Courtesy of Forbes.com.
Some of us have long argued that the United States has been committing economic suicide by letting its once-peerless manufacturing base fade away. To those who have investigated the facts, the case has, for decades, seemed unchallengeable. Yet it has received virtually no support from the American scholarly establishment. Now finally academe seems to be waking up. At least that is how I read the forthcoming publication of Producing Prosperity: Why America Needs a Manufacturing Renaissance. Written by Harvard management professors Gary P. Pisano and Willy C. Shih, and endorsed by former Harvard president (and noted economist) Larry Summers, the book argues that if a nation loses its manufacturing industries, it loses its ability to innovate. That is hardly the strongest case that can be made for manufacturing – there are much more compelling and direct arguments concerning exports, jobs, wages, and a nation’s ability to pay its way in the world — but at least the academic establishment has now finally been engaged.
The only previous serious academic treatment I can remember wasManufacturing Matters by the Berkeley economist Stephen S. Cohen and his political scientist colleague John Zysman. Written as far back as 1987, this was an inspired book but precisely because it was so early, it was forgotten long before the future problems the authors so presciently identified became universally obvious.
Why is manufacturing so important? In my book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity in 1999, I made three points:
1. Jobs. Manufacturing creates a much better mix of jobs than advanced services — jobs for everyone from ordinary blue collar workers to capable engineers, brilliant scientists, and resourceful and far-sighted top managers.
2. Wages. Those who in the 1970s began dismissing America’s manufacturing base as the “Rust Belt” displayed deep ignorance of modern First World manufacturing. Such manufacturing has long been highly capital-intensive, which means that each worker’s productivity is greatly leveraged by sophisticated production machinery. This creates plenty of room for employers to pay high wages. Advanced manufacturers moreover require great accumulations of secret production knowhow – typically knowhow acquired over generations of “learning by doing” – and this powerfully shields them from low-wage foreign competition.
3. Exports. I have calculated that, per unit of output, manufacturing businesses are nearly ten times stronger exporters on average than services. Thus America’s investment in postindustrial activities (such as computer software, internet development, finance, and legal services) cannot hope to bridge the trade gap opened up by the decline of manufacturing. One reason for manufacturing’s superior export prowess is that manufactured products generally require little adaptation to sell around the world. By contrast services have either to be performed in a customer’s home country or at least – in the case of computer software, for instance – have to be expensively adapted to meet different cultural needs in different foreign markets. Thus the net receipts transmitted back to the United States are often minimal.
What explains the American establishment’s complacency in the face of the near collapse of the national manufacturing base? The answer is mainly a misplaced faith in laissez-faire. American opinion leaders have trusted to the theory that if a factory closes, this is dictated by the “wisdom of the market.” In reality free markets have next to nothing to do with it. American manufacturers are competing in a globalized marketplace that is comprehensively rigged to hollow them out. If other advanced nations protect their domestic markets (Japan and Germany come to mind in the case of car industry, for instance) , their home producers enjoy greatly enhanced retained profits to plough back into improving their production technologies. After five decades of such unequal trade, this begins to add up. It is hardly surprising that Japan and Germany are now the leaders not only in cars but all sorts of advanced producers’ goods that once defined American leadership of the world economy.
As for the Pisano/Shih book, detailed comment must await its official publication later this month. In the meantime Pisano is making an appearance at a reception in Washington tomorrow hosted by, among others, the Kearny Alliance and Asia Policy Point at the offices of the King & Spalding law firm.
The key question is what America should do. Judging by the Amazon.com page for the book, the Pisano/Shih answer is a bromidical call to government and business to work more closely together on basic and applied research. This is little more than hot air and will do nothing to address the real issue, which is an unfair world trade system. The fact is that almost as soon as American corporations invent new, more efficient production technologies, they come under pressure from foreign governments to transfer these out of the United States. If they don’t do so, they face non-tariff barriers in the foreign markets concerned. By definition, given their single-minded focus on profits (and their acknowledged lack of concern for the American job base and wider national interest), they cave. They suffer no penalty for doing so. Quite the reverse: they improve their access to key foreign markets while they can continue, of course, to sell unhindered into the American market. This sort of economic blackmail has been taken to a high art by China in particular, with results that are now redefining the world’s future. Virtually every major American corporation has been persuaded — often under duress — to transfer key production technologies to China. Just some of the more notable names include General Electric, Ford, General Motors, and Motorola. Ultimately the fault does not lie with these companies. Rather they are creatures of an economic environment that was wished upon them by others — not least generations of Ivy League economists who thought that free trade and the resulting move to postindustrial services would bolster American competitiveness.