AAA<\/p>\n
The great new god of economics, productivity, may have feet of clay.<\/p>\n
The modern world is a noisy place, but you\u2019ve probably noticed the way economists now give speeches extolling the virtues of \u201cincreasing productivity\u201d.<\/p>\n
Such speeches were much rarer when I became an economic journalist in the 1970s. Why? Because, back then, productivity seemed to be improving a bit each year, the way we thought it should.<\/p>\n
![\"Illustration](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/07\/51ac06ad8bcd1105004d319666f5e03074d47b86.jpeg\")
Illustration by Simon Letch <\/p>\n
In more recent times, however, productivity seems to have faltered. Hence the speeches. The feds have even renamed one of our economic quangos as the Productivity Commission, these days led by one of our rising economic stars, Danielle Wood.<\/p>\n
Think of it: a whole commission full of economists studying our productivity performance, what\u2019s causing the deterioration in our performance and what we should be doing to improve it.<\/p>\n
There\u2019s just one small problem. John O\u2019Mahony, a partner in Deloitte Access Economics (and a mate of mine) has just published a paper<\/a> questioning our newfound obsession with productivity and the economics profession\u2019s conventional wisdom that productivity and living standards are everything we should be worried about.<\/p>\n The economics profession has taken up with great confidence the incessantly repeated remark of Nobel Prize-winning economist Paul Krugman<\/a> that \u201cproductivity isn\u2019t everything, but in the long run, it is almost everything\u201d.<\/p>\n But first, let\u2019s get something clear. Many normal people take increasing productivity to be just a flash way of saying the economy should increase its production of goods and services. Actually, what it means is that we should improve the efficiency of our output of goods and services relative to the inputs of land, labour and capital we use in the production process. That is, increase our output per unit of input.<\/p>\n How do we become more efficient? Mainly by giving workers (labour) more or better machines (capital equipment) to work with. Maybe by giving workers better training.<\/p>\n So far, all very obvious. It\u2019s improved productivity that lifts our material standard of living.<\/p>\n So what\u2019s the problem? Although all this makes sense in principle, it\u2019s not measurable in practice. \u201cThe moment you introduce a real economy, with real people living in it, the claim that productivity is almost everything collapses,\u201d O\u2019Mahony says.<\/p>\n Productivity is a concept \u2013 a perfectly sensible concept, but it\u2019s not \u201cdirectly observable\u201d. You can\u2019t see it and touch it, meaning you can\u2019t measure it directly.<\/p>\n So you start with the economy\u2019s production of goods and services \u2013 real gross domestic product \u2013 and take away things you know aren\u2019t relevant. What\u2019s left \u2013 the residual \u2013 should be productivity.<\/p>\n Trouble is, in measuring GDP, you left out a lot of things you couldn\u2019t measure. Such as? What economists used to call \u201cland\u201d. Today we call it \u201cthe natural environment\u201d.<\/p>\n When you use natural resources but don\u2019t count them, you\u2019re counting them as though they were adding to productivity, not depleting resources. O\u2019Mahony says Kuwait is not twice as productive as the United States, it\u2019s just sitting on a lot of oil.<\/p>\n Australia\u2019s 7.6-fold increase in energy consumption per person over the 20th century was counted as improved labour productivity.<\/p>\n Sometimes what we\u2019ve taken to be a productivity slowdown is actually a reduction in greenhouse gas emissions. Something we\u2019ve worked hard to achieve and which would leave us better off is taken to be a slip backwards.<\/p>\n Then we\u2019ve got GDP\u2019s limited ability to capture improvements in the non-market sectors of the economy such as health and education. Patients and students benefit from advances in medical science and learning, but this doesn\u2019t show up in GDP because it\u2019s been too hard to measure.<\/p>\n Even so, quality-adjusted health productivity improved at the rate of 3 per cent a year over the decade to 2019.<\/p>\n Related Article What all this tells us is that the economy has changed a lot over the decades without any improvement in the way we measure it.<\/p>\n It\u2019s not just more goods and services that lift our standard of living. We\u2019re working to improve our wellbeing in other, more subtle ways, but much of that does nothing to make our traditional figures look good.<\/p>\n In some other respects, presumably, our performance has deteriorated without that backward step being recorded.<\/p>\n The interesting thing to me will be how the nation\u2019s economists respond to O\u2019Mahony\u2019s scarifying attack on their business-as-usual approach to management of the economy. All of them could justly claim that none of O\u2019Mahony\u2019s criticisms were new to them. But this would not justify anyone ignoring them.<\/p>\n O\u2019Mahony concluded his report with a challenge for decision-makers. \u201cUltimately,\u201d he wrote, \u201ceconomic policy should aim to maximise societal wellbeing, not simply measured productivity. And in a mature, high-income economy like Australia, success may increasingly be defined not by how fast we grow, but by what we choose to value.\u201d<\/p>\n The official way of measuring the economy has fallen way behind and work to update the measurement tools must begin forthwith. Productivity improvement \u2013 correctly measured \u2013 remains of great importance.<\/p>\n Ross Gittins is economics editor.<\/p>\n Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter. Sign up to receive it every Tuesday evening<\/a>.<\/p>\n Save<\/p>\n You have reached your maximum number of saved items.<\/p>\n![\"Deloitte](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/07\/514f04c908bd9c6ad1d928784ed4b297c6397953.jpeg\")
Deloitte partner John O\u2019Mahony has challenged the conventions of productivity and how it\u2019s measured.<\/p>\n![\"Illustration](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/07\/a2c6a57fc1b5bddb213d42383c35db589762c66b.jpeg\")
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