Don't let on, but property crime is down

Wow. Did you see the latest figures for the falling crime rate? Pretty good, eh? What's that, you didn't see the figures? No one told you, eh.

It's true. Despite the best efforts of the federal Minister for Justice, Jason Clare, on Sunday, the Australian Institute of Criminology's latest compilation of statistics got remarkably little attention.

Why? One reason could be that it's old news. Levels of property crime have been falling for a decade. You've long known that, right? If you have, congratulations: you're much better informed than most.

A survey conducted in NSW in 2007 found that more than 80 per cent of respondents believed property crime had been increasing or had remained stable over the past five years. Only 11 per cent said it had been falling.

So why were the media so uninterested? Because they didn't think you'd be interested. They presumed you'd prefer to have your existing beliefs reinforced rather than up-ended. But I prefer to write for the minority who want to be informed rather than humoured.

The figures show falls in all the main categories of recorded property crime - burglary, motor vehicle theft and "other theft" (pickpocketing, bag snatching and shoplifting) - across Australia in 2010.

They also show falls in all the main categories of recorded violent crime - homicide, assault, sexual assault and robbery - other than kidnapping/abduction in 2010. For the latter, the number of cases rose by 39 to 603.

But levels of crime can rise or fall from one year to the next without that proving much. What really matters is whether the longer-run trend is up or down.

The clearest evidence is of a long-run decline in recorded property crime. The number of burglaries reached a national peak of almost 440,000 in 2000, and has since halved to fewer than 220,000 a year.

The number of motor vehicle thefts reached a peak of 140,000 a year in 2001, and has now fallen by 61 per cent to below 55,000 a year. Other thefts peaked at 700,000 a year in 2001, but are now down by a third to almost 460,000 a year.

If you allow for our rising population - up by a per cent or so a year - the decline in the rate of property crime is even greater.

So, as I say, it's clear property crime has been declining for a decade. For violent crime the trend isn't as clear - except for robbery, the property crime with violence. Robberies reached a peak of almost 27,000 in 2001, but have since fallen by 44 per cent to below 15,000 a year.

It's hard to detect any trend in the level of kidnapping and abduction, though the rate is very low: 2.7 incidents per 100,000 population. You wouldn't expect to see a trend in homicide, the rate of which is also very low: 1.2 incidents per 100,000 population. But after being well above 300 a year until 2006, it's been below 300 a year since then.

No trend in the number of assaults is visible to the naked eye, but the rate of assault seemed to peak in 2007 at 840 victims per 100,000, and is now down to 770 per 100,000. If this trend is confirmed, it will be because police have begun targeting the worst-offending licensed premises.

It's estimated only about half of all sexual assaults are reported to police. The number of recorded sexual assaults rose markedly between 1996 and 2008 to 20,000 victims a year - perhaps because of growing willingness to report offences - but though the arithmetic says the rate of sexual assault has been falling modestly since 2006, I'm not sure I believe it.

So why has property crime been falling? When the decline was first observed in the early noughties, much of it was attributed to a shortage of heroin, which led to a decline in its use and, hence, a fall in thefts by heroin addicts.

That seems true enough, but though heroin prices and purity stabilised in about 2004, the fall in property crime continued. Obviously, there must be more to it.

Most criminologists believe the amount of property crime is linked to the state of the economy. Unemployment has fallen and average weekly earnings have risen in real terms since the start of the noughties, so this may well help explain why people have been less inclined to take stuff that doesn't belong to them.

Another part of the explanation for which there's solid evidence is an increase in the proportion of property offenders who are imprisoned. The story here is not so much that tougher sentences are a greater deterrent, but that the more time you spend behind bars, the less time you're able to practise your nefarious profession.

And there are other possible explanations which, though untested by researchers, seem plausible. One is increased police effectiveness. They've been pushing hard on repeat offenders and also shifting their resources to crime hot spots at "hot" times of the day or night. Their crackdown on pubs and clubs with the worst records of assaults is a case in point.

A further possibility is that success breeds success. The more the incidence of crime falls while the number of coppers remains stable or rises, the easier it ought to be to catch offenders. As for motor vehicle theft, it's likely improvements have made cars harder to pinch than they used to be.

I finish with an appeal: you may prefer to know the truth, but keep it to yourself. Please don't spoil the fun of those who like to imagine they could be swept away at any moment by the rising tide of crime.

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Want better productivity? Try better education

The American con man Bernie Cornfeld's sales pitch was, "Do you sincerely want to be rich?" That is, are you prepared to pay a price to be rich? The question for Australia's business people is, do you sincerely want to raise our productivity?

It seems just about all our senior business people have taken to preaching sermons about the need to improve our flagging rate of productivity improvement, but I'm not sure how sincere they are.

Why not? Because the specific changes they say they want sound like a child's wishlist for Santa: industrial relations "reform" to reduce their workers' bargaining power, and tax "reform" to reduce the amount of tax they pay.

If chief executives were more sincere in their thirst for higher productivity - as opposed to things the government could do to make their jobs easier - they might have asked what the empirical research tells us about which changes would do most to enhance our productivity.

Had they done that, they would have found the biggest gains come from adding to human capital - that is, to the education and training of the workforce.

The productivity debate has been so superficial and self-serving you could be forgiven for not knowing that. Among all the research, consider the findings of Professor Eric Hanushek, of the Hoover institution at Stanford University, and Professor Ludger Woessmann, of the University of Munich. Because human capital is hard to measure, economists commonly fall back on the "proxy" (stand-in) of the workforce's average number of years of schooling or higher education.

The researchers collected data for 50 countries over the 40 years to 2000. They found that each additional year of schooling raised a country's average annual rate of growth in gross domestic product per person by 0.37 percentage points.

That's a significant increase. And it's consistent with the findings of many other researchers.

But Hanushek and Woessmann wanted to find a more accurate measure of human capital than just level of educational attainment.

So they constructed for each country an index of their students' performance in maths and science tests, such as those conducted by the Organisation for Economic Co-operation and Development in its program for international student assessment (PISA). Using this measure not of years of schooling but of cognitive skills, they found countries with higher test scores experienced far higher rates of growth in income per person (the very thing productivity improvement increases).

They found that if one country's test-score performance was 0.5 standard deviations (don't ask) higher than another country's in the 1960s, the first country's annual rate of economic growth per person was, on average, a full percentage point higher than the second country's over the following 40 years.

They also found, once the effect of higher levels of cognitive skills was taken into account, the significance of levels of school attainment dwindled to nothing.

So, the authors deduce, a country benefits from asking its students to remain at school for longer only if the students are learning something as a consequence.

"Higher levels of cognitive skill appear to play a major role in explaining international differences in economic growth," they say.

But could there be other factors helping to explain a country's higher rate of growth? Different researchers have identified two other important factors: the security of the country's property rights and its openness to international trade.

When Hanushek and Woessmann took those two factors into account, the positive effect of cognitive skills on average annual economic growth was reduced to 0.63 percentage points per half a standard deviation of test scores.

"This is the best available estimate of the size of the impact of cognitive skills on economic growth," they say. "Our commonsense understanding of the importance of good schools can thus be documented quite precisely.

"A highly skilled workforce can raise economic growth by about two-thirds of a percentage point every year."

Clearly, the professed searchers after higher productivity ought to be taking a lot more interest in what's happening in our schools than they are. One question they could be asking is whether it's having a few "rocket scientists" at the very top of the skills distribution that spur economic growth or if it's "education for all" that's needed.

When the researchers estimated the importance, they found each to be separately important to economic growth.

"That is, both the performance of countries in ensuring that almost all students achieve at basic levels and their performance in producing high-achieving students seem to matter," they say.

Just why this should be so isn't hard to imagine. Even if a country is simply making use of new technologies developed elsewhere - as we do - the more workers who have at least basic skills, the easier it will be for them to make use of those new technologies.

On the other hand, some workers need a high level of skills so they can help adapt the new technologies to their countries' particular situation.

Of course, it's not just the broad community that benefits from the accretion of human capital. As Dr Ben Jensen, of the Grattan Institute, has pointed out, improving the effectiveness of teaching - which is what increases students' cognitive skills - has substantial benefits for the students themselves.

"Young people who stay in school and invest in further education can expect to earn an additional 8 to 10 per cent per year for each additional year of education they undertake," he says.

But while we're focusing on the acquisition of education as a means to raise our material standard of living, let's not forget that education is also an end in itself. It allows us to lead broader, more inquiring, more comprehending lives.

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All work creates wealth

You'll find this hard to believe but not every reader of my columns agrees with everything I write. And when I wrote recently that jobs lost in manufacturing would be offset by jobs gained in other parts of the economy, one reader emailed to say he could see a gaping hole in my argument.

My point was that the high dollar wouldn't destroy jobs so much as "displace" them: shift them from contracting industries to expanding industries.

This would happen because the high dollar was the market economy's way of helping us restructure our economy to take full advantage of the marked and long-lasting change in what the rest of the world wants to buy from us at higher prices (primary commodities) and sell to us at lower prices (manufactures and tradeable services such as tourism).

So employment would fall in manufacturing and tourism but would increase in mining and construction, as well as in the services sector.

(This is not to imply that all the workers losing their jobs in manufacturing would move simply and easily to jobs in the expanding industries. Some may encounter difficulty making the switch, which is why governments should help them retrain and relocate. Some older workers will never make the transition. And some of the new jobs will go to people from outside manufacturing.)

People are often vague about which industries are included in the services sector, so I offered some examples of those likely to expand: "health, education and training, public administration, the science professions and arts and recreation".

Ah, said my reader, gotcha. "Surely the funding for many of the job types identified comes from the public purse, that money being generated by taxes on employees, companies, profits from investment in local manufacturing and [from] the businesses, secondary and tertiary, generated from manufacturing," he wrote.

"Where is your viable break-even point here between job creation and taxes/wealth creation sufficient to create those [public sector] jobs?"

See his argument? You have manufacturing and the rest of the private sector it supports, which creates the wealth and the jobs and pays the taxes governments use to finance all their activities, creating public sector jobs in the process.

If you allow the manufacturing sector to contract, you erode the economy's wealth- and job-creating capacity, thus reducing the tax governments are able to collect and use to create jobs in the public sector.

So there must be some point below which you can't allow the private sector to fall, otherwise you also destroy jobs in the public sector.

Convinced? I'm not. The reader's riposte is built on two related misconceptions.

One is that the private sector is productive - it generates the wealth and creates the jobs - whereas the public sector is essentially parasitic: it appropriates some of the private sector-created wealth via taxation and redistributes it to presumably worthy causes, employing public servants in the process.

Sorry, not true. What is this "wealth" that's being created? It's more accurately described as income: the income that's generated when employers and employees produce all the goods and services that make up the nation's gross domestic product.

So "wealth" is generated when people go to work and their employer provides them with the equipment and direction to do what they do. The workers receive income in return for their work. They pay some of that income in direct and indirect taxes but most of the rest they spend on the goods and services they need, which generates continuing demand for all the stuff that they and other workers have produced.

If you think this description of the economy is circular, you're right: supply (production) creates demand (spending) and demand leads to supply. Point is, there's no important distinction between goods and services produced in the private sector and those produced in the public sector. Nor between goods and services paid for in the marketplace and those paid for via taxation.

To imagine otherwise is to imply that someone working on a production line producing cans of beans is productive (generating "wealth") but doctors and nurses who fix broken legs and save lives, or people who teach our children to read and write, are unproductive (generating no wealth).

Many doctors are self-employed and there are plenty of private hospitals; many teachers work for non-government schools. We're being asked to believe that those in the private sector are productive wealth-generators but those in the public sector are unproductive wealth-appropriators.

We could, if we wished, leave the whole of healthcare and education to the private sector. Would that make the economy vastly more productive? Hardly. (What it would mean is a lot of people being unable to afford education or healthcare.)

The reader's argument also implies that only people working in the private sector pay tax and contribute to the cost of publicly-provided goods and services. Rubbish. Everyone who works is productive and everyone who earns and spends income pays taxes, regardless of their sector.

The second misconception is that economies are built like the pharaohs built the pyramids: one level on top of another. You start with a base of primary industry (farming and mining), then put secondary industry (manufacturing) on top of that and tertiary industry (services) on top of that.

Take away one of the lower building blocks and you lose the basis on which to build the levels above it. If you had no manufacturing sector, for instance, how could you have a services sector?

If you were building a closed economy - one that didn't trade with other economies - that's the way you'd do it. But, like all economies, we have considerable trade with other countries. Why? Because it makes us wealthier.

We specialise in producing things we're relatively good at, they specialise in producing what they're relatively good at, and we trade. That leaves both sides better off and means you don't have to do everything to have a viable economy. Indeed, the more you insist on doing things you're not good at, the more you forgo wealth.

These days, the rich countries of Europe have little mining and waste taxes propping up their inefficient farmers when they could buy from us more cheaply. Our natural endowment (plus 200 years of experience) makes us highly-efficient producers of rural and mineral commodities, which are now in great demand as poor countries develop. The workforces in the rich countries are too highly skilled and expensive for them to be used to make things in factories, so manufacturing in these countries is shifting to Asia.

So where are the jobs being created in the rich economies? In the services sector. The range of simple to sophisticated services we can perform for other people in our country - or for foreigners - is infinite.

And everyone with a job that involves "doing things" is generating wealth.

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Education is mainly about teachers

Thank goodness for that. David Gonski and his committee have produced a comprehensive review of school funding without setting off a bitter debate between the proponents of government and non-government schools.

They've done it by focusing not on how the lolly is divided between the rival systems but on the needs of students, with greater funding to be shifted over time to those suffering disadvantage.

Their report has been warmly welcomed by most groups, though not so their request for governments to spend an extra $5 billion a year. And just how willing the states will be to rejig their spending according to the committee's recommendations remains to be seen.

Some have suggested the report, worthy though it is, will be quietly pigeonholed, but I'm not so pessimistic. Just as Ken Henry produced his report on tax reform not for immediate implementation but to provide a road map for change over the coming decades, so the Gonski report will provide a guide to policy-makers on the right - and wrong - direction in which to head.

And now we have that guide to how the funds should be directed, perhaps we can move on to the question of what we most need to do to improve the performance of our schools.

Have you noticed how often our furious debates about education and health are debates about how they should be funded rather than what we should be doing with the money? We seem to be extraordinarily preoccupied with who gets what rather than what they do with it.

Why this obsession with money? Partly because allocating funds is the main thing the federal government does. While the states run the schools and the hospitals, it's the feds who raise most of the tax revenue and decide how it's divided.

But also because all the interest groups involved - the doctors, teachers, health funds and private schools, not to mention the premiers - have an obvious motive to push for a bigger slice. These contesting groups use the media to enlist the support of the electorate, and you and I end up arguing endlessly about funding rather than the substance of education and health.

One attraction of the study that Dr Ben Jensen has been doing on education for the Grattan Institute is its focus on what we could be doing better.

As measured by the Organisation for Economic Co-operation and Development's regular testing of the performance of 15-year-olds at reading, maths and science under its program for international student assessment (PISA), Australia is doing well. We don't do as well as Finland and Japan, but we're consistently better than the Americans, British, Germans and French and about the same as the Canadians.

As more Asian countries are added to the comparisons, however, we're slipping down the rankings. We also have a worryingly wide gap between the performance of our best and poorest students.

So we shouldn't be resting on our laurels. What can we do to improve our schools' performance? Well, it's not simply a matter of spending more money.

Jensen says most studies show more effective teachers are the key to producing higher performing students. "Conservative estimates suggest that students with a highly effective teacher learn twice as much as students with a less effective teacher," he says.

"Teachers are the most important resource in Australian schools. Differences in teacher effectiveness account for a large proportion of differences in student outcomes - far larger than differences between schools. In fact, outside of family background, teacher effectiveness is the largest factor influencing student outcomes."

Jensen says there are five main mechanisms to improve teacher effectiveness: improving the quality of applicants to the teaching profession; improving the quality of teachers' initial education and training; appraising and providing feedback to improve teachers once they're working in the profession; recognising and rewarding effective teachers; and moving on ineffective teachers who've been unable to increase their effectiveness through improvement programs.

His greatest interest is in appraisal and feedback. "Systems of teacher appraisal and feedback that are directly linked to improved student performance can increase teacher effectiveness by as much as 20 to 30 per cent," he says. Such an improvement would lift the performance of Australia's students to the best in the world.

Jensen says our present systems of teacher appraisal and feedback are broken. This is not to attack teachers, which would be both unfair and counterproductive. On the contrary, it acknowledges the central importance of the work of individual teachers and argues we should be investing in their greater effectiveness.

Indeed, no one understands the inadequacy of the present arrangements better than teachers themselves. A survey finds 63 per cent of them say appraisals of their work are done purely to meet administrative requirements. More than 90 per cent say the best teachers don't receive the most recognition and reward, and 71 per cent say poor-performing teachers in their school won't be dismissed.

"Instead, assessment and feedback are largely tick-a-box exercises not linked to better classroom teaching, teacher development or improved student results," Jensen says.

He proposes a new system of teacher appraisal and feedback that avoids a centralised approach. "Instead, schools should have the responsibility and autonomy to appraise and provide feedback to their own teachers."

Appraisal should be based on a "balanced scorecard" that recognises all aspects of a teacher's role. It thus shouldn't rely solely on students' performance in national competency tests but should include such things as teachers observing and learning from other teachers, direct observation in the classroom by more experienced teachers, and surveys of students and parents.

Such an approach would require a culture change in many schools, but it offers huge benefits for relatively little cost.

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How manufacturing will survive the high dollar

Beware of dire predictions that manufacturers will be wiped out by the strong dollar unless they're propped up by the government. All our experience says it won't happen.

Manufacturers and their (highly vociferous) unions gave us the same warning in the 1980s when the Hawke-Keating government decided to take away their protection from imports. It didn't happen - the industry adapted, and survived to complain another day.

Though manufacturing's share of the nation's total output (gross domestic product) and total employment has been declining for the best part of 40 years, little of this is due to the removal of protection.

Most is explained by the services sector growing at a faster rate than manufacturing grew. On the employment side, it's also explained by computerisation and other technological advances raising the productivity of labour in manufacturing, so that the same quantity of output could be produced using fewer workers. (Agriculture and mining have the same characteristic, in contrast to the labour-intensive services sector.)

So it's only in recent years that the absolute quantity of Australia's manufacturing production has begun to decline. Manufacturing survived the removal of protection by rationalising its production, becoming leaner and fitter.

And probably by hastening its introduction of the latest labour-saving technology. When employers get their unions to pressure Labor governments to provide protection (or, these days, direct government grants), the workers imagine they're protecting jobs.

In truth, all they can protect is profits. That's certainly the history of what happened in manufacturing during protection's last hurrah in the decade before 1987.

One way manufacturing responded to the removal of protection was by getting into the business of export. That was utterly contrary to the prediction that without protection against imports it would cease to exist.

When vested interests make such claims they're playing on the public's lack of knowledge of economic history, lack of imagination and lack feel for how market forces work.

In a market economy, nothing stays static. Industries could just sit there doing nothing until their last customer leaves, but they don't. They take evasive action. They cut their coat according to their cloth. More formally, they adapt to their changed economic environment.

Individual firms may bite the dust, but the industry regroups and survives. Consider the advent of television from the mid-1950s. Many people imagined it would spell the end of radio.

Instead, radio changed its programming markedly and survived. It went from being something people sat in the living room listening to, to something they carried around with them, particularly in their cars. They listened to it while they were doing something else: driving somewhere or cooking the dinner.

Many people imagined television would spell the end of the cinema. It's true most of the cinemas in every suburb were converted to supermarkets, but then along came the video cassette recorder and video lending shops.

Finally, someone invented the multiplex cinema, a classic example of exploiting economies of scope (producing more than one product at the same plant). Today a wider range of movies would be showing in any city than when suburban cinemas were at their height.

So what can we say about how manufacturers may adapt to a prolonged high exchange rate? Well, one possibility is that they simply move their production abroad to where labour is dirt cheap.

You have to suffer all the illusions and delusions of protectionism and mercantilism to think that would be a terrible thing; that most of the displaced workers wouldn't be able to get work elsewhere in the economy. But, in any case, I doubt if nearly as much of it will happen as is feared.

So what else? People say the high dollar reduces the international competitiveness of our manufacturers. Actually, it reduces their price competitiveness. So one way to respond is to search for ways to reduce their production costs - by becoming yet more capital intensive (raising the productivity of their labour) or finding other efficiency improvements.

Another response is to find non-price ways to stay competitive. A reputation for high quality can justify pricing at a premium. Indeed, if you're smart you can get into the space where the causation is reversed: people take your higher price as a sign of higher quality (utterly contrary to the most basic assumptions of conventional economics).

You can use superior design to justify charging higher prices. You can beat the foreign mass-producers by being more carefully and quickly attuned to changing fashion. Or you can be more willing and adept at customising your product. If all else fails you can get yourself a reputation for giving good after-sales service.

This is an old Australian angle, but still relevant: look for niches to occupy. One advantage of our smallness relative to the rest of the world is that what seems too small to the big boys seems quite big to us.

If manufacturers are to get their cut from the much-foreshadowed blossoming of the Asian middle class, it's pretty safe to be in niche areas that are too small for our bigger rivals to worry about, or that somehow exploit the novelty of our Australianness.

I think this time it is quite likely manufacturing's output will decline. But it's even more likely we'll retain a manufacturing sector that's leaner and fitter than it is today.

If it does survive and prosper it will be because manufacturers and their employees find ways to raise their productivity and respond with a wave of innovation. There's nothing like having your back to the wall to call forth such an uncharacteristic response.

And it's a safe bet those firms that do best in adapting will be those that do best at enlisting the engagement and initiative of their employees.

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Jobs aren't lost, just moved

As the media keep reminding us, the many pressures for change in the structure of our economy are causing some workers to be thrown out of their jobs. But this is unlikely to cause a decline in overall employment. Huh?

The structure of the economy - as represented by the relative sizes of the various industry sectors - is always changing. Normally the rate of change is so slow we don't notice it. At present, however, the pace of change is much quicker than usual.

These pressures are coming from outside Australia. Many are the consequence of the rapid transition of various populous economies from developing to developed. Some of these "emerging" economies are in South America; most are in Asia.

One big consequence of this development is that much of the manufacturing undertaken in the world is moving from the developed to the emerging economies, where labour is more abundant and thus cheaper. This is hitting manufacturing in all the developed economies, not just us. (They're not enjoying it, either.)

Because the emerging economies' immaturity means they're growing a lot faster than the rich economies, another consequence is that most of the growth in the global economy comes from them. That's been true for years; it will be even truer in the coming decade because the North Atlantic economies damaged their prospects so badly with their financial crisis.

A further consequence is that the cycle in the world prices of primary commodities - food and fibre, minerals and energy - is now driven more by the emerging economies than the rich economies.

And the different needs of the emerging economies - for energy, steel and high-protein foodstuffs - have produced a long-lasting change in the structure of world trade, where the demand for primary commodities is growing faster than the demand for manufactures, meaning the prices and volumes of commodities are growing faster than those for manufacturing.

Because the emerging economies have much more economic development to do, and because there's a pipeline of countries coming behind China and India, the increased global demand for commodities relative manufactures is likely to last for many moons.

This is bad news for the real incomes of most of the developed countries (which tend to import most of the primary commodities they use, while gaining most of their export income from manufactures), but great news for us, since our imports are mainly manufactures and our exports mainly commodities.

Of course, both the big advanced economies and we face painful structural change as a consequence of this shift in the structure of the global economy, but I know whose shoes I'd prefer to be in.

In Australia we have to shift resources of labour and capital to the expanding mining (and agricultural) sectors from the declining manufacturing sector and elsewhere in the economy.

The improvement in our trading fortunes relative to the rest of the world is reflected in our higher exchange rate - which is thus likely to stay high for the foreseeable future. To many people, this sounds like terribly bad luck (when they're not thinking about their next overseas holiday, that is).

To economists, however, it's all part of the same deal. Our trading position has improved, so our exchange rate has appreciated to help us bring about the change in the structure of our industries needed to fully exploit that improved position.

In other words, by making it harder for our manufacturers (and tourist operators and education providers) to compete on international markets, the higher dollar is helping shift resources out of manufacturing and into mining and elsewhere.

Of course, the era of the emerging economies isn't the only factor forcing change on our industries. The other big one is the continuing information technology revolution, which is presenting considerable challenges to our established media companies, the book industry, retailers and shopping-centre owners.

I started by asserting that the job losses being caused by structural change were unlikely to lead to a fall in employment overall. Why not? Because what creates jobs is the spending of income.

Starting with the mining boom, it's bringing a lot of additional income to Australia (first from higher prices per tonne, then from a lot more tonnes). But, people object, mining is highly capital intensive so it doesn't employ many people. It may account for 10 per cent of the value of all we produce (gross domestic product), but it accounts for only 2 per cent of total employment.

True, but what happens to all the income the miners earn that isn't paid to their employees? Some of it goes to foreign owners and is spent abroad, but the rest goes to local shareholders and local suppliers to the industry, with Australian governments also getting a big chunk (as they should).

When the local shareholders, suppliers and governments spend that income, jobs are created. Where? At present, a lot are in the construction industry but, more generally, all round the services sector.

How can I be so sure? Because the services sector (including construction) accounts for about 85 per cent of all employment and because it has accounted for all the net jobs growth for the past 40 years.

Next, the advent of new technology often prompts employers to retrench staff as machines replace workers. People imagine these jobs have been "lost", but economists know they've merely been "displaced" (moved).

Why? Because when companies make changes that improve their productivity (output per worker), they raise the economy's real income. The company shares the benefit from its higher productivity among its remaining workers, its shareholders and the taxman, but often competition forces the benefit through to its customers in the form of prices that are lower than they otherwise would be. And lower prices mean higher real incomes.

The point is that as this income is spent around the economy it creates jobs around the economy. Where? Somewhere in the services sector.

Ah, you say, but are all the workers "displaced" from manufacturing able to take up the new jobs in mining or the services sector? A lot more are than you imagine will be able to, but some will have a struggle and some individuals won't make it.

That's why the smart response from governments to pressures for structural change is not to help companies carry on as if nothing in the world had changed, but to help individual workers adjust to that change with help to retrain and relocate.

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Yes, there is more to life than happiness

Fed up with all the wrangling and speculation over who should be leading the Labor Party? Want something more substantial? How about the meaning of life - that weighty enough for you?

The question has been an object of contemplation by clerics and philosophers throughout the ages, of course, but in more recent times many psychologists and even a few economists have taken to studying it.

Psychologists' traditional focus has been on the abnormal - on relieving misery, helping people suffering from depression, alcoholism, schizophrenia, trauma and the like.

But for at least the past 30 years some psychologists and economists have been researching the nature of happiness. A spate of books has been written on the subject (including one by yours truly).

Then, about a decade ago, there sprang up among psychologists a new school known as "positive psychology", dedicated to helping the normal live more satisfying lives. The practitioners of positive psychology seemed to take over the happiness business.

The person most responsible for starting the positive psychology movement is Professor Martin Seligman, of the University of Pennsylvania. Seligman regularly works in Australia, and will speak at the Happiness and its Causes conference in Sydney next week, subtitled Life, Death and Everything. But is happiness all there is to the meaning of life? A lot of people doubt it. The spate of happiness books is now prompting a flow of anti-happiness books - including one by our own (eminently sensible) Hugh Mackay.

I think a lot of the problem lies with the word happiness. It's an eye-catching, emotive word beloved of book publishers and headline writers. But what does it actually mean? Different things to different people.

The critics interpret it very narrowly, as being perpetually in an upbeat, ho-ho-ho mood. And perhaps being a Pollyanna - looking on the bright side of everything and refusing to acknowledge problems.

If that's what happiness means it deserves to be ripped into by the critics. It's neither possible nor desirable to live like Dr Pangloss, and you could do yourself a mischief trying to.

Seligman points out that such an ideal favours those with an extroverted personality, disadvantaging the half of the population who are less expressive and more introverted.

Mackay argues that nature equipped us with the capacity to feel negative emotions - pain, sorrow, fear, even anger - for good reason.

But I've always used happiness to mean something much broader and more substantial. The seeking of pleasure and avoidance of pain is mere hedonism, and that's life without meaning.

Most of the academic study of happiness relies on surveys that ask people to rate their satisfaction with their lives on a scale of, say, one to 10. That's a bit broader, but recent research suggests people's answers to such a question are too greatly influenced by how they were feeling at the time they were asked.

Seligman has been giving the question much thought and the result of his cogitation is outlined in his latest book, Flourish. His objective is to guide the positive psychology movement away from happiness as its goal to something more encompassing, which he dubs "wellbeing".

Wellbeing, he argues, has five elements, of which only the first, "positive emotion", covers the narrow conception of happiness. He calls this "the pleasant life".

His second element is "engagement". Living the engaged life means regularly being in a state of "flow", where you become so absorbed in what you're doing you lose sense of time and consciousness of yourself.

It can involve your work or a hobby, but it requires an equal match between the challenge you face and your ability to meet that challenge. People in a state of flow realise they were happy only in retrospect.

Seligman's third element is "meaning". The meaningful life involves "belonging to and serving something that you believe is bigger than the self," he says. This is where other people first enter the picture.

"Today it is accepted without dissent that connections to other people and relationships are what give meaning and purpose to life," he says.

The fourth element is "accomplishment" - something Seligman added to his list only after a student told him his theory of what humans choose had a huge hole in it: "It omits success and mastery. People try to achieve just for winning's own sake."

Well, that's certainly the way it appears, though a leading economist researcher in this area, Andrew Oswald, of the University of Warwick, would argue that people want to win not for its own sake, but to increase their social status.

Billionaires scrabbling for their next billion aren't motivated by greed. They just want to demonstrate - to themselves and others - how good they are at playing the money game.

Anyway, Seligman now accepts that people pursue success, accomplishment, winning, achievement and mastery for their own sakes. He stresses, however, that his objective is to describe what people actually do to get wellbeing.

"Adding this element in no way endorses the achieving life or suggests that you should divert your own path to wellbeing to win more often," he says.

His fifth element is "positive relationships". When another founder of positive psychology was asked to say what it was about in two words or fewer, he replied "other people". Seligman says "other people are the best antidote to the downs of life and the single most reliable up".

No doubt, but that sounds a bit self-centred. For relationships to be "positive" they have to be two-way; you have to give as well as get. Whatever you call it - happiness, wellbeing, flourishing - it won't work if it doesn't have relationships at its core.

That's what we keep forgetting.

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High dollar’s job losses will raise productivity

If your goal is to raise Australians' material standard of living, the debate about what must be done to increase our flagging productivity is vitally important. But if we want the debate to achieve something, we should stop talking so much weak-headed nonsense.

People are talking about productivity as if it's motherhood for businessmen - all fluffy and soft. Sorry, productivity is more nasty than nice. Sometimes it's red in tooth and claw. It always involves effort and unsettling change, and often involves people being thrown out of their jobs.

As the headlines scream at us every day, many of our industries are being put through the wringer at present, and are shedding workers to prove it. This is not a downturn in the economy, it's the economy being hit by multiple pressures for structural change.

Manufacturers (and tourism and education - not that anyone cares about them) are being hit by the high dollar. Retailers are being hit by the end of a 30-year period in which consumer spending grew faster than household income and by globalisation as the internet breaks down longstanding national price-discrimination schemes. Shopping-centre owners are also in the gun.

Banks are still adjusting to the continuing global financial crisis, which has increased their cost of funds while also increasing their pricing power. Newspaper and media companies, and book publishers and sellers, are adjusting to the information and communication revolution. Qantas is adjusting to deregulation and globalisation.

Guess what? All these nasties are in the process of increasing Australia's productivity - as we speak. To the extent firms are shedding labour faster than their unit sales are declining, they're increasing their productivity as a matter of simple arithmetic.

More fundamentally, structural change is presenting all these firms (bar the banks) with an ultimatum: shape up or die. As they fight for corporate survival in a radically changed world, they will become leaner and fitter. In the process, they'll almost certainly contribute to an increase in national productivity.

What this means, however, is that all the business people, union leaders, opposition politicians and commentators pressuring the government to protect industries from change are fighting to prevent productivity improving. And every time the government gives in to those pressures it's acting to stop productivity improving.

I'm convinced many of the worthies banging on about productivity don't actually know what it is. Productivity is output per unit of input. That means it's about comparing quantities, not prices or values.

This is why productivity and profit (or profitability - profit relative to the equity capital or assets employed to earn the profit) are quite different concepts, not pretty much the same thing - as many business people seem to imagine.

Usually productivity is measured as output divided by units of labour inputs (hours worked), giving the productivity of labour. If you divide output by units of both labour and capital inputs you get "multi-factor [of production] productivity" (which always grows at a much slower rate).

The great delusion of the productivity debate - one inadvertently fostered by crusading economists - is that productivity improvement is a gift governments deliver to business, provided they have the political courage to implement "reform".

Rubbish. As our great private-sector productivity expert Saul Eslake has said: "Productivity only happens as a result of the decisions that are made and implemented in places of work."

So there's an obvious question no one is asking: why have Australia's chief executives failed to increase their firms' productivity for the past decade? Obvious answer: because it's been easier for them to increase their profits without doing much to increase their productivity. (And a big part of the reason for this is that the economy's been growing reasonably strongly, year after year, for 20 years - with just a mini-recession in 2008-09.)

Research suggests few firms actually measure their labour productivity. That's no surprise: the goal of firms isn't to increase their productivity it's to increase their profit - which is what they do measure, carefully and often.

Increased national productivity may be the key to rising material living standards, but increased productivity is just an incidental by-product of a firm's efforts to increase its profit. There are often many easier ways to increase profit than to improve your productivity.

Sometimes firms increase their productivity in response to opportunities or incentives - carrots - created by governments. This is what chief executives dream about while primitive tribes dream about planes dropping cargo from the sky.

Sometimes firms increase their productivity in response to governments beating them with sticks to force them to lift their game. This is known as "micro-economic reform". You slash protection against imports, allow the dollar to float, dismantle a host of interventions designed to give industries an easy life and tighten up the Trade Practices Act.

All this increases the competitive pressure on firms - from imports and local competitors - forcing them to lift their performance and their productivity. Is this the "reform" the business lobbies are crying out for? I doubt it.

Sometimes national productivity is improved by nothing more than firms doing what they do: striving to increase their profits. But, as we've seen, that hasn't been happening for a decade.

Alternatively, national productivity is improved as a by-product of firms grappling with adverse changes in their economic environment that threaten their profits and even their survival.

That's what's happening in our economy right now. You want higher productivity? Your wish is about to come true. When we've got through the present bout of structural adjustment we'll have a much more efficient set of industries. But everyone seems to be hating it.

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Herd behaviour, fashion and status seeking

Think for more than a moment about the causes of the global financial crisis - the fallout from which is still hurting the US and Europe - and you realise herd behaviour had a lot to do with it.

People paid extraordinarily high prices for houses because they felt they were trailing the Joneses. Brokers sold unsound mortgages because they had to keep up with rival brokers. Funds managers - remunerated according to their relative performance against other managers - traded shares with the same motive.

So, the study of herd behaviour must be a pretty important part of economics, right? Wrong. Between 1970 and the onset of the crisis only nine out of 11,500 articles in three esteemed economic journals discussed herd behaviour. And when they did discuss it they usually viewed it as "informational learning" - learning what I should do from your behaviour. If you hear a fire bell and see people running for the exit, you don't inquire further, you just join them.

Yeah, sure. That explains it. Fortunately, one economist who's taken a great interest in herding is Professor Andrew Oswald, of the University of Warwick, in Britain, and the IZA research institute, in Bonn. Oswald spoke about herd behaviour and keeping up with the Joneses at a conference this week to celebrate the contribution of Professor Ian McDonald, of Melbourne University.

Unlike his peers, Oswald has spent his career crossing the boundaries between economics and the other social sciences. Now he's forging links with the physical sciences and is on the board of editors of the journal Science.

On herding, Oswald took his lead from a seminal zoological paper written in 1971. "Before that article, the standard theory in biology was that herds had some inexplicable communitarian instinct," Oswald says. But the article argued that an animal clusters with others because its relative position is what matters. When you're being threatened by a predator, clustering with others reduces the chance it will pick you as its prey.

What has this to do with humans? Just our preoccupation with our position relative to others. Our desire to be in fashion - to wear what our peers are wearing - is motivated subconsciously by our strong desire to keep up.

And falling back worries us because it involves dropping down the status ladder. So, our often demonstrated desire to do what other people are doing seems to show a deep, though unconscious, concern to defend or advance our status (or rank) relative to others.

Economists have long been suspicious of survey evidence, of asking people what they think about things or why they do things. It's too subjective; how can you be sure they're telling you the truth? This is one of the profession's reservations about the study of happiness (of which Oswald has been a leader among economists).

So, Oswald has been interested in finding more objective ways to measure feelings such as happiness. When I compare your rating of your satisfaction with life with your spouse's or your friend's rating of your satisfaction, do they line up? (Yes, they do.)

He's done a lot of work using the British medical profession's system for rating people's mental health, rather than just asking people how they feel about their lives.

Another approach is to use magnetic resonance imaging (MRI scanning) to see what happens inside people's brains when they have certain feelings or encounter certain ideas.

Yet another approach Oswald is pursuing is the use of "biomarkers": can changes in a person's physiology - their heart rate or blood pressure, say - tell us about what they're thinking and feeling?

Oswald quotes the results of a study by German economists who put pairs of people in adjacent brain scanners and asked them puzzle questions, with money rewards for correct answers. They found that outperforming the other guy had a positive effect on the reward-related parts of the brain. People compare themselves with others and enjoy feeling they're winning.

You reckon that's pretty obvious? Not to an economist. Their standard model assumes away all interpersonal comparison. My likes and dislikes ("preferences") are unaffected by other people's preferences and never change over time.

Raise my income by $10 and my satisfaction ("utility") increases. Raise my income by

$20 and there's a commensurately greater increase in my utility. Raise my income by

$10 while you increase my mate's income by $20 and I won't mind a bit.

Actually, we know from happiness research that relative income (how my income compares with yours) has a big effect on how satisfied people feel with their lives.

Oswald asks whether our satisfaction from social status accelerates or decelerates as we increase in status. That is, does our pursuit of status bring increasing marginal utility or decreasing marginal utility?

This question is still being researched empirically. Oswald quotes the case of top tennis players. The gain in utility from going from being third in the world to second is likely to be much bigger than the gain from going from eighth to seventh.

But increasing marginal utility is probably limited to the very top of the status ladder, with diminishing utility applying to most of us.

We know, for instance, that though people with high incomes are happier than those with low incomes successive increases in income buy progressively smaller and smaller increases in satisfaction with life.

Another thing we know is that the rising average real incomes the developed economies have achieved over the decades haven't led to any increase in average levels of satisfaction.

This raises what Oswald calls a "disturbing possibility". "Maybe modern society is stuck," he says. "Individually, we chase higher income and 'rank', but for society as a whole this cannot be achieved."

Here's another worry: "Herd behaviour is often very natural and individually rational. But it has the potential to be disastrous for the group," he says.

"When rewards depend on your relative position it will routinely be dangerous to question whether the whole group's activity is flawed, and be rational simply to compete hard within the rules that govern success."

In the dotcom bubble a decade ago - where the shares of internet companies that had never made a dollar of profit traded for ever more ridiculous prices - those analysts who said it made no sense got fired.

"In financial markets, people are now routinely rewarded in a way that depends on their relative performance" - whether they're in the top quartile, second quartile or whatever. "That's dangerous," he concludes.

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Jobs market isn't nearly as bad as you think

Economists don't have a good record on forecasting what will happen to the economy, but here's a prediction I make with great confidence: whatever happens, it won't be as bad as you think it is. That applies particularly to the jobs market.

Consider this. One day you pick up a newspaper and on page five you read a small story saying employment grew by 10,000 last month, leaving the rate of unemployment unchanged at 5.2 per cent. A couple of days later, every time you turn on the car radio or look on the internet, then settle down at home to watch the evening news, you're told about the car company that's announced its intention to lay off 350 workers. The next day the big news is that a bank intends to lay off 1000 workers.

Question is, what conclusion do you come to about the state of the jobs market? You wouldn't be human if you didn't think things were in pretty bad shape.

You'd need the steel-trap mind of an economist to say to yourself: "These stories I'm hearing about layoffs here and there are sad news for the individuals involved, but they don't really prove anything. To make a balanced assessment of what's happening in the labour market I need aggregate statistics, not anecdotes - and the last stats I saw said that, overall, employment is growing sufficiently to hold the unemployment rate steady at 5.2 per cent."

The human mind isn't particularly good with statistics. Some people even have trouble pronouncing the word. Figures are too cold and impersonal. We're interested in other people, not numbers. So there's a sense in which we're moved more by a story of 350 people losing their jobs than by one saying 10,000 jobs had gone. Of course, what would really engage us is a story, with pictures, about the plight of just one sacked worker, worried about the mortgage and not at all sure where their next job was coming from.

But there's a distinction between fellow-feeling for someone who's struck hard times and assessing how worried we should be about the state of the world.

Already this year we've heard a lot of stories about people being laid off in manufacturing, retailing and now banking. It's a safe bet we'll be hearing a lot more, and that each announcement will get much attention.

How could this not leave most of us with the impression the economy's going to hell in a foreign-made handcart? Yet this impression will almost certainly be exaggerated, and may well disguise a position where, overall, the economy is holding its own.

One reason we're misled is that we're unduly impressed by very small figures. To put it another way, we don't appreciate just how big the economy is. There are 11,421,300 people in the labour force, either in a job or actively seeking one. So 350 people represent 0.003 per cent of the total.

The point is not that the fate of 350 people is unimportant, but that it makes a minuscule difference to the fate of workers generally. Make it 10,000 people and we're still only up to 0.09 per cent.

Another reason we're unduly impressed by news of people losing jobs is we don't realise how much turnover there is in the labour market. Julia Gillard keeps saying that every year about a million workers change jobs - with about a quarter of them also changing the industry they work in. When I checked that surprisingly large figure with an expert, he said it was too low.

(Gillard emphasises the remarkable degree of change in the economy by adding that, every year, about 300,000 businesses close - and 300,000 new ones start up.)

So every month many thousands of people leave their jobs - voluntarily or involuntarily - and many thousands move into jobs. What's another 350?

By now you may have realised we get told about only the tiniest fraction of all the coming and going. In fact, we get told when a big company announces it's decided to get rid of a block of workers. It makes an announcement because it wants to impress the sharemarket or pressure the government for assistance.

But we don't get told when big companies decide to hire a block of workers or, more usually, to hire people in dribs and drabs. And we're told virtually nothing about the hiring and firing by small business. Get the feeling we're being given a biased impression?

There is, however, another, more fundamental reason we'll be getting a distorted impression of what's happening in the economy this year. We're getting the idea the high dollar is causing the economy to slow down and shed jobs.

In truth, the high dollar and the factors that brought it about aren't destroying jobs so much as shifting jobs from one industry to another. That's painful for the contracting industries - and we're hearing their cries loud and clear - but, predictably, we're not hearing much from the expanding industries.

While jobs are being lost in manufacturing and elsewhere, employment will be growing in mining and the construction industry, pretty obviously, but also in the services sector, including in health, education and training, public administration, the science professions and arts and recreation.

I'll be surprised if, overall, we don't see continuing growth in employment. Whether this growth will be sufficient to cope with the natural growth in the labour force and thus hold unemployment steady, I'm not as sure.

But I do know this: with inflation under control, if the Reserve Bank sees unemployment drifting up it will cut interest rates further to encourage borrowing and spending and thus foster faster growth in employment.

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