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Can An Economy Succeed Without A Big Manufacturing Base?

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On a weak news Saturday, a very engaging debate between 2 brilliant economists:

Topic: Can an economy succeed without a manufacturing base?

Source: http://www.economist.com/debate/days/view/714

The moderator's opening remarks

Jun 28th 2011 | Patrick Lane

Welcome to the latest of The Economist's online debates. Our topic for the next few days is one that has divided economic practitioners and commentators for as long as anyone can remember: how important is manufacturing? This old question has had a new lease of life since the financial crisis of 2007-08. To some, this is a cautionary tale of the celebration of finance and the neglect of manufacturing. Some economies that had seemingly come to rely on financial services, such as America's and Britain's, have struggled since. Meanwhile, Germany, a manufacturing power almost written off a few years ago, has performed strongly; and China, the world's workshop, has continued to clock up giddying growth rates. There is more to services than finance, of course; but those who believe that making things is the basis of economic prosperity may see in all this a degree of vindication.

Others may say that the truth is more complicated. Japan, another place where prosperity has been built on making (and exporting) things, has stagnated for 20 years. And while China's boom has owed much to manufacturing, India has been enjoying a largely service-based surge. Look over a longer period than the few years since the financial bust, and you see that most rich economies have shifted the bulk of economic output (and to a greater degree, employment) away from manufacturing and towards services, and have done pretty nicely. Maybe manufacturing is not the be-all and end-all. And people on both sides, as well as neutrals, may wonder where manufacturing ends and services begin. Makers of many things, from aircraft engines to cars to telephone networks, will tell you that they do not simply make and sell fancy combinations of metal and plastic: customers want advice, design and maintenance too, as part of the deal. Manufacturing and services are complements not substitutes.

The chief protagonists in our debate are distinguished economists: Ha-Joon Chang, of Cambridge University, who is proposing the motion, and Jagdish Bhagwati, of Columbia University, who is opposing it. Mr Chang starts by noting that even apparently service-based economies in fact have strong manufacturing foundations. Much of the shift away from manufacturing, he argues, reflects inherently faster productivity growth in that sector; some of the measured productivity growth in services, notably retailing, reflects lower quality and is thus more apparent than real. Deindustralisation and slow manufacturing productivity growth hurt a country's ability to export and eventually lead it into balance-of-payments difficulties. As for tradable services, they too depend in the long run on a strong manufacturing base.

Mr Bhagwati, by contrast, believes that manufacturing has been fetishised by economists since Adam Smith. Technical progress is not confined to manufacturing: indeed, he says, there is evidence that retailing is the most progressive sector. Nor is it plain that progress in services depends on that in manufacturing in the same country. As for the financial crisis, he argues, in effect, that the baby should not be hurled out with the bathwater: though some financial "innovation" was destructive, some has surely done some good.

This promises to be a lively debate. There are conceptual arguments to be played out. How, for example, is manufacturing defined? What constitutes a "base": having factories on home soil, or keeping hold of intellectual property? What difference does it make if supply chains are spread around the world? And in a debate with such a long history, there are surely plenty of data to be brought to bear too. These are not just questions for Mr Chang or Mr Bhagwati, or for the guest commentators who will contribute later. They are questions for you, too, the readers on the "floor" of our virtual debating chamber. I do hope that you will join in—and that you enjoy the debate.

The proposer's opening remarks

Jun 28th 2011 | Ha-Joon Chang

I propose that the state of a nation's manufacturing base (its size and competitiveness) is the most important determinant of its prosperity.

Hearing this motion, some may ask: how about countries like Switzerland and Singapore, which have become rich through services, like finance, tourism and trading; don't they show the viability of service-based prosperity?

Actually, they show the exact opposite. According to UNIDO data, in 2002, Switzerland had the highest per head manufacturing value added (MVA) in the world—24% more than that of Japan, the second highest. In 2005, it ranked second, after Japan. Singapore ranked third. So these supposed "model" service-based economies are in fact two of the strongest manufacturing nations in the world.

Of course, there are some countries, such as Australia, that maintain high living standards without a big manufacturing sector, thanks to exceptional natural resource endowments. But most other countries are not so lucky. Without a substantial and productive manufacturing base, it is impossible for them to attain high living standards.

There is truth in the argument that above a certain level of development, countries become "post-industrial", or "deindustrialised". But that is only in terms of employment—the falling proportion of the workforce in engaged in manufacturing. Even the richest economies have not really become post-industrial in terms of their production and consumption.

From expenditure data in current (rather than constant) prices, it may appear that people in rich countries are consuming ever more services, but that is mainly because services are becoming ever more expensive in relative terms, thanks to structurally faster productivity growth in manufacturing.

By their very nature, many service activities are inherently impervious to productivity increases. In some cases, the very increase in productivity will destroy the product itself. If a string quartet trots through a 27-minute piece in nine minutes, would you say that its productivity has trebled? For some other services, the apparently higher productivity may be due to the debasement of the product. A lot of the increases in retail service productivity in countries like America and Britain have been a result of lowering the quality of the retail service itself—fewer shop assistants, longer drives to the supermarket, lengthier waits for deliveries, etc.

There are some service activities, such as finance, telecommunications and transport, which have had fast productivity growth in recent periods—sometimes even faster than those of some sub-sectors of manufacturing. However, these are mostly "producer" services, for which the main customers are manufacturing firms, so their growth is in large part dependent on the vitality of the manufacturing sector. Moreover, when it comes to financial services, the 2008 financial crisis has revealed that much of the recent productivity growth had been due to "financial innovations" that obscured (rather than genuinely reduced) the riskiness of financial assets, thereby allowing the financial sector to raise its productivity at an unsustainable rate. With the forthcoming tightening of financial regulation across the world, productivity growth in financial services will significantly slow down.

But, one may ask, if de-industrialisation is due to the very dynamism of a country's manufacturing sector, isn't it a good thing?

Not necessarily. The fact that de-industrialisation is mainly caused by the comparative dynamism of the manufacturing sector vis-à-vis the service sector does not tell us anything about how well it is doing compared with its counterparts in other countries. If a country's manufacturing sector has slower productivity growth than its counterparts abroad, it will become internationally uncompetitive, leading to balance-of-payments problems in the short run and falling standards of living in the long run. In other words, de-industrialisation may be accompanied by either economic success or economic failure.

Even if it is of the "successful" variety, deindustrialisation is likely to have a negative effect on a country's balance of payments because services are inherently more difficult to export. At the root of the low "tradability" of services lies the fact that many require their providers and consumers to be in the same location. No one has yet invented ways to provide long-distance hairdressing or house cleaning. Of course, this problem will be solved if the service provider (the hairdresser or the cleaner in the above examples) can move to the customer's country, but that in most cases means immigration, which most countries restrict heavily.

Given this, a rising share of services in the economy means that the country, other things being equal, will have lower export earnings. Unless the exports of manufactured goods rise disproportionately, the country will not be able to pay for the same amount of imports as before. If its de-industrialisation is of a negative kind accompanied by weakening international competitiveness, the balance-of-payments problem could be even more serious.

To be sure, not all services are equally non-tradable. There are some high-value producer services that are highly tradable, such as banking, consulting and engineering. However, even in Britain, which is most advanced in the exports of these services, the trade surplus they generate is well below 4% of GDP, just enough to cover the country's manufacturing trade deficits. In the case of America, the surplus is less than 1% of GDP, nowhere near enough to make up for its manufacturing trade deficits, which are also around 4% of GDP. America has been able to maintain such a large manufacturing trade deficit only by borrowing heavily from abroad.

Moreover, a country's ability to export many of these producer services cannot be maintained in the long run without a strong manufacturing sector. In services like engineering and design, insights gained from the production process are crucial. Given this, a weakening manufacturing base will eventually lead to a decline in the quality, and exportability, of these services.

While a simplistic "manufacturing good, services bad" viewpoint is unwarranted, we undervalue the manufacturing sector at our peril. It has been at the foundation of human material, and social, progress at least since the Industrial Revolution and it is likely to remain so in the foreseeable future.

The opposition's opening remarks

Jun 28th 2011 | Jagdish Bhagwati

Bill Emmott, a former editor of The Economist, is reputed to have remarked wittily about the "manufactures fetish" that most people think that unless one makes things that can be dropped on one's foot, they are not worth making. He would have been wittier if he had changed it to dropping them on one's foe's foot.

As is often the case, this fetish has the highest pedigree: no less than Adam Smith himself. We know of course that Smith is often misunderstood, as when he is condemned by liberals (in the American, not the Manchester School, sense) as an unqualified proponent of laissez-faire, whereas he qualified his support for the division of labour by arguing that specialisation on the narrowest of tasks and endless repetition of them would turn workers into morons and that good governance supplying education to offset this was necessary.

But, make no mistake, the founder of economics indeed dropped a brick, even a boulder, when he propounded the fallacy that I have called the manufactures fetish. In Book II of "The Wealth of Nations", he condemned as unproductive the labours of "churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc." Perhaps, with Shakespeare, he may be right about lawyers; but surely not about Vanessa Redgrave, Monty Python, Salman Rushdie and Kiri Te Kanawa.

But if Smith's error, which prompted the Soviets to omit services from their computation of GNP, is now relegated to the history books, the manufactures fetish continues to exercise a "fatal attraction" and resurrects itself periodically, but with different rationales.

The most influential revival was by my Cambridge teacher, Lord Kaldor, who was one of the most eminent economists of his generation. He raised an alarm in the mid-1960s over British "deindustrialisation". He considered manufacturing to be more technically progressive and contrasted it with services, which he regarded as inefficient and technologically stagnant. I guess his view of services was formed by casual empiricism: stepping out of an Oxbridge college, one often saw small shops selling Cadbury's chocolates for a couple of shillings and then, turning the corner, one saw small, traditionally outfitted post offices. Lord Kaldor even managed to persuade the chancellor of the exchequer to impose a Selective Employment Tax in 1966—reversed in 1973—which taxed employment in services (with an amusing exemption for service at the High Table where dons like Lord Kaldor and me ate our sumptuous dinners).

The problem was that Lord Kaldor had not registered the fact that modern services were technologically quite progressive. Indeed, the recent work of Dale Jorgenson of Harvard, the most prominent expert on measuring technical change, shows that retailing is the most progressive sector. (This is aside from the problem that, if the returns to better technology accrue to the firm, there is no reason to subsidise: one needs to establish an externality to advocate a subsidy. Besides, since Lord Kaldor believed that manufacturing output was the source of the alleged externality, the theory of optimal intervention also tells us that the appropriate subsidy would have to be related to output, not to labour.)

The same fallacy was to resurface when a similar but within-manufacturing argument was made later in America that semiconductor chips should be favoured over potato chips as the manufacture of the former was considered technically advanced. But when a reporter visited a factory making Pringles, the potato chips that nest perfectly on one another in the little boxes in the mini-bars of upscale hotels—unlike the uneven ones that our grandmothers made—he found automated production, whereas semiconductors turned out to be manufactured in a mindless fitting onto circuit boards. Reality was the opposite of the rhetoric.

The Kaldor worry about deindustrialisation resurfaced two decades later in 1987 when two political scientists from the University of California at Berkeley, Stephen Cohen and John Zysman, argued that "manufacturing matters" because, without it, other activities including services would be destroyed as they were in a tight complementarity production wise. They asserted that if you offshore "the tomato farm, you offshore or close the ketchup plant ... No two ways about it". I responded with sarcasm: "As I read the profound assertion about the tomato farm and the ketchup plant, I was eating my favourite Crabtree & Evelyn vintage marmalade. It had not occurred to me that England grew its own oranges."

But if Lord Kaldor did not succeed for long in Britain, and Cohen and Zysman did not even get off to a start in America, the most recent return of the manufactures fetish, most notably in America but also in a milder version in Britain, may turn out to be more potent. The push for manufacturing has come in the aftermath of a devastating financial crisis, which exposed the asymmetry between financial and non-financial innovation. The latter poses problems of what Schumpeter called "creative destruction": ie, how to prevent Luddite reactions. But financial innovation leads to the possibility of what I have called "destructive creation": ie, a huge disruption of the financial system as we have just experienced. The phrase "innovation" lulls us into the false equation of financial and non-financial innovation. Of course, Paul Volcker's remark that the only useful financial innovation was the invention of the ATM is witty but it is not good economics: some financial innovation has surely done good just as Milton Friedman showed that speculation can be stabilising.

But the fact remains that many today regard the financial sector as not just unproductive, but also counter-productive. This, in turn, has fed the revival in the public domain of the view that therefore manufactures must be supported. But this is a non sequitur. Even if you wished to reduce the size of the financial sector, you would not have to go into manufacturing. DHL and Fedex are, to recall Mr Jorgenson, very innovative; we do not have to encourage cement mixers. Non-financial services are no sweat, and produce little sweat, compared with a great deal of manufacturing.

Finally, at least in America, the manufacturing sector attracts a lot of subsidies. States compete to attract manufacturing firms, with tax holidays, land grants and much else; few states do that for services or agriculture. Do we need to support the manufacturing sector even more, just because of shoddy arguments?

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If you're creating a product that someone else wants to buy, then I'd say that's manufacturing.

But by that definition virtually everything would be manufacturing, even a restaurant.

I think software creation is usually consider service. No?

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If you're creating a product that someone else wants to buy, then I'd say that's manufacturing.

I've done a little Googling:

Services

Products of economic activity that you can’t drop on your foot, ranging from hairdressing to websites. In most countries, the share of economic activity accounted for by services rose steadily during the 20th century at the expense of AGRICULTURE and MANUFACTURING. More than two-thirds of OUTPUT in OECD countries, and up to four-fifths of employment, is now in the services sector.

http://www.economist.com/research/economics/alphabetic.cfm?letter=S#services

Service definition

The generic clear-cut, complete and concise definition of the service term reads as follows:

A service is a set of singular and perishable benefits

  • delivered from the accountable service provider, mostly in close coaction with his service suppliers,

  • generated by functions of technical systems and/or by distinct activities of individuals, respectively,

  • commissioned according to the needs of his service consumers by the service customer from the accountable service provider,

  • rendered individually to an authorized service consumer at his/her dedicated trigger,

  • and, finally, consumed and utilized by the triggering service consumer for executing his/her upcoming business or private activity.

http://en.wikipedia.org/wiki/Service_%28economics%29#Service_definition

Edited by Tired of Waiting

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The first argument is about why manufacturing is required in an economy, the opposing argument is some waffling about what some people said about manufacturing and that they are wrong, without really saying why. A solid 1-0 to Mr Chang, I think.

My personal view is - there are Primary, Secondary and Tertiary industries and each one follows from the other. This is a universal rule that will always apply. For an economy with all three industries, all that is required are customers for it to function and sustain itself. An economy with only tertiary industry will always require other economies/countries to do the other bits and hence are much less independent - this is of course the method (or aim?) of our current globalisation. One could say that it weakens individual countries, makes them less independent, leading to riches accruing not to countries or economies, but to the directors of the globalistaion itself.

Edited by shipbuilder

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But by that definition virtually everything would be manufacturing, even a restaurant.

I think software creation is usually consider service. No?

No it wouldn't. Walking someone's dog or cutting their hair or doing their legal stuff or their taxes for them is obviously only a service.

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Funnily enough I was thinking about the term 'software engineers' earlier.

Clearly some elements are services like Amazon involving retail and distribution.

It is the function that is key not whether it happens to be on the internet and requiring an IT guy to write something.

Absolutely.

Edited by shipbuilder

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3 days later, they rebutted each other's opening remarks.

(Sorry if this is getting a bit long, but I think it is worth it - well, for those interested in the topic, of course.)

Source: http://www.economist.com/debate/days/view/718

The moderator's rebuttal remarks

Jul 1st 2011 | Patrick Lane

We are now in the second phase of our debate, in which Ha-Joon Chang and Jagdish Bhagwati set out their rebuttals to the opening arguments. They are joined today by Geoffrey Owen, of the London School of Economics; and before the final arguments appear Will Hutton, of the Work Foundation, will also contribute.

The rebuttals are perhaps a little more technical than the opening remarks, but in essence, like the whole debate, they are exchanges about the sources of economic growth. Does productivity growth stem largely from manufacturing, or can other sectors provide it just as readily? Does technical progress come mainly from improvements in the making of things? Mr Chang argues yes: he takes issue with Mr Bhagwati's comparison of two types of chip, silicon and potato. The greater sophistication of semiconductor-making, he says, cannot be denied. For his part, Mr Bhagwati notes that as economies develop rising incomes per person are associated with a greater share of manufacturing in GNP—but argues that causation runs from growth to manufacturing rather than the other way.

Our two debaters also argue over retailing: evidence for its dynamism is not clear-cut, says Mr Chang, and retailing depends on manufacturing anyway; Mr Bhagwati replies that Mr Chang has missed the importance of online shopping, with the variety and improvement in service that it offers.

Both have much more to say. Plenty of other points could be drawn out of their rebuttals and the lively floor debate, but I will confine myself to two. One is geography. The connections between sectors cross borders. Consider the exchange between two speakers from the floor: one, writing as heu49fEZSm, remarks that Hong Kong is doing pretty well with a smallish manufacturing sector; another, labelled FbGDuwvrgo, retorts that that may have something to do with the huge workshop next door.

Another is the division of the economy into manufacturing and other sectors—which several floor speakers consider as good as meaningless. Most of our debate has focused on manufacturing and services, but both our debaters remind us that there is another, much older part of the economy, agriculture, where technological change has also carried on apace. For Mr Bhagwati, hybrid corn, the green revolution and genetic modification are reminders that "we cannot afford to think only of manufacturing as the key to prosperity". For Mr Chang, the success of the Netherlands, a small place, as an agricultural exporter reflects the prowess of its chemical and electronics industries, which has enabled the Dutch to "industrialise" agriculture. Fertile ground for debate, you may say.

The proposer's rebuttal remarks

Jul 1st 2011 | Ha-Joon Chang

Jagdish Bhagwati, with his characteristic flair, has made an engaging case against what he calls the "manufacturing fetish".

Unfortunately, his designated leading opponents are all ghosts from the past, so to speak. Nicholas Kaldor was writing in the 1960s, while Stephen Cohen and John Zysman published their book in 1987. The literature has moved on quite a lot since then.

In particular, thanks to the pioneering work of Robert Rowthorn and his associates, most experts now agree that the central force behind deindustrialisation is the relatively higher productivity growth in manufacturing. Dale Jorgenson, who Mr Bhagwati cites as someone whose data support his position, is no exception. This is a problem for Mr Bhagwati, because his argument hinges on denying that manufacturing has faster productivity growth.

Moreover, he is not even correctly characterising the "ghosts". He "guesses" that Kaldor formed an unfavourable view of services because he saw only the "mom-and-pop retail shops" and "traditionally outfitted post offices" of a sleepy university town. However, Kaldor was a careful applied economist, advising governments all over the world. I cannot speak for the dead, but it is highly implausible and deeply insulting to suggest that Kaldor based his argument on this kind of "casual empiricism".

If anyone is engaged in casual empiricism, it is Mr Bhagwati. For example, in trying to argue that potato chips are actually more high-tech than semiconductor chips—evidence against what he calls the within-manufacturing variety of the pro-manufacturing argument—he cites a reporter, according to whom "semiconductors turned out to be manufactured in a mindless fitting on to circuit boards" while Pringles potato chips were made through "automated production" (which, however, being done by a machine, must also be "mindless").

The reporter is probably describing—in a highly simplified manner—the "packaging" process, which is only the last, and the least sophisticated, part of semiconductor manufacturing. This is preceded by the "fabrication" process, which requires the handling of very high-purity materials and the use of very precise and expensive processes (including photolithography, etching, doping and dicing of silicon wafers). All this must occur in a "clean room" dampened against vibration and kept within narrow bands of temperature and humidity. And all this is even before we talk about the high-technology design and engineering involved. Pringles may use some high technology (the design process involves a super-computer), but there is simply no comparison between the two products in their technological contents.

If triumphantly declaring that "[r]eality was the opposite of the rhetoric" on the basis of an observation by an ill-informed reporter is not casual empiricism, I do not know what is.

Having said that, I agree with the point that Mr Bhagwati is trying to make here, albeit with completely wrong examples—that is, we cannot judge the technological characteristics of an activity simply by looking at the final product. Or, to put it differently, what matters is not what you make (or do, if it is a service activity) but how you make it (or do it).

Take the case of the Netherlands. Unbeknown to most people, it is world's third largest agricultural exporter, despite having little land (it has the world's fifth highest population density). This has been possible because the Dutch have "industrialised" agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world's most advanced chemical and electronics industries. In contrast, despite being the world's second most high-tech exporter (measured by the share of high-tech products in manufactured exports), the Philippines has only $2,000 per person income because it makes those products with other people's technologies.

Mr Bhagwati is right in saying that we should look into the technological processes behind a product, but the point is that we actually do so.

When we look at the detailed technological processes as well as the standardised quantitative indicators of different activities' technological contents and dynamism (eg, various productivity estimates, indexes of technological contents developed by Sanjaya Lall and others), we find that, on the whole, the manufacturing industry is more dynamic than the service industry. We also see that most of the more dynamic elements of the service industry are dependent on the manufacturing industry. The wholesale and retail trade sectors may be the most dynamic elements of the service sector (although this is only according to the Jorgenson studies and there are other studies that contradict that), but what are they moving around? Mostly manufactured products. Who are the "producers" in "producer services", another dynamic element of the service sector? Mostly manufacturers.

Having seen financial services implode, Mr Bhagwati is now trying to advance his pro-service line by arguing that countries can prosper on the basis of things like "DHL and Fedex" or, as he proposed elsewhere, "professional therapy, nursing and teaching". In doing so, he is seriously misleading the rest of us.

The opposition's rebuttal remarks

Jul 1st 2011 | Jagdish Bhagwati

Unfortunately, Ha-Joon Chang adds new errors to those that the proponents of the "manufacturing fetish" perpetrate. Let me concentrate on the principal ones.

First, he says that rich countries are generally manufacturing nations, and that (except for cases where there are "natural resource" endowments) "without a substantial and productive manufacturing base, it is impossible for them to attain high living standards". As it happens, whereas Mr Chang cites stray examples like Japan and Switzerland, we know from the work of Harvard development economist Hollis Chenery (American Economic Review, 1960) that increasing per person incomes are associated with a greater share of manufacturing in GNP. But several points must be made.

First, it is growth that is likely to cause the share of manufacturing to rise, rather than the other way around. I argued long ago (1997), in commenting on Chenery, that there are good analytical reasons to think that manufacturing will rise as a share of GNP as GNP grows. First, there is a "consumption bias" in favour of manufacturing: the income elasticity of demand has often been estimated to be in excess of unity for manufacturing. So, in a closed economy where production and consumption must match, production in favour of manufacturing must follow. But then there is also a "production bias". We know from general-equilibrium theory (the technical proposition is known as the Rybczynski theorem) that if manufacturing is capital-intensive, then capital accumulation will shift resources towards manufacturing and away from other activities. So, we have a perfectly good explanation for the Chenery finding.

Second, it is also important not to jump from a descriptive Chenery regression to prescription, as Mr Chang seems to do. When countries plan, for example, investment allocation, there is nothing that requires them to follow the Chenery regression as if they were trekkers closely following the footprints of the Abominable Snowman. Thus, within manufacturing, India opted to go for heavy industry, and many critics said that the historical evolution was from light manufacturing to heavy manufacturing. But that criticism was mistaken. If India wanted to raise the investment rate, and this required increased availability of machines, and the economy was closed at the margin as export earnings could not be increased, it followed that India would have to produce its own machines, no matter what descriptive regressions showed had happened earlier and elsewhere. India's decision turned out to be mistaken only because its assumed export pessimism was unwarranted.

Third, Mr Chang makes assertions about productivity increases in the retail sector which are way behind the curve. For instance, many of us today buy online, which offers a huge variety of products that even the large stores cannot carry and also prompt service. Mr Chang's complaints about fewer shop assistants and longer drives to the supermarket are increasingly matters that are behind us as the retail sector embraces modern technology.

Fourth, Mr Chang's notion that only producer services experience productivity change, and not services consumed by consumers like him and me, is also incorrect. For instance, a major growth sector today is medical tourism where the user goes to the provider. In all four modes of services that are now embodied in GATS (the General Agreement on Trade in Services), there is enormous potential and a growing trend. I have written several articles recently with Sandeep Madan to the effect that international transactions in medical services promise enough savings to America to eliminate the need for President Obama to increase taxes to finance Obamacare.

Fifth, this also means that Mr Chang's view that services will mean "lower export earnings" has no basis as a realistic appraisal shows that services are already becoming major items in world trade.

Sixth, I just do not see how he can justify his assertion that, without a manufacturing sector, quality and exportability of services cannot be maintained. If General Electric manufactures its turbines abroad, why can it not use that experience in providing, in production of some service in America, whatever know-how that is gained from the manufacturing operations undertaken elsewhere through transfer of necessary experienced personnel from overseas to home? This is the Cohen-Zysman fallacy that I noted in my opening statement.

Seventh, we know from hybrid corn and the green revolution that enormous technological change also occurs in agriculture, which Mr Chang largely ignores. Today, with the huge shortfall in agricultural production, we cannot afford to think only of manufacturing as the key to economic prosperity. With genetically modified (GM) crops representing massive technological change in agriculture, it is time for us to discount the notion that they are Frankenstein foods to be avoided regardless of scientific evidence. Else, we would be in danger of fearing an improbable Frankenstein and welcoming the Grim Reaper (as food production fails to match our needs).

Edited by Tired of Waiting

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Angels on the head of a pin shit.

The world is doomed unless it abandons the nonsensical 'growth' paradigm for one of sustainability.

Two economists in an argument. Just what the world needs right now.

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This is where Evan Davis came unstuck on his documentary last week.

His thesis was that as economies shift upmarket manufacturing goes out of the window to be replaced by design at front end and marketing at back end.

The UK was on the right track according to him, because we'd shifted manufacturing out.

This is tosh. If you think about BMW, in the UK we are unlikely to get their design work or much in the way of worldwide marketing. You just don't normally design, develop and prototype a car or other complex mechanical item thousands of miles from where it is being made, unless you're talking low-end countries manufacturing i.e. crap or low-tech products. Not talking Dyson here, which is actually pretty straightforward spannering, but high-end aerospace, electonics, autos, F1, rocket science stuff. High-end ones go back and forward from the factory floor to design and devt., and if they re oceans apart life isn t easy. And companies wanting to do their manufacturing on the cheap normally drag design the same way. The ability to make stuff is a direct function of design and development gone into it. We should be making margin on making stuff, like the Germans, not just designing and licensing it.

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This is where Evan Davis came unstuck on his documentary last week.

His thesis was that as economies shift upmarket manufacturing goes out of the window to be replaced by design at front end and marketing at back end.

The UK was on the right track according to him, because we'd shifted manufacturing out.

This is tosh. If you think about BMW, in the UK we are unlikely to get their design work or much in the way of worldwide marketing. You just don't normally design, develop and prototype a car or other complex mechanical item thousands of miles from where it is being made, unless you're talking low-end countries manufacturing i.e. crap or low-tech products. Not talking Dyson here, which is actually pretty straightforward spannering, but high-end aerospace, electonics, autos, F1, rocket science stuff. High-end ones go back and forward from the factory floor to design and devt., and if they re oceans apart life isn t easy. And companies wanting to do their manufacturing on the cheap normally drag design the same way. The ability to make stuff is a direct function of design and development gone into it. We should be making margin on making stuff, like the Germans, not just designing and licensing it.

That is because BMW is located in an advanced economy and can find the skilled design staff in Germany (home location).

Whereas MG a Chinese company can not so they design and market in the UK, maufacture the parts in China and then assemble in the UK.

http://www.bbc.co.uk/news/10317764

Same when Mercedes wanted to enter formula one did they do it in Germany no. First they bought a UK engine designer and Manufacturer Ilmoor, then they bought a complete formula one team with marketing, manufacuturing, Brawn. In this case Mercedes could not find the skilled staff in their home territory.

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this probably belongs on here from another thread about currency

i thiink its structural due to a mickey mouse service, selling bshit and govt spending economy, the only thing that will change it is real manufacturing/production be it technology based licence or not, a structural economic change away from services/finance and selling bshit of the last 25 years,

2iih7c6.jpg

Not suprisingly it went structural and fell off a cliff straight after GaTT and the intro of china and Maggie introduced her bshit service/finance economy nonsense , it then dropped as the uk went into recession (less spending). It only managed to a risible flatline during one of the biggest innovation bubbles in the 90s of which the UK played a sizeable part, and then the completely inept loony fckwit Brown carried on with the services nonsense without the luck of the tech boom the tories had. Youll also note it dropped in 08 (again recession induced) and it has spiked down again in 11(one among many potential forewarnings of an upcoming recession). so it can balance in recessions ie alot less private spending

In short i think the the economy can survive as long as everyone is willing to accept a hugely lower standard of living that comes without producing much of note, sorta like a 90s Poland which wont exactly help pension obligations or the welfare state or help to keep immigrants in the country to pay the pension obligations

Edited by georgia o'keeffe

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A lot of the time I use services in the pejorative sense as a description of those activities that don't add productivity. Most are obvious like hairdressers, estate agents, and any kind of financial innovation. Software may strictly be a service but it does, in theory at least, improve the productivity of the economy.

I imagine an economy of the future could do very well without manufacturing if it is knowledge based. Genetics, AI - that sort of thing.

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Depends what it is. Have you heard of Arm Holdings in Cambridge, England?

ARM make a lot less profit than the people making things from ARM chips. When I was working for a company using ARMs I believe they were making a few cents for every chip we sold, whereas we were making a few dollars.

Design work can be highly profitable relative to its costs, but that doesn't mean it's highly profitable at an absolute level. If I design something and license it to you for $0.10 a time and you sell ten million products a year making $10 profit on each one, then I have a nice income, but you have 99% of the profits.

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Can An Economy Succeed Without A Big Manufacturing Base?

If we define Manufacturing as something we can put on a ship and export, then I would say that an economy without a big manufacturing base can succeed in the short term as long as the economy with a big manufacturing base invests its trade surplus by buying debt in the other.

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To be pedantic, "Can an economy succeed with out a big manufacturing base?" logically, is a nonsense question.

If we are talking about the economy of an individual country, to answer yes, it would have to apply in all cases. It can't.

If we are talking about a single global economy, then clearly the answer is no as well.

Wealth is only created by creation or production - this gets back to my last post - the service sector can only ever spend wealth, it can never create it - if you want a service, you need to be able to offer something in exchange.

What we can say is that the economy of country A may be able to succeed without manufacturing as long as manufacturing and wealth creation is being done in country B and that country B wants country A's services.

However it's clear which country is in the stronger position.

Edited by shipbuilder

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But software is classed as services.

If software is services, then software engineers shouldn't be called engineers. Engineers create things.

If you are producing a product that can be sold, you're not in services. I think the idea that the product must be a physical one that can be 'dropped on your foot' is simply outdated.

One can physically interact with a piece of software. If one couldn't, electronic musicians, for example, would be having a difficult time.

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Depends what it is. Have you heard of Arm Holdings in Cambridge, England?

http://ir.arm.com/phoenix.zhtml?c=197211&p=irol-irhome

http://en.wikipedia.org/wiki/ARM_Holdings

What you don't seem to understand is that there are certain perculiarities specific to chip design and integrated circuitry that give ARM holdings a very large competitive advantage vs companies that don't license out/in their chip technology.

For circuitry built into consumer products power usage is paramount. By licensing out/in chip technology all-in-one integrated circuits can be used in place of discrete chips, which substantially lowers power usage. These perculiarities give the licensing model of arm holdings (as compared to companies that build and sell discrete chips) a competitive advantage that just doesn't exist in other industries. For most, having the design base away from the production facility does the exact opposite and lowers competitive advantage. What has been seen to happen time and time again is when production goes abroad, some years later the design aspect follows.

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If software is services, then software engineers shouldn't be called engineers. Engineers create things.

If you are producing a product that can be sold, you're not in services. I think the idea that the product must be a physical one that can be 'dropped on your foot' is simply outdated.

Financial engineering - another UK manufacturing success story!

I'll get my coat...

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The first argument is about why manufacturing is required in an economy, the opposing argument is some waffling about what some people said about manufacturing and that they are wrong, without really saying why. A solid 1-0 to Mr Chang, I think.

Took the words right out of my mouth. The first argument was very well put and had quantitative support added, the second argument was purely qualitative, emotional ******** without really saying anything of substance, just throwing out wild comparisons between things.

As for the reason our manufacturing base is so weak, it's mostly to do with the green belt problem where land has become very expensive, then add to that our very high taxes especially on business.

I was infuriated when the opening article pondered the question of whether owning intellectual property and manufacturing abroad was exactly the same as having the factories locally, he seemed to be implying it was exactly the same when the obvious reality is keeping the factories here provides a large number of high paying jobs.

I get the feeling that for our media channels and the middle class attitude generally in Britain is to remove the human equation and just look at pure profit and from this perspective it makes sense to manufacture abroad and sell items into our own local artifically high-cost economy. Considering how weak our economy is, there must be big incentives given to manufactures like tax free operation and free land.for factories.

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(...)

Wealth is only created by creation or production - this gets back to my last post - the service sector can only ever spend wealth, it can never create it - if you want a service, you need to be able to offer something in exchange.

(...)

Firstly, remember that the 2 most socially important activities in life are both services: health and education. Yes, they don't generate wealth immediately, or directly, they must be paid for by the tax-payers, but without them we would have middle-ages' levels of wealth.

And isn't scientific knowledge/know-how also service? From GM food to the IT industry, I think the wealth generated by knowledge part of it is probably greater than from the physical production of stuff.

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That is because BMW is located in an advanced economy and can find the skilled design staff in Germany (home location).

Whereas MG a Chinese company can not so they design and market in the UK, maufacture the parts in China and then assemble in the UK.

http://www.bbc.co.uk/news/10317764

Precisely, and which business model has the greatest longevity?

Which car would you buy?

Which Company would you invest in?

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Here again we come up against the problem with the old demarcation between 'services' and 'manufactrure'.

Whilst technicially correct, I would include health and education as part of investment, infrastructure. The things you need to provide that allow the private sector to flourish. No less important than roads. But you do need to direct them with that knowledge or they become their own beasts as ours have.

True services, I believe, are consumed such as haircuts or visiting a prostitute.

Yes, if we redefine service as everything that is superfluous and short-lived then we can conclude that services are unimportant. Though, this would be a silly debating technique, wouldn't it? ;)

Health and education are services. As most aspects of transport, in fact, since you mentioned it. Of course some company did manufacture the trains, and rails, but after they are in place, the transport service provided by the train operators is a service.

EDIT: And re the knowledge point. Someone earlier in this thread pointed out the paltry sums that ARM makes compared to the manufacturers who use their chips. I think that says a lot about the relative sums involved between knowledge and 'power'. The power of the aggregator, the client choosing the chips to go in their machines, the brand or retail owner.

Quite possible. I am not familiar with that.

And also, as someone else has pointed out, this is a great path for the middle classes because whilst it doesn't make that much in the overall scheme of things it makes much more per (highly educated) person and has the hassle of dealing with the dirty hands on workers with someone else.

Class?? Aren't you confusing intelligence and educational level with class? If so, I think this is a form of prejudice. (Though after the end of grammar schools meritocracy did go down considerably.)

(And declaring my perspective here: class-wise, I have "mixed heritage", working class/professional.)

.

Edited by Tired of Waiting

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Britain is the most advanced nation in the world for exporting services. And it seems our economy sucks compared to nations that just went for boring old manufacturing.

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Firstly, remember that the 2 most socially important activities in life are both services: health and education. Yes, they don't generate wealth immediately, or directly, they must be paid for by the tax-payers, but without them we would have middle-ages' levels of wealth.

And isn't scientific knowledge/know-how also service? From GM food to the IT industry, I think the wealth generated by knowledge part of it is probably greater than from the physical production of stuff.

Without the physical production a lot of the time you do not get a critical mass of people involved in the whole sector with the skills required to actually deign the stuff in the first place. Take one of your examples - health (which in itself will become increasingly "mechanised" - outside of the pharmaceutical side there are a whole lew of manufacturing opportunities form medical devices/aids/monitoring, most of which I bet we import. Agaain without an active manufacturing base you do not get the staff that may one day say "hey you could make this that way or add this to that" and produce a better piece of equipment that then creates a new market or becomes te leader in the market. Design and manufacturing are joined at the hip for anything that is "physical" in nature, neither existis in a vacuum for long and you are at real disadvantage if you do not have both.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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