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The Economist Gets It Wrong

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I'm normally a fan of The Economist's sober and often witty take on life. However, the article below really grated, it seems like a text-book-wishful-thinking A-level type response to one of the most important issues facing the UK and its future. Yes, making things that you can drop on your toe is more value added than giving someone a haircut.

JY

[Mods: pls feel free to move to OT once it's been seen.]

The great jobs switch

Sep 29th 2005

From The Economist print edition

The fall in manufacturing employment in developed economies is a sign of economic progress, not decline

THAT employment in manufacturing, once the engine of growth, is in a long, slow decline in the rich world is a familiar notion. That it is on its way to being virtually wiped out is not. Yet calculations by The Economist suggest that manufacturing now accounts for less than 10% of total jobs in America. Other rich countries are moving in that direction, too, with Britain close behind America, followed by France and Japan, with Germany and Italy lagging behind (see article).

Shrinking employment in any sector sounds like bad news. It isn't. Manufacturing jobs disappear because economies are healthy, not sick.

The decline of manufacturing in rich countries is a more complex story than the piles of Chinese-made goods in shops suggest. Manufacturing output continues to expand in most developed countries—in America, by almost 4% a year on average since 1991. Despite the rise in Chinese exports, America is still the world's biggest manufacturer, producing about twice as much, measured by value, as China.

The continued growth in manufacturing output shows that the fall in jobs has not been caused by mass substitution of Chinese goods for locally made ones. It has happened because rich-world companies have replaced workers with new technology to boost productivity and shifted production from labour-intensive products such as textiles to higher-tech, higher value-added, sectors such as pharmaceuticals. Within firms, low-skilled jobs have moved offshore. Higher-value R&D, design and marketing have stayed at home.

All that is good. Faster productivity growth means higher average incomes. Low rates of unemployment in the countries which have shifted furthest away from manufacturing suggest that most laid-off workers have found new jobs. And consumers have benefited from cheap Chinese imports.

Yet there is a residual belief that making things you can drop on your toe is superior to working in accounting or hairdressing. Manufacturing jobs, it is often said, are better than the Mcjobs typical in the service sector. Yet working conditions in services are often pleasanter and safer than on an assembly line, and average wages in the fastest-growing sectors, such as finance, professional and business services, education and health, are higher than in manufacturing.

A second worry is that services are harder to export, so if developed economies make fewer goods, how will they pay for imports? But rich countries already increasingly pay their way in the world by exporting services. America has a huge trade deficit not because it is not exporting enough, but because American consumers are spending too much.

A new concern is that it is no longer just dirty blue-collar jobs that are being sucked offshore. Poor countries now have easier access to first-world technology. Combined with low wages, it is argued, they can make everything—including high-tech goods—more cheaply. But that's only partly true. China's comparative advantage is in labour-intensive industries; and a basic principle of economics, proven time and again, is that even if a country can make everything more cheaply, it will still gain from specialising in goods in which it has a comparative advantage. Developed economies' comparative advantage is in knowledge-intensive activities, because they have so much skilled labour. For years to come, China will be more likely to assemble the best computers than to design them.

Employment in rich countries will have to shift towards higher skilled jobs to maintain economic growth. Countries that prevent this shift taking place risk being left behind. Rather than block it, governments need to try to ameliorate the pains which change inflicts by, for example, retraining or temporarily helping those workers who lose their jobs.

People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer.

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I'm normally a fan of The Economist's sober and often witty take on life. However, the article below really grated, it seems like a text-book-wishful-thinking A-level type response to one of the most important issues facing the UK and its future. Yes, making things that you can drop on your toe is more value added than giving someone a haircut.

[Mods: pls feel free to move to OT once it's been seen.]

No, making manufactured goods is lower value-added than services. With services, the input costs are generally negligible, so nearly 100% of the value of the transaction is value added. With manufacturing, materials costs are often substantial, so a much smaller percentage of value is added.

The Economist article you quote looks absolutely correct to me.

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"People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer."

What a load of rubbish. How do they so called economists get to print this sort of sh.it. America produces more produce now than it ever did in 1820. Yes, there are far less people employed, but the point is the USA still produces more food stuff than it ever did in 1820 on it's own land with less people.

Manufacturing, and its associated technologies, are being transferred from USA to Mexico, China etc. THAT IS IT - IT's GONE! Can you see the difference?

Comparing manufacturing to agriculture in the USA is totally off base.

Edited by Pluto

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It would be OK if we replaced our exports with exports from our service industry but by their very nature this is difficult and there's only so much insurance we can 'export', not forgetting tourism is now classed as an export :)

We've done a good job of destroying our industrial exports but we haven't replaced them with anything, hence our whopping trade deficits, any economist who claims ignorance when it comes the balance of payments is fooling himself. Say what you like about the state of play in Germany but what cannot be ignored is their great trade surpluses year after year after year, we're exactly the same... in reverse.

If we replaced our manufacturing core with insurance and invisible exports then would it matter so much? No, but we haven't done that.

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Thing about Imports is, you generally need Exports (in whatever form) to pay for them,

Now when we are a country that has little/no exports, were is the money coming from to pay for these imports?

Oh yeah, just remembered, we get the money for these imports via the fabled "Money Tree". Money which grows on trees-er-i mean houses, so were allright coz house prices never go down, only upwards dont they? :rolleyes:

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No, making manufactured goods is lower value-added than services.

er, really? Where do you think wealth comes from ultimately?

With services, the input costs are generally negligible,

You seem to be ignoring any intellectual property, investment in education and training, rent, advertising etc.

so nearly 100% of the value of the transaction is value added.

Wrong, see above.

With manufacturing, materials costs are often substantial, so a much smaller percentage of value is added.

Again you ignore the IP (intellectual property) that went into the design and production process. Yes, assembly line jobs can be mundane, but there is a lot more to manufacturing than the guys and girls on the shop floor. The point is if the UK stops making things that the rest of the world wants, you can forget any further growth - the rest of the world won't need the UK's "services" soon.

The Economist article you quote looks absolutely correct to me.

I think you need to THINK.

JY

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This is the first time I have ever read a printed news article suggesting a decline in manufacturing in - any - country is actually postive.

What about all the industries that support manufacturing?

Transport, Engineering, Accounting, Banks, Colleges, the local cafe, etc. etc.

You want to see what happens to a community when manufacturing leaves?

Try Detroit and Youngstown in the USA; or sheffield in the UK.

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Think of the economy as a simple business, if you are continually buying paper anything clips to computers but never actually produce any output to sell then eventually you or the bank will pull the plug.

It really is that simple. Our invisible earnings may end up being just just that, invisible and offshored just like manufacturing and trade based earnings. One thing that is often forgotton s the wider influence and income generation that goes alongside manufacturing - nearly every type of commercial activity is involved in the process - from everything to the utilisation of land/buildings and their upkeep to all the softer skills such as managemnt, design and development, accounting, advertising, the list is endless.

There are more serious issues - what are the long term security and sustainability issues if you are unable to make your own product, generate your own power and grow your own food? Pretty damn serious in the wrong circumstances.

Edited by OnlyMe

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This is the first time I have ever read a printed news article suggesting a decline in manufacturing in - any - country is actually postive.

What about all the industries that support manufacturing?

Transport, Engineering, Accounting, Banks, Colleges, the local cafe, etc. etc.

You want to see what happens to a community when manufacturing leaves?

Try Detroit and Youngstown in the USA; or sheffield in the UK.

I can accept the argument for retaining some manufacturing & farm jobs for strategic reasons.

But the Economist is spot on with this article.

If you guys don't agree, go back and read "Wealth of Nations".

It's fundamental economics.

Edited by BandWagon

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I can accept the argument for retaining some manufacturing & farm jobs for strategic reasons.

But the Economist is spot on with this article.

If you guys don't agree, go back and read "Wealth of Nations".

It's fundamental economics.

Please don't be patronising. :)

What do you think the UK's current and future COMPARATIVE ADVANTAGE is then?

JY

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"People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer."

What a load of rubbish. How do they so called economists get to print this sort of sh.it. America produces more produce now than it ever did in 1820. Yes, there are far less people employed, but the point is the USA still produces more food stuff than it ever did in 1820 on it's own land with less people.

Manufacturing, and its associated technologies, are being transferred from USA to Mexico, China etc. THAT IS IT - IT's GONE! Can you see the difference?

Comparing manufacturing to agriculture in the USA is totally off base.

Read the article. Manufacturing output in the US is increasing, not reducing. It's only manufacturing employment that is falling, due largely to technological improvements in the manufacturing processes, not Chinese imports. It's exactly like what happened to agriculture, where an ever-shrinking workforce produced an ever-increasing output.

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Please don't be patronising. :)

What do you think the UK's current and future COMPARATIVE ADVANTAGE is then?

JY

The future improvements in the well-being of people on this planet are going to come from improvements in medicine and technology.

Finding cures for AIDS, cancer, many other diseases. Finding cheaper and better sources of energy that will preserve the planet and our chances of surviving.

Getting rid of poverty and the war and destruction that it causes.

We needs mathematicians, scientists, biologists, doctors.

That's where the future lies, not in making car tyres.

Edited by BandWagon

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Guest magnoliawalls
I can accept the argument for retaining some manufacturing & farm jobs for strategic reasons.

But the Economist is spot on with this article.

If you guys don't agree, go back and read "Wealth of Nations".

It's fundamental economics.

Bandwagon,

Can you explain why it is 'fundamental economics' and what this Economist article has to do with Adam Smith?

;)

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I can accept the argument for retaining some manufacturing & farm jobs for strategic reasons.

But the Economist is spot on with this article.

If you guys don't agree, go back and read "Wealth of Nations".

It's fundamental economics.

Actually you wouldn't like what Adam Smith has to say on such matters, see his talk of "balance of trade" in Book IV.

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The future improvements in the well-being of people on this planet are going to come from improvements in medicine and technology.

Hmm. Medicine and Technology: sounds like forms of design and manufacturing to me i.e. making tangible goods. A far cry from haircuts, accountancy and McJobs.

Don't you think China might be able to do a lot of these things without our help? So where is the UK's comparative advantage?

What does the UK do uniquely better than the rest of the world? (Other than create exotic financial instruments and flog them to dumb consumers.)

JY

The Economist is very misleadingly titled.

It's like Socialist Worker calling itself The Weekly Politics Review.

The Economist should really be called Voodoo Economics or Neo-liberal Economist or Globalists' Digest.

COAB

I'm interested in broadening my reading - do you recommend any journals/books?

JY

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Read the article. Manufacturing output in the US is increasing, not reducing. It's only manufacturing employment that is falling, due largely to technological improvements in the manufacturing processes, not Chinese imports. It's exactly like what happened to agriculture, where an ever-shrinking workforce produced an ever-increasing output.

Personally I have a lot of doubt over what is actually being reflected in the stats.

If a company imports $70m of components, sub-assemblies, packaging, etc and shoves them all together with a US name on the front and flogs them for $100m what figure gets stuck down on the bottom line for manufacturing output?

What about the huge trade deficit?

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Hmm. Medicine and Technology: sounds like forms of design and manufacturing to me i.e. making tangible goods. A far cry from haircuts, accountancy and McJobs.

Don't you think China might be able to do a lot of these things without our help? So where is the UK's comparative advantage?

What does the UK do uniquely better than the rest of the world? (Other than create exotic financial instruments and flog them to dumb consumers.)

Have a look at medical technology. The comparative advantage lies in the knowledge.

Making the drugs is usually the cheap part, it's the development and testing of the drugs where the costs lie.

The added wealth comes from the research that went in to creating these drugs.

That explains American's obsessession with their patents, the need to protect that advantage.

China has a totally different philosophy regarding the rights of the individual balanced against society.

Many jobs that are welcomed in China would never be allowed in the UK (try mining asbestos).

We have practically no comparative advantage in manufacturing against China.

We need to look in other places.

Edited by BandWagon

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I agree, the article has a distinctly 'amateur' sound to it, as if its from a GCSE economics essay or perhaps being spouted by someone down the pub who also thinks house prices will keep rising and Gordon is a prudent genius...

Edited by tonification

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Actually you wouldn't like what Adam Smith has to say on such matters, see his talk of "balance of trade" in Book IV.

Here's a quotation from the bit of Adam Smith that you linked to:

If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.

That is exactly what the Economist article is saying, so it is in wholehearted agreement with Adam Smith.

Edited by zorn

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BandWagon,

Have a look at medical technology. The comparative advantage lies in the knowledge.

Making the drugs is usually the cheap part, it's the development and testing of the drugs where the costs lie.

The added wealth comes from the research that went in to creating these drugs.

Again this is a sector with a bit of a problem - many of the best sellers are going off-patent, development costs are increasing and arguably the scope for creating new drugs (a massive breakthrough in gene therapy aside) is dwindling. There just isn't the constant stream stream blockbuster drugs that there used to be.

China (with the right invesment) can take the off-patent market too if it wishes.

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Again you ignore the IP (intellectual property) that went into the design and production process. Yes, assembly line jobs can be mundane, but there is a lot more to manufacturing than the guys and girls on the shop floor. The point is if the UK stops making things that the rest of the world wants, you can forget any further growth - the rest of the world won't need the UK's "services" soon.

I think you need to THINK.

Design is not manufacture. If you want to see the future, read the packaging on any Apple product: "Designed by Apple in California; manufactured in Taiwan". The high value design jobs are largely staying in the West -- and when China and India have their own top designers, their currencies and salaries will have increased to a level where their manufacturing is not so competitive as it is now, and the cheap manufacturing sweatshops will be elsewhere.

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Design is not manufacture. If you want to see the future, read the packaging on any Apple product: "Designed by Apple in California; manufactured in Taiwan". The high value design jobs are largely staying in the West -- and when China and India have their own top designers, their currencies and salaries will have increased to a level where their manufacturing is not so competitive as it is now, and the cheap manufacturing sweatshops will be elsewhere.

You're saying that when ALL the 2.5 billion people of China and India reach a similar wealth per capita as the West, they lose their competitive advantage. I agree. But that is a big 'when' - at least a century away. And 2.5 billion extra Western-style consumers will destroy the planet anyway, so its irrelevant.

Edited by tonification

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Design is not manufacture. If you want to see the future, read the packaging on any Apple product: "Designed by Apple in California; manufactured in Taiwan". The high value design jobs are largely staying in the West -- and when China and India have their own top designers, their currencies and salaries will have increased to a level where their manufacturing is not so competitive as it is now, and the cheap manufacturing sweatshops will be elsewhere.

When Chinese designers have to earn enough to say afford a £180K average house to live in whilst designing for their company then you will have some sort of parity , until then the skills and work will STILL exit the UK and elsewhere in the west.

Then agan it looks like the Chinese are NOT going to let that situation occur - they have already very forcefully stopped speculation in their own housing market and may well do more if they think it will compromise their competitive position.

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China (with the right invesment) can take the off-patent market too if it wishes.

And they will, rather than be beholden to the West for their health needs.

I think the West over-estimates its comparative advantage in IP (research and design) - The Economist says it will be a very long time before China designs and builds the best computers - I'm not so sure.

JY

Design is not manufacture. If you want to see the future, read the packaging on any Apple product: "Designed by Apple in California; manufactured in Taiwan". The high value design jobs are largely staying in the West -- and when China and India have their own top designers, their currencies and salaries will have increased to a level where their manufacturing is not so competitive as it is now, and the cheap manufacturing sweatshops will be elsewhere.

Actually the design for the latest generation Apple iPods was done in India at a fraction of Cupertino rates.

Keep up.

JY

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