A simple reading of orthodox economics tells you that the urge to maximise profits leads businesses to continuously improve the productivity of their activities. But, as former competition tzar Rod Sims has often reminded us, improving productivity is just one way to increase profits, there are other ways to do it that are a lot easier.
One other way is to increase your share of the market by having a better product. Or better, coming up with a marketing campaign that merely cons people into believing your product is better.
Melbourne’s population is growing thanks to a return in migration.Credit: Chris Hopkins
Another way to increase market share is to undercut your competitors’ prices. But in oligopolies dominated by only a few big players, which many of our markets are, the threat of mutually damaging retaliation is so great that price wars are rare.
(This why the big four banks were so shocked and offended when the Macquarie group, a huge financial group with deep pockets and a small bank, decided recently to get itself a slice of the lucrative home loan market by offering below-market interest rates.)
Another way to increase profits is to take over a competitor. This may or may not increase profitability – percentage return on the share capital invested in the business – to the benefit of shareholders. But the managers of the now-bigger business will have to be paid commensurately higher wages and bonuses.
But the simplest, easiest way to increase profits? Sell into an ever-growing market. And how do you do that? Persuade the government to maintain a high rate of immigration. This is a mission on which big business has had great success in recent decades.
Polling shows the public does not approve of high immigration. With some justification, the punters tend to blame it for road congestion and rising housing costs.
But the Howard government and its Coalition successors did a roaring trade in keeping the punters’ disapproval focused on poor people who arrived uninvited on leaky boats, while they were quietly ushering in all the immigrants that business was demanding. These people arrived by plane, and so drew no media attention.
Is it mere coincidence that productivity improvement has been weak during the period in which immigration-driven population growth has been so strong? I doubt it, though of course, I’m not claiming this is the only factor contributing to weak productivity improvement.
While it makes self-interested, short-sighted sense for businesspeople to be so untiring in their clamour for ever more immigration, the strange thing is that the virtue of rapid population growth goes almost wholly unquestioned by the nation’s economists.
Using immigration to raise our living standards is like trying to go up a down escalator.
Population growth is an article of faith for almost every economist. For a profession that prides itself on being so “rational”, it’s surprising how little thinking economists do about the pros and cons of immigration. There’s little empirical evidence to support their unwavering commitment to high immigration, but they don’t need any evidence to keep believing what almost all of them have always believed.
Before we get to the narrowly economic arguments, let’s start with the bigger picture. The primary reason for doubting the sense of rapid population growth is the further damage every extra person does to the natural environment.
As the sustainable population advocates put it: too many people demanding too much of our natural environment.
Economists have gone from the beginning of their discipline assuming that the economy and the environment can be analysed in separate boxes. This further assumes that any adverse interaction between the two is so minor it can be safely ignored.
High immigration to grow the market and provide ready access to skilled and unskilled workers – hasn’t induced business to increase the productivity of its labourCredit: Bloomberg
In an era of climate change and growing loss of species, this is clearly untenable. The economy and the natural environment that sustains it have to be joined up. But when it comes to population growth, these are dots the profession hasn’t yet joined.
Even on narrowly economic considerations, however, economists long ago stopped checking their calculations. It’s obvious that a bigger population means a bigger economy, and since economists are the salespersons of economic growth, what more do you need to know?
Well, you need to know that economic growth achieved merely through population growth leads to what the salespersons are promising the punters: a higher material standard of living. Simply, higher income per person.
If there is evidence higher population growth leads to higher income per person, I’ve yet to see it. I have seen a study by the Productivity Commission that couldn’t find any. And I have seen a study showing that the higher a country’s population growth, the lower its growth in gross domestic product per person.
But it doesn’t surprise me that the committed advocates of population growth don’t wave around any evidence they have to support their faith. What is well understood, though the advocates seem to have forgotten it, is that, whatever economic benefits immigration may or may not bring, it comes with inescapable economic costs.
Which are? That every extra person dilutes our existing per-person investment in business equipment and structures, housing stock and public infrastructure: schools, hospitals, police stations, roads and bridges, and much else.
In other words, every extra person requires us to spend many resources on preventing this population growth from diminishing our economic and social capital per head, and thereby making us worse off.
Economists call this “capital widening”, as opposed to “capital deepening”, which means providing the population with more capital equipment and infrastructure per person.
Trouble is, there’s a limit to how much the nation can save – or borrow from overseas – to finance our investment in housing, business equipment and structures, and public infrastructure. So resources we have to devote to capital widening, thanks to population growth, are resources we can’t devote to the capital deepening that would increase our standard of living.
Using immigration to raise our living standards is like trying to go up a down escalator. You have to run just to stop yourself going backwards. This is smart?
In practice, it’s worse than that. There’s a big government co-ordination problem. It’s the federal government that’s responsible for immigration levels, and that collects most of the taxes the immigrants pay, but it’s mainly the state governments that are lumbered with organising the extra housing and building the extra sewers, roads, transport, schools, hospitals and other facilities needed to avoid congestion and overcrowding.
Another thing to remember is that the easier you make it for businesses to get the skilled workers they need by bringing them in from abroad, the more you tempt them not to go to the expense and inconvenience of bothering with apprentices and trainees.
This is why so many businesses were caught short when, during the pandemic, their access to imported skilled labour was suddenly cut off. No wonder they were shouting to high heaven about the need to reopen their access to cheap labour. A lot of it was actually unskilled labour from overseas students, backpackers and others on temporary visas, who are easy to take advantage of.
Have you joined the dots? If giving business what it wants – high immigration to grow the market and provide ready access to skilled and unskilled workers – hasn’t induced business to increase the productivity of its labour, why don’t we try the opposite?
Make it harder for business to increase profits without improving productivity and investing in training our local workforce. Of course, this would require us to value productivity improvement more highly than population growth.
Ross Gittins is the economics editor.
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