Victoria's economy is particularly dependent on manufacturing.

But Professor Jeff Borland, a labour economist at the University of Melbourne, has written a little paper that sheds much light on these concerns.

It's true that manufacturing's share of total employment in Australia is declining. But this is hardly a new phenomenon, which suggests the end may not be nigh. Half a century ago, manufacturing accounted for a quarter of all employment. Today it's 8 per cent.

And almost none of that dramatic decline is explained by a fall in our production of manufactured goods. The great majority of the fall in manufacturing's share is explained simply by the faster growth of other parts of the economy, particularly the service industries.

It's true, however, there's been a (much less dramatic) decline in employment in the industry over the years. Employment in manufacturing reached a peak of 1.35 million in the early 1970s. Today, it's about 950,000. Of the overall loss of 400,000 jobs, about 200,000 occurred during the '70s, about 100,000 in the recession of the early '90s and the rest since the global financial crisis in 2008.

Many people would explain this decline in terms of the removal of protection against imports in the '80s and the very high dollar since the start of the resources boom in 2003. But, in fact, the great majority of it is explained by nothing more than automation.

How do I know? Because if you look at the quantity (or real value) of manufactured goods we produce, it reached a peak as recently as 2008, and has since fallen just 6 per cent. Nowhere have the machines of the computer age replaced more men (and I do mean mainly men) than in manufacturing. Is this a bad thing? It would be a brave Luddite who said so.

The consequence is a change in the mix of occupations within manufacturing, the proportion of machine operators, drivers and labourers falling by 10 percentage points since 1984, with the proportion of managerial and professional workers increasing by about the same extent. The proportion of technicians and tradespeople is little changed.

But there's also been a change in the types of things we manufacture, with the share of total manufacturing employment accounted for by textiles, clothing and footwear falling from 11 per cent to 4 per cent since 1984, while the share accounted for by food products has risen from less than 15 per cent to more than 20 per cent.

The share of transport equipment (cars and car parts) is down, but the share of other machinery and equipment is up by much the same extent.

The next thing that's changed a lot since 1984 is the location of manufacturing in Australia. Then, almost 70 per cent of manufacturing employment was located in NSW and Victoria; today it's down to 58 per cent. Then, NSW had more manufacturing workers than Victoria; today they have 29 per cent each. (Bet you didn't know that.)

But if the big two states now have smaller shares, which states' shares have grown? The two we these days think of as "the mining states". Western Australia's share has risen to 10 per cent, while Queensland's share has almost doubled to 21 per cent. (Bet you didn't know that.)

So far, South Australia's share of national manufacturing employment has fallen only a little to 8 per cent.

This tendency for manufacturing's distribution between the states to become more even over time, plus the much faster growth of other industries, has made all states less dependent on manufacturing for employment, as well as narrowing the gap between the most dependent (SA on 10 per cent of its total employment) and the least (WA on 7 per cent).

Whereas in 1984 Victoria depended on manufacturing for 21 per cent of its jobs, today it's 9 per cent. (See what I mean about out-of-date information?) Victoria's more dependent on the health industry (12 per cent) and retailing (11 per cent), with almost as many jobs in professional services as in manufacturing.

The wider conclusion is that, though the faster growth of other industries has made all states less dependent on manufacturing for jobs, this doesn't mean manufacturing's dying. Its actual output hasn't fallen much, though it's using fewer workers to produce that output.

The unwritten story is there've been big changes in what Australia's manufacturers produce: less stuff that relies on protection against imports and more stuff that fits with Australia's comparative advantage. You see that with food products - including things such as wine-making - now being the biggest category within manufacturing, employing 20 per cent of all manufacturing workers.

You see it also in the growth of manufacturing employment in the mining states - a spillover from the resources boom.

Manufacturing is undoubtedly suffering from the high dollar. But, apart from that, it's in good shape. It has shed some fat and is fitter and wirier than it has ever been, better able to survive in a harsh world.

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Cons and pros of the mobile revolution

I confess to a having an old fogey's ambivalence towards mobile phones. There are times when it suits me to keep in touch, but most of the time I don't want a phone taking over my life - or even interrupting it. And I figure I'm old and odd enough to get away with rarely using one.

But of all the amazing things going on in the digital revolution - the spread of computers, the internet, the declining cost of telecommunications - nothing is more remarkable than the growing ubiquity of the mobile.

According to a report by Ric Simes and John O'Mahony of Deloitte Access Economics, "it is undeniable that mobile telecommunications are altering the way the world conducts business".

The report, prepared for the Australian Mobile Telecommunications Association, points to the way the mobile has changed from a device for making phone calls to a platform - for emails and the internet, for transferring data, for conducting commercial transactions and for accessing the media (including this newspaper).

Now, the report says, everything digital is going mobile: software, the internet, the cloud and social media.

What are young people doing when you see them incessantly fiddling with their phones? They may be playing games, but they're more likely to be checking emails or reviewing their "twitter feed".

Do you realise that we 23 million Australians now use more than 30 million mobile services? As well as phones, this would include tablets such as iPads and the dongles that link laptop computers to the internet.

Because the sales of the mobile telecommunications industry have largely been driven by increasing subscriptions, this penetration rate of well over 100 per cent means the industry's sales are faltering. Last financial year they actually fell by 1.5 per cent. The report predicts no sales growth in real terms this year, with a modest recovery in 2013-14.

But just because sales revenue has stagnated doesn't mean the use of mobiles isn't continuing to balloon. In 2011, mobile broadband traffic averaged 8.8 petabytes a month. Cisco Systems predict this will grow by 68 per cent a year until 2016.

It's worth noting that if industry revenue is stagnant while usage continues to explode, the use of mobiles is becoming cheaper.

It may help make sense of all this to know that, according to Ericsson, voice calls now make up only a quarter of the time people spend on their mobile devices. In June 2009, less than 10 per cent of people used the internet via a handset; three years later, almost a third did.

Old fogeys like me think email and mobiles are a very mixed blessing in terms of the efficient use of our time, but the report argues valiantly that they increase the productivity of businesses.

Mobile technology can improve the productivity of employees by allowing communication on the go. Workers who are travelling can be in touch with others in the office by making calls as well as by sending and receiving emails. They can use their mobiles to access information on the internet.

Mobiles allow workers to make more productive use of down time. Time previously underutilised because of lack of access to a desktop computer is no longer so. Smartphones and tablets can be used to review documents and make changes without being in the office.

Some applications (or apps) can increase productivity. "Voice notes" allow people to store audio information, calendar apps help with time management and various apps allow you to streamline repetitive tasks. And as well as increasing the productivity of labour, mobiles can make capital equipment more productive. Desktop computers can be replaced by laptops or sometimes smartphones. Employees can be allowed to bring their own laptops or mobiles.

If mobiles and laptops allow more people to work at home, businesses can save on office space. Retailers who sell more over the internet can save on the cost of bricks and mortar, or store more of their stock in warehouses rather than city shops.

According to Deloitte Access Economics's calculations (which I wouldn't take too literally), the productivity benefits from mobile technologies added almost $500 million to gross domestic product in 2011, and this will increase to $1.3 billion a year in 2016.

But what about the social implications of all this?

To its credit, the report considers those implications rather than ignoring them, as economists and business people tend to. On the plus side, it notes that, for the individual, mobile devices offer not just communication but "rich digital experiences on the go" - photos, music, games, location-based services (such as getting directions to a place), maps, the internet and the millions of features offered by apps. And all this fits in your pocket.

But being always contactable can make you feel "always on". And Hugh Mackay, the social researcher, offers a more sceptical perspective: "You have this sense of continuous connection; it's like being in a strand of a web which is continually vibrating. Part of this feeling of being in a 'cyber crowd' is illusory, but some of it is real; it is important to note that some of this tribalism is purely cyber ...

"The richness of interpersonal encounters is largely lost if you rely on a mobile connection."

All of the audio-visual elements of a personal encounter are necessary in order to communicate fully, with feedback and subtlety.

Higher levels of interconnectivity may lead to overstimulation and a lack of silence, making it difficult for people to find time to reflect.

"The effect of this incessant stimulation on the brain is unknown, but likely to be detrimental," Mackay concludes.

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Productivity more about technology than reform

A while back I met a businessman who'd been a big wheel in IT. He expressed utter amazement that the Productivity Commission and other economists could attribute the whole of the surge in productivity during the 1990s to micro-economic reform, without a mention of the information and communications technology revolution.

He was right; that's exactly what they do. And he's right, it's pretty hard to believe that computerisation and the digital revolution could make such a big difference to the way so many businesses go about their business without that making any noticeable difference to the nation's productivity.

Can the economists prove the productivity surge in the late '90s and early noughties was caused by the delayed effect of all the micro reforms of the '80s and '90s - floating the dollar, deregulating the financial system, phasing down protection, privatising or corporatising government businesses, reforming taxes and decentralising wage-fixing?

No they can't. The plain truth is so many factors influence productivity, and the figures themselves are so ropey, you can't say what's driving them at a particular point with any certainty.

I think the best you can say is all that reform must surely have had some positive influence. But most economists are great advocates of micro reform, so you've got to allow for salesman's bias.

But here's the big news for that incredulous businessman: for the first time, to my knowledge, the econocrats have acknowledged that IT may have played a significant part in the productivity surge.

The likelihood is accepted in an article on Australia's productivity performance by Patrick D'Arcy and Linus Gustafsson in the most recent issue of the Reserve Bank's Bulletin.

"One possible explanation for the surge and subsequent decline in multi-factor productivity growth in Australia ... over the past two decades is the pattern of adoption of information and communication technologies, which are primarily developed and produced offshore," they say.

"The widespread adoption of these technologies through the 1990s was largely complete by the early 2000s. Assuming that the introduction of computers created a gradual upward shift in the level of productivity of some workers ... this would have been reflected in strong multi-factor productivity in the 1990s, with the contribution to productivity growth moderating in the 2000s once rates of usage had stabilised."

In case you're rusty, "multi-factor productivity" growth measures the increase in the amount of output for a given amount of both labour and capital inputs.

Over the 20 years to 1994, it improved in the market sector at the rate of 0.6 per cent a year. Over the 10 years to 2004, the rate surged to 1.8 per cent a year. Over the seven years to mid-2011, it contracted at the rate of 0.4 per cent a year. Exclude mining and the utilities industry, however, and the underlying improvement was plus 0.4 per cent a year.

If you're a glass-half-full kind of guy, you can say our productivity performance in recent years is only a little worse than our long-term average. But on this score most economists prefer the half-empty view: the rate of productivity improvement has suffered a significant and worrying slowdown in recent times.

Again, that's a salesman's line. The authors observe that what's exceptional is not our present underlying performance but the unprecedented surge in the '90s.

If you're new to the productivity business you could be forgiven for thinking it occurs mainly as a result of economic reform. That's what many economists have been implying, but - as they well know - it's nonsense.

Particularly over the longer term, the primary driver of multi-factor productivity improvement - and the rise in material living standards it brings - is technological advance. That's why it never ceases to surprise me how little interest most economists take in technology and innovation.

But the authors outline what economists do know. "At a fundamental level," they say, "productivity is determined by the available technology (including the knowledge of production processes held by firms and individuals) and the way production is organised within firms and industries."

Conceptually, economists often view technology as determining the productivity "frontier". That is, the maximum amount that could be produced with given inputs.

Factors affecting how production is organised - including policies affecting how efficiently labour, capital and fixed resources are allocated and employed within the economy - determine how close the economy actually is to the theoretical maximum.

This means "trend" (medium-term average) productivity growth is determined by the rate at which new technologies become available (that is, how fast the frontier is shifting out) and also the rate of improvement in efficiency (how fast the economy is approaching the frontier).

"Overall, there is some evidence that both a slowdown in the pace at which the frontier is expanding and the pace at which Australia is approaching the frontier have contributed to the decline in the rate of productivity growth relative to the historically high growth of the 1990s," they say.

However, there is little evidence a lack of incentives to invest in physical capital has been significant in explaining the slowdown in multi-factor productivity growth, we're told.

The authors note that the slowdown in multi-factor productivity improvement has occurred despite continued strong growth in investment. In many cases, new investment involves increasing the stock of physical capital based on existing technologies. And although this "capital deepening" may improve labour productivity, it doesn't necessarily improve multi-factor productivity.

For investment to drive gains in multi-factor productivity, there need to be "spillover effects" that generate a more than commensurate increase in output than the increase in capital.

In practice, this typically requires the introduction of a new technology to be associated with some fundamental reorganisation of production processes, or the development of a genuinely new technology that has benefits greater than the research costs required to develop it.

For these reasons, economists generally view the likely drivers of multi-factor productivity as being research and development spending, investment in human capital (education and skills) and investments in capital equipment that can fundamentally change the way firms operate, such as information and communication technologies.

Figures show a fairly universal slowing in productivity growth in the noughties among the members of the Organisation for Economic Co-operation and Development.

This suggests part of our slowdown may be related to common global factors, such as the pace of technological innovation and adoption.

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