 I was once at a talk at which my colleague, Tanya Plibersek, gave a short introduction and then absconded with the next speaker's talk, and I confess that at the time I didn't quite understand the emotion of the next speaker as they stepped up, but now with Selwyn having absconded with half my speech I feel I can understand how that speaker felt. In Tanya's case she'd actually gone back to her office, so the visiting British speaker stood at the lectern for a little while until he realised the situation could not be resolved and then gave a brilliant off-the-cuff speech. I on the other hand would not have done so well. It's a delight to be back at the ANU and an honour to be delivering the Melville lecture. I'm really grateful to Martin Richardson for the invitation, to Selwyn Cornish, Australia's Reserve Bank Rosetta Stone, mastermind of monetary policy for his most learned introduction, and of course acknowledge the Ngunnawal people on whose lands we meet tonight. It's a real pleasure to look out over the audience and see former colleagues, students and constituents who've joined us tonight. So Leslie Galfield Melville, oops, well that is interesting. Here I was thinking that would move to my PowerPoint but that's moving to something like what I saw at a Doctor Who last night. Martin shall now see if the slides can be restored. Well that's good, alright, what happens if I now advance? There we go. So Leslie Galfield Melville was a remarkable Australian, born the year after Federation, trained in engineering and science, before wisely settling on economics. Inaugural professor of economics at Adelaide University at age 27, founder of what would become the Reserve Bank's research department, leader of Australia's delegation to Bretton Woods, and new Vice-Chancellor for most of the 1950s. Appointed to chair the tariff board by McEwen, it's to Melville's enduring credit that he quit the post rather than succumb to McEwenism. Having been born at the dawn of the 20th century, Leslie Melville lived to see the start of the 21st. As one obituary noted, there has not been another Australian economist to hold the range of jobs that Melville did. It's virtually impossible to think about Melville's life without being conscious of the technological changes that took place during it. The 20th century or the Melville era as Australian economists might henceforth refer to it, saw an explosion in technologies, in transport, planes, helicopters, mass market cars, space shuttles, in communications, radio, television, the internet, in health, antibiotics, sewage cities, the pill, and genetic engineering. Not to mention atomic bombs, vacuum cleaners, smartphones, radar, the barar and plastic. And yet for most of the 20th century we saw not only rising living standards but also falling inequality. Melville's working years from the 1920s to the 1970s saw the largest reduction in inequality in Australia's history. My focus today is on two challenges. How do we continue the pace of innovation in the 21st century that we saw in the 20th? And how do we ensure that prosperity is broadly shared? By acknowledging the tendency of technological change to increase inequality, we can harness the gifts of Prometheus without suffering their destructive tendencies. And as it happens, I'll argue that a single policy recommendation offers the greatest promise to make us more entrepreneurial and more equal. Let's start with innovation and entrepreneurship. Innovation is the production of new ideas. Entrepreneurship is the process of turning those ideas into products or services that can underpin a successful business. It's a common place to say that Australia produces our fair share of ideas but underperforms when it comes to turning ideas into startups. But as I'll argue, we need more innovation and more entrepreneurship. Now, I have to admit I'm not the first parliamentarian to discuss this issue. Across Australia's startup incubators, visiting politicians have become as common as cans of diet Coke and Red Bull. This is no bad thing. New business formation is as critical to economic growth today as it ever was. But if we're devising policies to boost innovation, they need to start with a clear-eyed analysis of the data. As the joke goes, talk about innovation in business can be like talk about sex among high schoolers. Everyone says they're doing it. There's less of it than you think and there's plenty of fumbling in the dark. So let's run for a few numbers. When it comes to the most cited research in science and engineering, Australia accounts for 5.5% of the most cited papers. That's around 10 times what our share of world population would lead you to expect. Across science fields, Australia does especially well in geology, geochemistry, earth sciences, environmental sciences, and veterinary sciences. Australia has more top researchers per person than almost all advanced countries. However, we do less well when it comes to translating those ideas into businesses. According to former chief scientist Ian Chubb, just 1.5% of Australian companies developed new-to-world innovations, compared to 10% to 40% in many other OECD countries. Just 6% of ASX300 firms say that Australia is a highly innovative nation, just 6%. In a similar picture emerges, when we look at the workforce, researchers make up 0.85% of the Australian workforce, which is about average for developed nations. But the share of our researchers in business is 32%, the lowest share of researchers in business in the OECD. We also have one of the lowest rates of industry research collaboration in the OECD. Another indicator is to look at patent filings. Whether or not you think Australia's intellectual property system is perfect, the number of patent filings probably says something about the underlying level of innovation in a country. According to the OECD, Australia ranks in the bottom half of advanced countries for patent filings per person. Over the past decade, most advanced countries have increased their rate of patent filings. But the number of patent filings in Australia is down by at least a fifth over the last decade. So a comparison of Australia with the rest of the advanced world suggests we do better on ideas generation than business development. However, it doesn't follow from that that policy makers need only focus on the start-up side. Think of it this way. Imagine Australia is producing 100,000 clever ideas each year and 10% are becoming new businesses. We want more business ideas. We can either produce more than 100,000 ideas or raise the commercialisation rate above 10%. Most likely, we'll want to do both. So I'm going to go on to argue. This is fundamentally an issue of human capital. Ensuring the Australian workforce has the skills to forge new ideas and turn them into great businesses. Over recent months, Bill Shorten's Labor Oppositions proposed some ideas to boost innovation and entrepreneurship. We've talked about promoting the teaching of coding and computational thinking in schools, offering a start-up year to young university graduates seeking to start their own enterprise, creating new visa categories to attract entrepreneurial immigrants, and getting start-ups to help solve government problems through challenge platforms. Over the long term, we probably also want to think about whether we need to update other parts of our regulatory framework. Does it really make sense to allow firms to include clauses in employment contracts that prevent employees from leaving to start a competing business? Is a patent system that once gave Amazon a 20-year monopoly over one-click ordering really appropriate to the modern economy? Should we be worried when Google tells us that Australia's copyright rules wouldn't have allowed them to create their search engine in Australia? In other areas, an increasingly weightless economy is creating measurement challenges for government. Australians such as Colin Clark led the way in the development of national income accounting. But increasingly, people are asking whether net national disposable income per capita would be a better measure of well-being than gross domestic product. In either case, the challenge remains of ensuring that a statistical framework developed for the wheat and steel era continues to give us a good picture of economic activity in the world of the sharing economy. While innovation and entrepreneurship are important to increasing total output, it doesn't follow that this prosperity will be broadly shared. I recently took a taxi to a Sydney event on the sharing economy. On the way, my taxi driver talked about his concerns about how ride-sharing would affect his work. At the event, most of the entrepreneurs were positive as either drivers of innovation or consumers of sharing economy services. One innovator's disruption is another person's job loss. The Luddites might have used a bit too much force to make the point, but they weren't wrong about the fact that technological change can destroy jobs as well as create them. So it's useful to consider what changes technology has wrought across the job distribution. In a series of articles with not particularly reassuring titles like why are there still so many jobs? David Orta and his co-authors have divided jobs into three categories, manual, routine and abstract. They show that routine jobs, which tend to fall in the middle of the wage distribution, have shrunk the most. This is one graph from one of David's papers, ranking industries from lowest paid on the left to highest paid on the right. You can see more growth on the left and the right than in the middle. He's shown that routine jobs fall in the middle of the wage distribution and have shrunk the most. It's true of the United States for the 1980s, 1990s and 2000s. Other researchers have also shown that the same pattern is true for most European countries over the period 1993 to 2010. Routine jobs are occupations such as bookkeeping, administrative support and routine manufacturing tasks. What makes routine jobs vulnerable to commuterisation is that they involve following established rules. By contrast, abstract jobs involve problem solving, creativity and teamwork. When a lawyer advises a client as to whether accept a plea bargain or a manager decides on how to respond to an employee who's arrived a little late for work, they're tackling problems that don't have a closed form solution. Most interesting is the resilience of manual jobs to commuterisation. As far as attempts to automate the work of jobs such as cooking, cleaning, security work and personal care have largely failed. We've seen data for the United States and for Europe. What does it look like for Australia? Fortunately, two excellent recent studies have taken a careful look at precisely this question. Analyzing broad occupational data from 1966 to 2011, Jeff Borland and Mick Coelly look at occupational growth across 10 categories. Ordering their occupations from the lowest hourly wage to the highest hourly wage, they're then able to look at job growth in low paid and high paid occupations. They find that the share of people working in the two best paid occupations, managers and professionals, rose by 14 percentage points, while a share working in the two lowest paid occupations, sales and food slash cleaning, rose by three percentage points. Yet the two occupational categories in the middle of the distribution. Production and operators shrank by 20 percentage points from 1966 to 2011. Another approach is to look at a shorter time frame but more fine grained job categories. Analyzing employment changes from 1993 to 2013, Roger Wilkins and Mark Wooden look at employment change across 43 occupations. This shows the same broad U shaped pattern with growth in both low paid occupations such as store persons and carers and high paid occupations such as managers, ICT professionals and legal professionals. In the middle jobs like clerical workers, machine operators and secretaries have shrunk relative to the workforce as a whole. There's also some exceptions to the stories such as farm workers who are poorly paid but shrinking and sports workers who are mid-paid but growing. Finally Jeff Balland and Mick Carelli seek to directly address the question of routine jobs by coding each occupation according to its degree of routine content. I find a very strong pattern. The more routine a job is the more likely it was to have shrunk since the mid-1960s. And that process can be seen continuing in a host of different labour markets. For example, a fast-growing sector of financial advice is the phenomenon of robo-advisors, computer algorithms that seek to compile and manage an investment portfolio to suit individuals tax status and state of life. On farms, unmanned helicopters can now be programmed to spray pastures at a fraction of the cost of piloted crop dusting aircraft. Companies are continuing to automate their human resources and back office functions, removing mundane and routine tasks such as payroll and invoicing. And 3D printers are now being adapted by if used by the construction industry to print large structural parts. The ultimate goal is to print an entire building on site. So what should we do about it? At this point I'd been tempted to discuss half a dozen policy ideas that might make us a bit more innovative or a bit more egalitarian. But instead I want to take a different approach. I want to propose a single idea that I believe would radically transform both our innovation landscape and our level of inequality. If you speak with startup founders and ask them what would make their business more productive, they invariably point to the need for highly skilled people. If you chat with those who do job placement, I'll tell you about the value of a great education as a platform for lifelong learning. If you sit down with those who've spent time behind bars, they'll often tell you how much they hated school. Over recent decades we've done a reasonable job of increasing the quantity of education received by the average Australian. Since the mid-1970s school completion rates have risen from three in 10 to eight in 10. University attendance rates have gone from one in 10 to four in 10. We haven't gone as good a job at education quality. Melbourne universities Chris Ryan and I showed that if you looked at the literacy and numeracy of 14 to 15 year olds. Here's literacy and here's numeracy with each dot showing our best point estimate and the interval being the 95 confidence interval. On both those measures we find literacy and numeracy either flatlining or even falling slightly from the 1960s to the early 2000s. Since then over the past decade or so the international PISA exams show Australian 15 year olds going backwards in maths, reading and science. For example over the period from 2003 to 2012 Australia's average PISA score in maths slipped from 524 to 504. Michael Thorley head of the department of prime minister and cabinet recently described this as a 300 to 500 percent worse result which is a quite nail the magnitude but does inadvertently remind us that the nation's numeracy problem goes right to the top of the public service. Most recently NAPLAN figures for grades three five seven and nine show little improvement over the period 2008 to 2015. To the extent that there's been some improvement it tends to be at the lower grades suggesting that preparation for school has improved rather than value added at school. Now the most significant reform of this period the move towards needs-based school funding only began the 2014-15 financial year so it'd be pretty unrealistic to expect it to show up in student results immediately. I strongly support needs based funding and believe it would be a mistake to scrap it but I also think getting the funding model right is only part of the answer to building a great education system. To raise the quality of Australian education I believe we need a national push to raise teacher effectiveness. As my colleague Kate Ellis puts it teachers don't just help students build skills they change lives. In the past Australian education ministers state federal and national have noted that teacher quality is the single greatest in school influence on student engagement and achievement. In my view this means it should be a central priority for Australian schools policy. First some background in the 1950s Australian teacher aptitude was underpinned first and foremost by a single factor. Rampant gender pay discrimination in law medicine business and other professions meant that teaching was one of the few occupations open to female university graduates. Teaching wasn't free of discrimination but it provided considerably better opportunities for talented women than many other occupations. Gender pay discrimination meant that the caliber of many professional occupations was lower in the 1950s and 60s than it would otherwise have been. For example as late as 1971 women made up 13 percent of doctors, 6 percent of lawyers and 0 percent of members of the House of Representatives. The reduction in gender pay discrimination was one of the great post-war advances for Australia. Not only did it expand the opportunities available for women but it raised output because as we know discriminatory firms are less productive. Now of course gender pay discrimination still exists but our public services and businesses are more productive now than in the mad man era because they make better use of the talents of women. Yet as talented women flooded into the professions they flooded out of occupations such as teaching and nursing which had been in relative terms more attractive to women. Chris Ryan and I look at the literacy and numeracy of new teachers relative to those in their age cohort. We estimate that from 1983 to 2003 the average percentile rank of those entering teacher education fell from 74 to 61. Well the average rank of new teachers fell from 70 to 62. The share of new teachers who are in the top fifth of their class halved. The share of new teachers who had been in the bottom half of their class doubled. Now note that all of these comparisons I'm giving you now are relative to the cohort so they're not driven by that across the board drop in standards that I outlined earlier. The Lee Ryan study only covered the period up to 2003 but there's little evidence that teacher aptitudes risen since then. Over the period 2005 to 2012 the share of teacher education students with ATARs over 80 fell from four in 10 to three in 10. Now having noted these figures it's important to recognise that academic aptitude isn't everything. After all a good player doesn't always make a good coach. My favourite teachers were inspirational because they loved their subject matter. To hear my English teacher Judith Anderson talk about John Dunn was to be transported back to 17th century England. Once my maths teacher Mick Canty and told you why complex numbers existed you felt you'd known it all your life. Passion, empathy and grit were all elements of terrific teaching but aptitude matters too. Great teachers are more commonly those who aced a subject rather than barely passing. It's also important to note that a statement about averages is just that. To note that the average academic aptitude of new teachers is falling is not to suggest we don't have great teachers in the system today. People like Jeff McNamara, a former optical mechanic who teaches at Melrose High in Canberra. Jeff McNamara has published over a hundred articles and three books on topics such as dark matter, pulsars and gravitational waves. He not only won last year's Prime Minister's Prize for Excellence in Secondary School Teaching he's inspired and I was taught by Mr Mack Facebook group. Jeff McNamara is a sensational teacher and we need more like him. Considering how to raise teacher effectiveness we could do worse than look at the performance of Finland a country which routinely ranks near the top of international test school lead tables. Now I'll admit as an education researcher I'd always been a bit skeptical of those his education reform ideas seemed to boil down to let's be like Finland. Somehow they all reminded me of Monty Python's song Finland Finland Finland Finland Finland has it all. And the problem is it's not quite clear which bit of the Finnish approach we should replicate. Late school starting ages, less homework, long recess breaks, no school uniforms, low levels of inequality, a logical language in which words are pronounced exactly the way they're written. But what's more interesting to me than the Finland is great summary is the fact that this is really only the story of the past generation. In the 1960s and 1970s Finland was an average performer on the international tests. Indeed one study estimates that Australian students outperformed their Finnish counterparts in the mid-1970s. It was only in the late 1970s that Finland embarked on a major push to raise the aptitude of new teachers. One mark of the success of Finland's teaching push is that teacher education students are generally drawn from the top fifth of high school graduates. To every position in a teacher education course there are around 10 applicants. Those selected are chosen based not only on academic excellence but also on interview. Finnish teachers are highly regarded with polls placing them as their nation's most admired profession. Raising teacher effectiveness involved a suite of changes in Finland. Smaller teacher education providers were closed down. The remaining universities were forced to be more selective and more rigorous. The government worked closely with the teacher union in implementing the changes. Teacher pay is about average for the OECD although the wage gains to experience are relatively large. Finland has no national system of merit pay though municipalities do sometimes pay bonuses to high performing teachers. Finland also mandated master's degrees for all teachers meaning that those who want to study teaching needed to study for a minimum of five years. Economists have generally been skeptical of the value of master's degrees noting that long study periods can act as a barrier to entry. Effectively discouraging talented people from entering a profession. Studies in the United States and my own work for Australia has failed to find evidence that teachers with a master's degree do better in the classroom. So why was Finland's push for master's trained teachers a success? One possibility is that Finnish master's degrees were more focused on improving teaching than those in other countries. For example students studying to be a secondary school teacher spend a third of their time during a master's degree doing face-to-face teaching in schools. Another possibility is that Finland succeeded despite its emphasis on master's degrees. Once you select teacher education students from among your best high school graduates it's plausible that what you do with them at university is a secondary importance with apologies to my host. Indeed this goes to a broader point. Once you select superstar teachers many of the critical issues in education become less important. I'm a strong supporter of a national curriculum, test score reporting and raising the caliber of school leadership but I have to admit that all of those issues become less critical the more effective our teachers are. So how might we transform teacher effectiveness in Australia? The first answer is to make it our foremost schooling priority. For all the talk about teaching being the number one factor in school effectiveness teacher effectiveness risks getting lost in the weeds of other agendas. Making teacher effectiveness the leading priority means doing more to celebrate great teachers and recognizing their power to transform lives. In 2006 A&U invited graduating students to nominate a teacher, school teacher who'd made a difference. To read the nominating statements is to be reminded of what great teaching involves. One female A&U graduate wrote of her biology teacher Lorraine Huxley that she'd inspired me to include science as part of my tertiary studies. A commerce student wrote of his teacher David Dorian he was truly excited about his topic mathematics and imbued this in other students. An archaeology student wrote of her ancient history teacher Mary Condon. Mrs Condon had a way of making historical characters and events come alive. I felt I knew exactly what it was to grow up in a Spartan village and felt that Augustus and Agrippina were close friends of mine. Imagine how much more innovative and egalitarian our schools could be if every student felt like this about every teacher. In his 1993 interview with Selwyn, Leslie Melville reflected back on his many decades of practicing economics in Australia including interacting with Keynes, leading the Australian team to Bretton Woods and becoming A&U's second vice-chancellor. Asked about the role of economists Melville replied certainly economists are having much greater influence today than they did 60 to 70 years ago. They have for example miraculously persuaded people that tariffs ought to be reduced. As an elected economist I occasionally share Melville's sense of wonder. The miracle that a profession that communicates in fluent Greek and broken English ever manages to persuade policymakers of anything. And yet the reality is that economists really have managed to make a mark on modern-day Australia. Tariff cuts to income contingent lines. Central bank independence to universal superannuation. Our nation is happier, healthier and better educated as a result of ideas formulated by economists. As we grapple with the twin challenges of boosting innovation and reducing inequality Australia will need to again draw an economic expertise. A major increase in the quality of school education would produce outcomes that would dwarf minor tweaks to our tax or regulatory structures. As the late James Tobin once noted, it takes a heap of Harberger triangles to fill an open gap. Education remains our best productivity boosting policy and our best anti-poverty vaccine. To transform teacher effectiveness would raise both the rate of innovation and entrepreneurship and reduce joblessness and inequality. If the robots are coming we'd best ensure we have great teachers to meet them. Thanks very much.