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Canada Needs a “Canadian” Productivity Commission

Canada Needs a “Canadian” Productivity Commission

May 2, 2024

In a recent speech on lagging Canadian productivity, Senior Deputy Governor of the Bank of Canada Carolyn Rogers stated, “You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass.” Yes, it is. Canadian productivity growth has been dismal. And that means that growth in Canadians’ living standards has been dismal.

In response, some have argued that Canada should emulate Australia and create a national productivity commission to study the issue and make recommendations. For example, the Business Council of British Columbia has long championed the idea, and former Finance minister Bill Morneau has also called for Canada to emulate Australia.

But while Canada definitely should establish a productivity commission, it should not emulate Australia’s model, as it is driven by an orthodox neoclassical economics doctrine that largely ignores the real drivers of national productivity: firm structure, behavior, and technology. Mainstream neoclassical economists, especially in Anglosphere economies, study the overall economy, markets, and prices, but by and large ignore the processes by which entrepreneurs, firms, and industries boost productivity.

As such, any Canadian productivity commission should be staffed and governed, not by economists, but by what I call “productionists.” Productionists have a deep understanding of firm, industry, and technology dynamics. Some countries, such as Finland, Israel, Korea, Singapore, Sweden, and Taiwan, rely more on productionists for productivity and innovation policy guidance. Canada needs to the do the same. Economists will still need to still play the lead role in overall macroeconomic policy, but solving Canada’s productivity crisis requires “productionists” to lead the conversation and bring new disciplines to the table.

Australia’s Productivity Commission

In response in part to lagging productivity, the Australian government formed its productivity commission in 1998. While it has done considerable analysis of the state of Australian productivity, it has done surprisingly little work to understand how to actually get organizations to boost productivity. Instead, the commission’s focus has been on related but tangential issues like tariffs, income inequality, public transport pricing, SME growth, education, retirement policy, rental housing availability, tourism policy, and increasingly social policy and redistribution issues. In large part, this is because most of the commission’s leadership and staff have a background in traditional economics, which largely ignores enterprise issues and increasingly focuses on redistribution and fairness rather than growth. Australian Professor Roy Green has detailed the Australian Productivity Commission’s shortcomings in another commentary piece for the Canada Centre.

What’s Wrong With Orthodox Economics as a Guide to Productivity Policy?

In most Anglosphere countries, including Canada, policymakers rely on conventional economics for virtually all guidance related to economic issues. Yet the conventional orthodoxy remains deeply focused on limiting government’s role in the economy or supporting a fairer distribution of income, or both. Economists largely leave questions of productivity to the market and provide little usable advice to policymakers in search of an effective productivity strategy, other than to support broad inputs into firms (e.g., more years of schooling) or ensure proper framework conditions (smart regulation, lower taxes, etc.)

However, as Canadian economist Don Drummond argues, this conventional framing is “necessary but not sufficient.” He goes on to note in reference to Canadian government policy that “Canada is not alone in having shifted gears on framework policies quite radically without reaping all the expected benefits. Something seemed to be missing from the policy paradigm.” Drummond argues that a “research agenda with a focus on firm behavior from a micro approach is needed to obtain a deeper understanding of Canada’s terrible productivity record and to develop actions to boost productivity growth.”

Likewise, Nobel Prize–winner Edmund Phelps writes, “standard economics offers no inkling of what policy initiatives might solve the stagnation of productivity and wages… Their models were conceived to show how short-term fiscal interventions could shave off peaks and troughs of a short cycle around a rising trend path—not to address a sea change in dynamism bringing stagnation.” And as the late Clay Christensen, the father of the theory of disruptive innovation, wrote:

Most theories of growth are developed at the macroeconomic level—at 30,000 feet. That perspective is good for spotting correlations between innovation and growth. To understand what causes growth, however, you have to crawl inside companies—and inside the minds of the people who invest in and manage them.

In other words, economists do not study how societies create new forms of production, products, and business models to expand productivity; rather, they study markets to see how commodities are exchanged. But progress does not come from allocating widgets more efficiently, it comes from making widgets more efficiently and, even more so, by inventing the next new widget.

To the extent the neoclassical doctrine has any anything to say about a proactive role for the government in spurring productivity, it advises supporting factor conditions that all firms can benefit from (e.g., free trade, better education, reduced regulations, basic scientific research, etc.). For example, in economist Robert Gordon’s 784-page treatise on American productivity, his policy agenda for raising productivity consists of a grab bag of just seven measures: raising the earned income tax credit, legalizing drugs, more preschool education, more money for public schools, free college education, more immigration, and reducing copyright and patent protection. Most of these measures would have little or no effect on productivity (e.g., free college tuition, earned income tax credit), and some (reduced intellectual property protection) would worsen it. A report on productivity based on a joint workshop in 2016 between the French think tank France Stratégie and the U.S. Council of Economic Advisors speculated on a wide range of possible factors leading to the productivity slowdown and could only conclude that “some policy measures [were] worth exploring.”

These broad market and factor input improvements are woefully inadequate as a comprehensive strategy, but they are the best the neoclassical economists can offer, not only because they fail to understand technology and organizations, but also because actual technology-based and sector-focused productivity policies violate their views of what is acceptable economic policy.

Time for a “Productionist” Approach to Productivity Policy

A productionist approach is grounded in understanding that productivity is less about markets and more about organizations and systems—in particular, about how organizations develop and utilize technology and work organization to drive productivity. Few conventional economists bother, as Nathan Rosenberg wrote, to “look inside the black box” of actual innovation in actual organizations or industries and cross-industry systems. Yet it is there that the keys to raising productivity—and thus the keys to the right productivity policy—will be found.

Productionists hail from a variety of disciplines, including business administration, urban and regional planning, engineering, public policy, and even economics. The key is less about what their degree is in, and more about their theories, methods, and knowledge. By establishing a productionist-focused productivity commission, Canada could be a global policy leader, while also taking a key first step to revive its lagging productivity growth.

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