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.
