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Saturday, August 28, 2010

"The Manufacturing Fallacy"

I have put up a few posts on the loss of US manufacturing, many of which claimed it was to the detriment of the US. However, I meant to explore ideas, not endorse a position, though there were those who objected to even raising the issue and asking these questions. My inclination is toward open borders coupled with more social support -- much more than we have presently -- for those who are on the losing end of international reallocations (yeah, I know, fire away in comments...). I also believe that the degree to which you create the proper foundation through education, infrastructure, etc. influences the nature of those reallocations. In any case, I want to let Jagdish Bhagwati push pack a bit in the other direction:

The Manufacturing Fallacy, by Jagdish Bhagwati, Commentary, Project Syndicate: Economists long ago put to rest the error that Adam Smith made when he argued that manufacturing should be given primacy in a country’s economy. Indeed, in Book II of The Wealth of Nations, Smith condemned as unproductive the labors of “churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc.” We may agree with Smith (and Shakespeare) about the uselessness of lawyers perhaps, but surely not about Olivier, Falstaff, and Pavarotti. But the manufacturing fetish recurs repeatedly, the latest manifestation being in the United States in the wake of the recent crisis.
In mid-1960’s Great Britain, Nicholas Kaldor, the world-class Cambridge economist and an influential adviser to the Labour Party, raised an alarm over “deindustrialization.” His argument was that an ongoing shift of value added from manufacturing to services was harmful, because manufactures were technologically progressive, whereas services were not. ...
Kaldor’s argument was based on the erroneous premise that services were technologically stagnant. ... In fact, the dubious notion that we should select economic activities based on their presumed technical innovativeness has been carried even further, in support of the argument that we should favor semiconductor chips over potato chips. While rejection of this presumption landed Michael Boskin, Chairman of President George H.W. Bush’s Council of Economic Advisers, in rough political waters, the presumption prompted a reporter to go and check the matter... It turned out that semiconductors were being fitted onto circuit boards in a mindless, primitive fashion, whereas potato chips were being produced through a highly automated process (which is how Pringles chips rest on each other perfectly). ...
While these episodes ... died early deaths, the same cannot be said for the latest revival of the “manufactures fetish” in the US and Great Britain. The latest flirtation with supporting manufactures has come from the current crisis ... and is therefore likely to have greater prospects for survival. The fetish is particularly rampant in the US, where the Democrats in Congress have gone so far as to ally themselves with lobbyists for manufactures to pass legislation that would provide protection and subsidies to increase the share of manufactures in GDP.
Because of the financial crisis, many politicians have accepted the argument, in a virtual throwback to Adam Smith, that financial services are unproductive – even counterproductive – and need to be scaled back by governmental intervention. It is then inferred that this means that manufactures must be expanded. But this does not follow. Even if you wanted to curtail financial services, you could still focus on the multitude of non-financial services.
Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing, and teaching are available. The case for a shift to manufacturing remains unproven, because it cannot be proved.

    Posted by on Saturday, August 28, 2010 at 12:22 PM in Economics, International Trade | Permalink  Comments (152)


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