Australia has immense natural, financial and scientific wealth, but has failed to turn enough of it into productive industries, skills and long-term national capability.

Australia is one of the world’s richest nations in natural resources. We have strong democratic institutions, an educated population, world-class researchers and one of the largest pools of retirement savings on earth. Yet we continue to rely heavily on exporting raw materials, importing advanced technologies, borrowing against land and using population growth to sustain demand. We are asset rich but capability poor.

For four decades, governments have largely assumed that open markets and private investment would naturally produce a more sophisticated economy. In some areas they have. But overall, Australia has become increasingly dependent on property, mining rents and consumption while manufacturing has declined, research translation has remained weak, productivity has stagnated and too much capital has flowed into existing assets rather than new productive industries.

The choice, however, is not between returning to 20th-century protectionism and continuing with market liberalism. Australia needs something different: a capability state.

Instead of asking only how markets can become more efficient, a capability state asks a deeper question: what must Australia become capable of doing?

This changes the focus of economic policy. Instead of celebrating GDP growth, population growth or rising asset values, success is measured by whether the nation becomes better able to design, manufacture, innovate, educate, care, restore ecosystems and respond to future shocks.

An economy can become larger simply by adding more people, building more houses and extracting more resources. That does not necessarily make it stronger. True capability growth occurs when a country develops greater technological competence, stronger institutions, more skilled people and higher-value industries that improve living standards over the long term.

Australia has pursued developmental policies before. The post-war settlement built railways, electricity systems, technical education and a diversified manufacturing base. But........

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