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Western Economies Don't Need a Manufacturing Industry

Economics / Economic Theory Sep 12, 2010 - 01:21 AM GMT

By: Phill_Tomlinson


Best Financial Markets Analysis ArticleA common assumption among many commentators is that Western countries need a manufacturing base. We have these trade and budget deficits because we don't 'produce' anything tangible. I suppose 200 years ago the same people would have said we need an agricultural base and not this 'phoney' manufacturing industrialisation many nations embarked towards. I disagree with Peter Schiff, Americans don't need manufacturing any more than a country used to employ huge numbers of the population in the agricultural sector. They just need to do things that other nations can't. The service sector is not a drag on the economy, its a path to further prosperity and represents an increase to a nations living standards.

The purpose of conducting trade on a global scale is take advantage of one another's skills. Argentina and New Zealand are rich in agricultural, so we import their produce as it is more efficient than producing our own. Japan has virtually no natural resources so they turned to electronics and car production and export such goods for the exchange of oil or steel for example. China has an army of low cost workers, impoverished by Mao's Communism, they now look to improve their living standards by using Western expertise in tooling, to produce goods we buy here in the West. America has been a nation of great entrepreneurship, producing some of the leading technologies we use throughout the world. Apple, Microsoft, Google - even Facebook - they all came from an American and throughout the world we all enjoy using their services in some instances for free.

The point is a country does not require manufacturing in order to prosper. American Manufacturing lost out to the first wave of Asian tigers such as Japan, South Korea, Taiwan - not because of 'Government Regulation' as Peter Schiff wrongly associates in the video, but because they could do the work better and cheaper than the Americans. They do it so well, that the US exports their Iron Ore for the South Koreas to use, then South Korea sells it back to America in its end form, and it is still cheaper than doing the work domestically.

The decline of manufacturing in America is not an isolated case. Throughout the West - Germany, France and Britain, the sector has continually shrunk. That's nothing compared with Hong Kong. It's manufacturing base is 10% of the total economy. Yet Hong Kong is an impressive place. I was impressed by how efficient things worked when I visited. The service was excellent where ever I went and cheap. Hong Kong used to be predominately a manufacturing economy along with the other first wave of Asian Tiger economies - Singapore, Taiwan, Japan, South Korea. Now they have all to some degree expanded into a post industrial economy, into services, yet all these countries generally run trade and budget surpluses.

The fact that the second wave of Asian tigers have picked up the manufacturing tasks - India, China, Vietnam, Indonesia, Malaysia and so forth shouldn't be something to fear, we should embrace it. We all benefit.

Its easy to use emotive arguments to state that paying Asian workers a dollar a day is immoral, but every society needs to begin somewhere, and history illustrates this. 200-150 years ago our Western ancestors lived in conditions we can't begin to imagine. They lived in fear of constant starvation, literally if the weather was bad that year people would starve, it was that bleak. We moved out of these conditions into the relative utopia today by our ancestors working, innovating and building the capital structure we inherit today. They built the infrastructure, knowledge and tools we use today. And as generations move on, a free market improves this process and each generation should be better off than the previous one (excluding Government stupidity).

Take for example a Chinese person. They are beginning this process our ancestors went through, however they can access a wealth of Western knowledge that will greatly speed up this process. For example the Chinese worker on a Dollar a day now, can feed himself and his family while in comparison under Mao millions starved. As China exports more to pay for technical imports they can build roads, lightening fast railways and improve their capital structure like we did. His Children then have access to more education, tools, computers - objects their father never had. Instead of working at the factory for a Dollar a day, they set up a company that competes with the Western firm. This is what happened in many places like South Korea and Taiwan. Now they have their own companies, HTC (I highly recommend their phones), LG, Samsung, which the Children of the similar hard working parents indirectly helped to create.

The so called humanitarians are currently protesting against such wage rates, but wait another generation to see how it transforms the ancestors of the people who walked before them. It will be a different picture.

The common mistake is that when a manufacturing job is lost, this will deteriorate our living standards. When we joke that everything is made in China, we also talk about the decline of our living standards to come. The opposite is in fact true. Both sets of nations benefit.

Think about it. Since China has become the manufacturing hub of the world every good conceivable has come down in price. This increases our purchasing power and living standards. It helps China move out of poverty. We move into work that pays better and exchange this other service based products for such goods.

That's not to say its all a bed of roses. People who previously had these types of jobs in the West are displaced. They need to find alternative work. With the advent of minimum wage rates and generous benefit options it has become increasing hard for such people to find alternative work. They are the forgotten minority, the underclass who become stuck in a vicious cycle, created by the plethora of Government experiments. A free market society would find jobs for such people. The Government hampers this process.

Peter Schiff has also made comments in the past stating that China should send their push bikes to America (indicating a reverse in living standards for Americans as opposed to China). Peter is also wrong on this front and history again has the answer. The UK used to be like America, the most prosperous country in the world, ahead of the game. As we went into decline others became more prosperous. Now if we take like for like, Britain was once America and America was once the China of the world, do I now have lower living conditions than my great grandfather? Relative to Americans conditions may have declined, but over time both sets of peoples living conditions have risen. Its the same with the rise of Developing countries today. Just as America made huge innovations in technology and exported it to the world to use, Chinas rise will also benefit us all.

With 3 Billion people awakening from the shackles of Socialist or right wing Statist Military dictatorships, all that extra human labour will be a great boon for the global economy, just as it has been already. Historically the native Han Chinese are a very entrepreneurial people. When Mao took control, many such individuals fled - Singapore, Taiwan, Hong Kong, the West - and they all prospered. With Chinas embracement towards freer trade I'm willing to bet there are some smart people there that will have some great ideas, products that people will want, innovations that will make our lives better. Jobs we don't even know exist will be created from such ideas. Just as Americas innovators have made our lives better with their products, it will be the same with developing nations as they rise in prosperity.

As more of the world becomes educated, more service jobs will be created. More wealth will be created at an ever increasing rate. There's only been hundreds of millions in the West over the past Century who have had free speech and markets. Imagine what another 3 Billion people can bring to the equation as they become increasingly educated and freer.

To contrast markets to Governments look at the technology sector, the industry I work in. It is probably the most dynamic and fast paced industry continually making our lives easier and more productive. Its also one of the few sectors that has no Government interference at all. No regulation. No government agencies monitoring it. Yet it continually increases the quality of goods with more features. We are told that we need regulation and Governmental agencies to 'protect the consumer' condescending people that they are too stupid to manage their own interests. Yet the technology sector flies in the face of such logic. Bad products and companies go bust quickly, and quality always wins out at as consumers are rational and don't need an agency to co-ordinate such an activity. Contrast that with the financial sector - fractional reserve banking instigated by the Government, Regulation after Regulation, Agencies (Moody, S&P, FSA etc), price fixing of interest rates, currency monopolies - its no coincidence that its in a mess. It will always be in a terrible condition and a drag on society with the Governments involvement, meanwhile the technology counterpart continues to efficiently mobilise societies resources effectively using the free market. If you ever need to argue the merits of a free market then this is the example to choose and will stump anyone opposed to the concept of Capitalism. I don't even think the Socialists would dare contemplating nationalising this sector. On the other hand many financial service jobs we could do without. Just like propping up our Steel, Coal and Car industries of the seventies its with finance this time and its counter-productive.

I'm bullish for the Century to come. Sure we all know many Governments are walking head on towards the next crisis of their own doing - stagflation, trying to erode our capital structure and removing individual liberties. Its going to be rough for at least the next decade, probably slightly longer. Going forward however we have a lot to look forward too. Markets will be embraced further, people will see our Governments misdoings. The Socialist and Communist experiment is dead. Thatcher or Regan didn't kill the left, it was the free market. I don't agree with Peter Schiff, I personally align more with Warren Buffets recent statement where he said our children will have better lives than we did. So long as we allow markets not Governments to enhance our lives this will always be the case. Relative decline, sure, but as with the example of the UK's decline each generation has had a better standard of living because we never truly abandoned the free market despite a few wobbles along the way. Look forward to the future, the innovation revolution is only just beginning.

By Phill Tomlinson

The Age of Stupidity "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.", Ludwig Von Mises

© 2009 Copyright Phill Tomlinson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Rodney Allan
12 Sep 10, 09:30
I disagree I don't think services will cut it

"Think about it. Since China has become the manufacturing hub of the world every good conceivable has come down in price. This increases our purchasing power and living standards. It helps China move out of poverty. We move into work that pays better and exchange this other service based products for such goods."

OK I've thought about it and this is my reply. I've got no economic training apart from what I read on this and similar sites (only a recently minted Physics PhD, and a programming job), so you'll have to forgive my economic naivety but this is how I see things.

IF you have a job then cheap goods are great. However if the cheap goods come at the expense of you losing your job then net standard of living won't actually rise for you the job loser (for me the job holder it is great though, while I still have my job).

Yes in the short term cheap goods are great, but in the long run if we all go broke because we can't sell anything any one wants, because we can't compete with the sellers of the cheap goods, then standards of living won't rise. (Sorry for repeating myself but I think it's an important point).

Its mainly that last sentence I have a bone to pick with though, the one that goes "We move into work that pays better and exchange this other service based products for such goods". I'll skip over questioning whether "service" based work actually does pay better, I have certainly heard otherwise, and get to the point.

If the US is only ever sending money to China, for said cheap goods, and never getting any back again in return for goods and or services given to China, then there will be a net flow of money from the US to China. This one way flow of money can only go on for so long, before an imbalance occurs with the US as a massive debtor and China as the creditor. This state of affairs can be extended of course by China extending the US credit. But you can only rack up debt with someone for so long (even borrowing from them to pay the interest you owe them) before it all comes crashing down. This story sound familiar to anyone?

Just to reiterate the point. While an American can exchange money for a service to a fellow American to give to China for a good, and that American can in turn get his dollars for exchanging services with a fellow American and so on, eventually someone somewhere along the chain is still going to have to get their money by exchanging a good or service with China, if a net flow of dollars from the US to China is not to occur. (The Chinese simply lending the money they receive for goods back to the US solves this problem in the short term but only makes the debt even worse in the long run, so doesn't really count as a solution. The printing press, money out of thin air option isn't a credible solution either).

So then what exactly is it that the US will be sending to China in order to get all those dollars back and avoid a US economy wrecking trade imbalance? Services you say? Well my points is that "services" for the most part don't actually travel well. It is hard for an American to cook a hamburger for someone residing in China, or be their bell boy, or door greeter or security guard if they are both on different continents. These jobs tend to be given to local people (as in people not on the other side of the planet away from where the job needs to be performed) for obvious reasons.

What about those few services that thanks to the wonders of modern communication technology do travel, like call centres perhaps ? Are the Chinese going to start farming out call centres to the US, the way the US has to India? Will dollar a day Chinese workers one day start experiencing the joys that I've had of talking to someone on a different continent (in their case the US apparently) when they want to know why their internet connection is down or why their electricity bill is so high? Better start brushing up on the Mandarin I guess?

As for the author's mention of software export potential, well I think you'll find the Indians have that market cornered too. If you're an avid flight simmer like me you'll also be familiar with the brilliance of Russians programmers (outlasting Microsoft in that area by the way). Both the Indians and the Russians come a lot cheaper than the US. Programming is the sort of thing that you can do if you're clever but find yourself lacking much capital, which is why it's so popular with smart, educated people in poor countries. That's precisely why so much US IT has already been outsourced overseas just like US manufacturing, there are plenty of well educated and clever programmers in 2nd/3rd world countries that will work a lot cheaper. Sorry but I don't really see the US comparative advantage in programming. As for the hardware, there is very little silicon left in silicon valley these days or so I was recently reading.

OK what about financial services, perhaps the US can sell the Chinese financial services? Well if its advice you want to sell, there's the language barrier, plus I'm not sure how keen the Chinese would be for American financial know how given the current state of affairs. Or perhaps the US can become money lenders to the Chinese....Oh wait.

12 Sep 10, 11:58
Countdown To Doom

Mr. Tomlinson has just so many fallacies and fantasies imbedded in his article that I scarcely know where to begin....or end for that matter.

"The service sector is not a drag on the economy, its a path to further prosperity and represents an increase to a nations living standards".

An increase to whom? The one that pounds the cash register at Wal Mart? Wow! I guess that we'll all have to write the exploitative multi-nationals and their whores in Congress a thank you note!

"The purpose of conducting trade on a global scale is take advantage of one another's skills."

Confucius says that a translation is needed here: "The purpose of conducting trade on a global scale is to exploit the $1/day indentured slaves toiling in Chinese sweat shops at the expense of the American workers so as to further fatten the bottom line of the exploiteers (multi-nationals)".

"The point is a country does not require manufacturing in order to prosper."

Yes, we can all see the fruits of that collected wisdom as evidenced by the steadily increasing poverty, the massive (double digit) unemployment lines and the 40 million plus on food stamps in America.

"The so called humanitarians are currently protesting against such wage rates, but wait another generation to see how it transforms the ancestors of the people who walked before them. It will be a different picture."

Well of course these exploited indentured slaves in China are protesting against the $1/day wages in the sweat shops. Who wouldn't be if all that they could afford to offer their families is a half bowl of rice on the table for dinner? My! Won't the future generations be the lucky ones here?

"As more of the world becomes educated, more service jobs will be created. More wealth will be created at an ever increasing rate."

Well, I guess that leaves America out. Today's American chlldren still can't read nor write even after completing high school.

Shelby Moore
13 Sep 10, 11:17
Delay = Catastrophe

Rick, actually Mr. Tomlinson is correct that west doesn't need manufacturing per se, it needs to adjust to a net exports balance productive stance in its core strengths, but the reason the western economies are not quickly and positively adjusting to good globalization is because the elite who want bad globalization are destroying the real-time feedback loop in markets that would cause people to make the correct decisions about their present and future: (Jocelyn is me) (Good Globalization)

Rather, Rick from your past comments on this site, you propose to introduce more delay and false promises, thus aiding the elite (and playing right into their strategy as they expect you to) in causing a worse catastrophe that will hand them control in a global grab, aka "rescue" or world war:

Phill Tomlinson
13 Sep 10, 13:42

Thanks for all the comments.

Rodney - So what are the alternatives to not sending manufacturing jobs somewhere else? We could have autarky where we keep all the work here and don't export or import goods with others. We wouldn't be able to afford as much, even staples such as food would rise (in fact we wouldn't be able to get some a lot of the foods we enjoy). Alternatively we could compete. As such nations usually have Western tooling we would need to drop our wages substantially, again a complete collapse of purchasing power. You fancy living on a couple of dollars a day?

There is no easy solution - both proposed solutions that you identify mean we end up in poverty. Alternatively we can do work that others can't, and increase our living standards by adhering to the free market.

Why do Countries such as Hong Kong have less manufacturing than the US as a percentage but generally run trade surpluses? You shouldn't equate a trade defect with a loss in manufacturing capacity, Peter Schiff is wrong to mislead people like this (I'm sure its not intentional). Services can alleviate a trade defect much more effectively than manufacturing.

For example Google is an American company. Its revenue come from advertising, companies all over the world pay google to post adverts. All the money comes from Europe or where ever - creating huge trade surplus with the world. Google is in the service sector. Soon the developing world will pay more and ad revenue will all come flowing back to the US (thats not to say they won't come up with their domestic competition), but its easy money. Its the intellectual, creative economy that can generate so much money.

Regarding software in India or where ever, its good, they are moving into services which will make them richer. We just have to do other things that add value, and a lot of Indian developers don't add value (trust me, I've worked with them).

Rick - Its Government who create poverty though welfare, price controls on wages or the inflation they create that enriches the wealthy at the expense of the poor.

Chinese people are not "Slaves", they move under their own will from the penniless countryside. They are doing what our ancestors did building a better life for their children. It the same process, we can't assist in this.

America is not going to be in poverty, it will be like Britain during its decline, its all relative compared to the China man who starved under Mao 40 years ago, but in the future we will have all sorts of wealth.

Shelby - My sentiments exactly. The trade deficits are caused because many in the world tolerate them (in Chinas case encourage them as an economic weapon against the west to make us weak) and our government promises us things they can never hope to deliver.

Services are the next natural progression. Think about the example above. Google generates in excess of $20B revenues per year yet it only does that with 20,000 employees.

Now do the sums for those people doing low cost manufacturing in the developing world. To generate the same revenue you are talking about millions of people working. Thats the creative economy and the power it brings and thats where we need to head if we are to continue prospering. The knock on effect to create other service jobs compound.

Shelby Moore
13 Sep 10, 14:19
Why invest in $0 wages?

Furthermore, manufacturing is being automated and eventually it will add no value and pay no wages. In the next 10 - 20 years, designs fed into a computer will be built and replicated by a nanotechnology bot. The valued added is the services, the design, the engineering, the integration of components, marketing, analysis, etc..

Americans would have a long time ago been more motivated to invest in the future, had their motivation not been turned upside down by the manipulation of interest rates:

But the Americans demanded this manipulation and of course supply will always rise to meet demand:

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