Why Is Manufacturing Special?

Andrew Coyne has an excellent piece in the National Post dealing with why there are no good reasons for corporate handouts in the wake of yet another round of assistance to the automobile sector.  He asks what the economic rationale for this assistance is – that is, what is the economic value?  He argues that what passes for economic arguments in support of corporate assistance and bailouts really are but “pseudo-arguments”.  For example, we must subsidize the auto industry because we must be in the automobile business – in essence, the auto industry is special.  Or, other countries are assisting their manufacturing sectors with subsidies so we need to do so to compete.

Yet, the question remains.  What are the benefits and costs of subsidizing the manufacturing sector?  What is the value to the economy of directing public funds and resources into subsidizing manufacturing in general and automobile production in particular?  This is perhaps all the more galling because it is a supposedly market-oriented Conservative federal government that is providing this latest round of financial assistance and support.  Whatever happened to the federal finance minister's lament of corporate dead money?  If there are stockpiles of cash in the private sector that can finance investment and innovation, why are we subsidizing?   

And what about other types of manufacturing?  Why for example was assistance on the scale provided to automobile production not also provided to pulp mills to help them innovate and compete?  How did government reach the decision that decided one form of manufacturing was more important in economic terms than the other?  Sure, we can say that the decision was really based on politics and there are more votes in southern Ontario auto production than rural resource mill towns but again that is not an economic argument.

Is there a special economic value or role to manufacturing that makes it special?  Coyne feels: “If it’s about anything, it’s about aesthetics, or a sort of sectoral snobbery, the kind that finds the prospect of being “hewers of wood and drawers of water” so unspeakably vulgar. And yet it is presented as if it were an economic argument.” My gut feeling is that this tendency to put manufacturing on a pedestal is rooted in an almost 1930s Soviet-style view of economic development with heavy industry and manufacturing being the high ground of the economy.  Industrialization is seen as a sort of “higher-level” of economic activity after agriculture and resource extractio - a logical higher-order stage.  A classic exposition is in the work of Walter Rostow and his “Stages of Growth” approach to economic development – I am not calling it a model.  Interestingly enough, his work was presented in the 1950s as a market driven alternative to Soviet style economic planning to the road to industrialization and development by presenting economic development as a set of natural stages.

Rostow chronicles five stages to economic growth – the third of which is the “Take-off” stage in which manufacturing begins to grow and leading sectors in steel, coal and heavy industry develop leading the economy away from the “Traditional society” which was characterized as pre-modern, low tech and in essence backwards.  Of course, Rostow’s traditional society was a primary sector economy of hunting, fishing and agriculture.  For Canada, substitute natural resource extraction for those primary industries, and you get a pretty good idea of how the resource sector is viewed by many Canadians. Dutch Disease is obviously all the more traumatic when viewed as an economic infection that causes regression to a traditional society.

What is also interesting in all of this is why in a similar vein we do not view manufacturing as backward in relation to the post-industrial knowledge economy of high end financial, medical and knowledge services?   Surely, if our society is imbued with a tendency to view economic development as a series of sequential progressive higher-level stages, why not also consign manufacturing - and specifically automobile production - to the dustbin of history?  Is not the highest stage of economic development one in which we effortlessly glide from one shopping and dining experience to another while not having to produce anything that is physically tangible all the while powered by friendly and renewable green energy and green transport modes? I repeat the question raised by Coyne, why is manufacturing special?

Related articles

"Does Canada have Dutch disease?" is a question without a meaningful answer

Arguments for why Canadians should pay for industrial handouts hold no value

Comments

[Robert McClelland]

Coyne's question ignores that Harper is not just handing out corporate welfare to the manufacturing sector but to nearly every sector.

[Angelo Melino]

In late 2008 and early 2009, I could convince myself that support for the auto industry made some sense. Given the obvious need for fiscal stimulus and the difficulty of identifying "shovel-ready" projects, spending some cash to avoid the death (but not bankruptcy) of the large auto companies didn't seem too crazy. However, I don't see any economic justification now for any further government support for the industry. I expect to see more of the production and jobs bleed away over the next decade.

Anyhow, manufacturing isn't anywhere near as "special" in the eyes of our politicians as agriculture!

[Robert McClelland]

Anyhow, manufacturing isn't anywhere near as "special" in the eyes of our politicians as agriculture!

Nor is it anywhere near as "special" in the eyes of our economists as resources.

[Determinant]

Economic nationalism, and industry has always been the post-child for that nationalism, is a powerful emotion. It reached its height in the Second World War which gave Canadian industry a shot in the arm that it hasn't had before or since; the narrative that the US spent Germany and Japan under the table by mobilizing production leads to the conclusion that industry is power.

No, I don't buy this, but I don't buy "post-modern economy" based on services either. Economics is about balance. To make too much and spend too little (China's export surpluses) is just as bad as spending too much and making too little (much of the US feels this).

Moreover, we are really good at distributing the profits of industry broadly, the shadow welfare state (unions, high pay, pensions, drug benefits) is geared to work in a large industrial environment. We are not as good at distributing the fruits of service work broadly. I used to work at a call-centre that had an Apple contract, I and everyone else there got paid half of what internal Apple employees did for doing the same work, taking the same calls.

The middle class, which was in large part created by industrial corporate capitalism is fearful that its wealth is disappearing in the new service economy. But politicians don't want to address raw distribution and economic power questions, so they spend on subsidies to divert attention and hopefully help the problem. It's a solution by substitution.

[Livio Di Matteo]

Well, it turns out that there has been more federal investment in pulp and paper than even I had realized. According to Natural Resources Canada (http://cfs.nrcan.gc.ca/pages/231): "In June 2009, the federal government announced $1 billion in funding to improve the environmental performance of Canada’s pulp and paper mills and by doing so, help lay the groundwork for a more sustainable and prosperous future for the sector." As the web site states: "Under the program, eligible Canadian pulp and paper companies could earn credits at a rate of $0.16 per litre of “black liquor” produced at their mills between January 1 and May 4, 2009. The companies could then invest those credits where doing so made the most environmental and economic sense for their Canadian pulp and paper mills.
This approach helped to direct funds to profitable and competitive mills, and to maximize the long-term benefits of the program’s investments.Companies had until March 31, 2012, to draw on their allocated credits to finance approved capital projects. Projects had to be those that would achieve measurable environmental benefits through energy efficiency improvements, renewable energy production, emission reductions and similar means.
In total, 24 companies received credits, and 98 project proposals were approved in 38 communities across the country. Per-project funding ranged from about $80 000 to over $100 million (average value: $9.7 million)."

More questions. 1)Is corporate funding for environmental reasons simply another a way of providing corporate subsidies or are there good externality arguments here? 2) How succesful was this program in helping the pulp and paper industry?

[Neil]

Loss aversion.

[Livio Di Matteo]

@McClelland,Melino: Borrowing from the Nixonesque line about Keynesianisn - When it comes to corporate Canada, can we conclude that "We are all subsidized now?"

[Ralph Musgrave]

The same “maufacturing fetish” has been around in the UK for decades. That sector has been referred to a million times as the “manufacturing base”: a natty little phrase designed to give the impression that manufacturing is more important than all else.

[Rumplestatskin]

If you want ever to have a military when it matters - during wartime - you need well developed domestic manufacturing to procure for military purposes. Or you could just outsource your military manufacturing to China who would be more than happy to help.

Or we could just go on ignoring geo-political realities.

[Mark]

Hedging for the day oil prices, and the C$, fall.

[Stephen Gordon]

So when that happens, do we subsidize the oil sector as a hedge for when oil prices go back up again?

[Determinant]

"Manufacturing" is code for "regional politics" where "manufacturing" = Ontario or Quebec or both.

I remember at least one post by Jacques (which I will link to, if requested) wishing that oil revenues had been at the federal level.

Oil = Alberta.
Manufacturing = Ontario, Quebec or both at the politician's discretion.

The Maritimes do not figure in this sort of discussion.

[Stephen Gordon]

Yep

[Bob Smith]

Rumplestatskin: "If you want ever to have a military when it matters - during wartime - you need well developed domestic manufacturing to procure for military purposes. Or you could just outsource your military manufacturing to China who would be more than happy to help" - which might have been a valid argument in 1913 when (a) a single country could support its own weapons industry and (b) when meaningful wars might last longer than 30 minutes.

But in 2013, we plainly see that few countries, outside of the US and China can afford to manufacture all its own weapons - and even then China imports military technology from Russia, while the US tries to farm out the cost of its new technologies to its allies (the F-35 anyone?). Moreover, if World War III breaks out, even assuming that it lasts more than the half hour or so it would take to reduce the world to a pile of radioactive carbon flakes, modern weapons systems are so complex, and the skill sets and technologies to create modern weapons systems are so refined, that the notion of converting Bonneville factories to Bomber factories (as in WWII) bears no relationship to reality. You'd have to create those industries from scratch anyhow.

In any event, let's talk about geopolitical realities, even if you accept your argument might be valid in some cases, it's clearly not a compelling one for Canada since (a) the only country that poses any real military threat to us is the US, i.e. our closest ally and friend, and a country which has managed to refrain from invading us for a couple of centuries, and (b) if the US ever decided to conquer us, the war would be over before it started.

In any event, to a point Coyne makes repeatedly that isn't an ECONOMIC argument. There may be sound strategic reasons for wanting to maintain a military capacity, but "being good for the economy" isn't one of them.

[Bob Smith]

"The Maritimes do not figure in this sort of discussion" - they sort of do, that's the reason we subsidized the fishing industry (until it fished up all the cod).

[Bob Smith]

"if our society is imbued with a tendency to view economic development as a series of sequential progressive higher-level stages"

We're not. We have a tendency to view economic development IN THE PAST as being a progressive sequence, one that achieves the perfection that is "today". But since it's a lot harder to envision the future than the past, that process doesn't work going forward. Had you told 19th century Luddites that industrialization would mean that their great, great, great (+/- a great or two) grandchildren would enjoy the living standards they do, they'd have told you that you were drunk and that they'd prefer the lifesyles of their fathers, thank you very much.

The modern obsession with industrialization and the manufacturing sector, ironically, feeds off of the same instinct that fed the luddites who opposed it, a preference for the certainty of the known.

[Robert McClelland]

So when that happens, do we subsidize the oil sector as a hedge for when oil prices go back up again?

We did last time and I see no indication we wouldn't do so again.

[Shangwen]

I usually stay out of these discussions, and have no view on how much X (mfg, resources, etc) we "should have" in the economy. But I observe this in the pro-mfg rhetoric:

1. It offers "added value" (some intangible beyond goodwill, in the accounting sense)
2. It emanates vague positive externalities (creates a middle class, etc)
3. Those who work in it deserve protection
4. No such thing as too much of it
5. It has some long-range protective quality

This sounds an awful like the rhetoric on pseudo-sacred public services (health care, policing, the military, and other non-tradables). In other words, the main output of manufacturing is domestic employment. Unfacetiously, I ask if any pro-mfg commenter here would agree that this is the core merit of manufacturing?

[lark]

Employment. Obviously.

"why in a similar vein we do not view manufacturing as backward in relation to the post-industrial knowledge economy of high end financial, medical and knowledge services?"

Maybe the "viewing" is not the essential aspect. Maybe the essential aspect is WHO gets employed.

Or would you rather have your non-college graduate males unemployed?

[Mick.Marrs]

Well here in Oshawa the. CAW reports that for every GM assembly jiob there are 9 -16 spin off jobs with suppliers, transport companies and the supporting food and entertainment sector.

Where else can people with only high school education get high paying relatively comfortable menial jobs? Sine the pay is good and the cost of living is low compared to the typical office worker that lives in Toronto or commutes in, which provides a high level of disposible income which is probably all spent since they dont need to save for retirement because og their defined benefits pension.

Why does this government and all others subsidize these manufacturing jobs?, the generate positive spin offs, forces a wedge between the workers and their radical socialist union leadership, keeps manufacuring know-how and engineering talent in the country.

Plants are hard to move, once you lose them you aren't getting them back easily. There probably is no economic justication but there are other justifications, security, nation building, social cohesion by keeping people employed.

[Jacques René Giguère]

With Fordism, we could decompose complex physical tasks into simple ones. That's what gave us high manufacturing wages for low-skilled peoples. A lot of descendants of low-skilled workers ( such as my grandfather who died of exhaustion before I could know him) were able to graduate to complex mental tasks (me and a lot of others on this blog)but not all. Most of these mental tasks can't ( at least for now) be fordized.and made accessible for them.They compete with almost 3 billion underused peoples with a shadow price of zero. That's why the unupgradable need manufacturing as a second-best solution. Unless we pay them straight welfare to get them out of the way. But it is thought bad for bourgeois virtues. At least by subsidizing manufacturing ,we get something in exchange to partially offset the payments.

Determinant: you can link with all my approval. What I meant in that comment is that , as long as we are in a monetary union ( and as I tell my students, in a monetary sense we don't need two countries with the same currency but one central bank with many currencies...), we have to go full fiscal union. France or Sweden never hear about interregional tranfers as they are they not accounted for and simply thought of as normal budgetary procedures. Now of course, it's too late.

[Frank Restly]

Shangwen,

"It offers "added value" (some intangible beyond goodwill, in the accounting sense)"

"This sounds an awful like the rhetoric on pseudo-sacred public services (health care, policing, the military, and other non-tradables). In other words, the main output of manufacturing is domestic employment. Unfacetiously, I ask if any pro-mfg commenter here would agree that this is the core merit of manufacturing?"

Adding value is not rhetoric. In a world of fixed resources (at least until energy to matter conversion or interstellar travel is a reality), value added accounts for most real (inflation adjusted) economic growth.

[Determinant]

Canada learned its lessons about fiscal union in the last depression, the Great Depression. Rowell-Sirois, Employment Insurance, tax rentals and later fiscal transfers were designed to keep provinces solvent and allow us to move money around so our bills can be paid.

Even if you upgrade, there is no guarantee of success. The lines for jobs for grads are a mile long.

"why in a similar vein we do not view manufacturing as backward in relation to the post-industrial knowledge economy of high end financial, medical and knowledge services?"

What precisely of value has come from high-end financing? I would argue not much and in fact it has led to a degeneration and deterioration of credit quality and basic risk controls.

For example, the insurance principle of insurable risk should be extended to all derivatives. One cannot insure a risk one does not possess, e.g. you can only insure a house you own, rend, live in or otherwise have a stake in. You cannot insure a random house. If we didn't have his principle, if a house burned down and it was insured 50 times by 50 people, 1 owner and 49 gamblers, we would have chaos. Insurance law has prevented that for centuries, but we forgot that many derivatives are just insurance or reinsurance.

No, in the name of deregulation we ignored this lessons. I don't have a high opinion of modern finance.

[Bob Smith]

Mick

I know the CAW is keen on talking about "spin-off" jobs (and let's recognize that they're not exactly impartial), but why is that unique to manufacturing? Do only people who work in the manufacturing sector consume food and entertainment? Aren't the arguments about spin-offs amongst suppliers and support sectors (transportation, professional services like law or accounting) equally true of the farming, resource or service sectors?

As for the claim that once the manufacturing sector leaves, its gone for good, the US economy is busy disproving that proposition, as the manufacturing sector has been growing rapidly over the past few years. In any event, that's really only a concern if you start with the proposition that manufacturing is "special", which is the proposition that it is trying to rationalize.

[Peter T]

I thought the classic economist question was "compared to what?". Compared to former manufacturing workers living in slums? Compared to service workers - hard to unionise, easy to replace?

In many chains of production some elements are able to capture much more of the surplus than others. EG, grain companies and supermarket chains do better than farmers. Air cargo, airports and almost everyone captures more from the flight industry than airlines (even though the airlines actually, you know, fly the planes, like the farmers grow the food). Manufacturing can reliably capture more surplus than resource extraction or service work, and distribute the gains more widely. Further, industrial skills are hard to acquire (a good machinist takes linger to train than an an IT worker) and easy to degrade - since they depend as much on access to the plant and to a corporate body of knowledge and skill as to formal education.

So given that life is uncertain, and that power is unequal, and the downsides of maldistribution are - over some longer timeframe - much greater than the upside - it makes a great deal of sense to build and keep a manufacturing core. What that is and how to do it is another question.

Real life example - eastern Europe spent most of the 15th and 16th centuries dismantling its manufacturing sector in favour of resource extraction and services (effectively they concentrated on grain and timber for export and bought manufactured goods from the Dutch and French; local services were outsourced to the Jewish population). Most ended up losing their independence and plagued with internal warfare to boot. Or - would you rather live in Milan or Naples?

Or, to put it another way, how people earn their money is as important as how much money they earn.

[Ken Schulz]

My opinion, based on 25 years employment in manufacturing companies, is that the constraints of needing to transform physical materials into complex products requires the contributions of a wider range of disciplines and skills than other businesses. Manufacturing therefore is a driving force for advancement in not only all the engineering disciplines, but also basic sciences (and even the 'softer' sciences: I am an engineering psychologist, studying how people work with complex systems, and feeding the knowledge gained back into the system design process, to improve operating efficiencies and reduce error.) I suspect manufacturing drives the advancement of knowledge across a broader front, moreso than other sectors, but I'd like to see someone find a way to study this empirically. Lots of innovation studies use patent filings, I guess. Might work in the US, where you can still patent 'business processes' and software, so you don't stack the deck against the service sector from the start.

[Patrick]

On the pulp and paper questions: Umm ... all that stuff about competitiveness and saving the environment is just the pretty wrapping for the real policy objective of sending money to rural constituencies. I'd be surprised if the policy objectives where a) clear enough to be measured b) actually measured. I'm sure there's an applicable episode of "Yes, Minister" but I just can't think of it right now ...

[Kevin]

Mick, that CAW number does not add up to me. According to Enrico Moretti in "The New Geography of Jobs" the multiplier is 1.8 for traditional manufacturing. It is much higher for "innovation" jobs (I think 5).

Bob, I wouldn't exactly call US manufacturing booming- a better narrative is that it got so bad that the only way to go was up.

In a globalized world firms are offshoring any part of their supply chain that is routineizable (I made the word up I think). Therefore, I can understand the government wanting to direct industry towards jobs that are high value on the production chain. Unfortunately I would not put manufacturing in that category. However, there is a huge amount of retraining/switching to lower paid work that would accompany that type of structural shift. something no government wants on their watch!

[Jim]

Would be great to extend this initiative south of the border and apply it to the Housing and Financial Sectors - and go one step further and ask why the Fed thinks its appropriate to continue to overstimulate them. Weren't the biggest stock and housing bubbles in US history enough for one generation to live thru? Now we have to pump up all interest-sensitive assets to the point of no real future returns?

[marcel]

Not an argument for subsidies, but some anecdata for why mfg is special...

http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing-boom/309166/

This article is focused on an example that a lot of innovation depends on engineers being actively involved on a frequent and regular basis with the factory, how it is organized and laid out, the people who work in it and the mfg processes in it.

It reminds me of Smith's pin factory (I think it was the pin factory example), where a boy in the factory figures out a more efficient way to perform his task so that he can goof off more: only he had the incentive to come up with the solution.

[Bob Smith]

Kevin,

I think "booming" is a fair description of the US manufacturing sector (at least compared to the rest of the US economy). As Andrew Jackson notes in today's Globe, since 2002, US manufacturing output is up 23% (compared to an 11% decline in Canada). That's hardly a "dead cat bounce.

There's a now phenomenon of "on-shoring" as American companies start bringing plants back to the US. Apple is only one of the more prominent public companies to shift production of its products back to the US.

Peter,

It's an odd argument to say that we should be subsidizing manufacturing because it's better at capturing "surplus" - if that were true, why does it need subsidies?

In any event, I think that argument is highly contestable. There's nothing inherent about manufacturing, per se, that makes it better at capturing "surplus" (and, query, as consumers, why we should think that capturing "surplus" is a good thing?). I think it is true that, historically, some manufacturing sectors (automobiles, for example) had sufficiently large economies of scale (relative to market size) to limit entry and to allow incumbants (and their workers) to colect economic rents. But that has never been true in all areas of manufacturing (think of the textiles industry, which is (and always has been) highly competitive, and in which wages are low and margins are razor thin) and, in a globalized world, query whether it is even true in industries like the automobile sector (where a global market means increase competition and reduced market power - the collapse of the Big 3 is not unrelated to the arrival of the Honda, Toyota and Hyundai's of the world).

Similarly, it isn't obvious that the skill used in manufacturing are inherently harder to acquire than in other industries. No one denies that, say, a machinest, has a difficult skill set to acquire, but thay would be equally true of, say, a transfer pricing specialist in the services sector (who typically have PHDs in economics). Hard to say catagorically that the skills sets in one sector are materially more diffcult to acquire than in any other.

As for the distributional implications, I have two comments. First, it isn't clear that manufacturing inherently result in a more egalitarian distribution (Marx, after all, didn't write Das Kapital in response to the falling inequality resulting from the industrial revolution). Second, is subsidizing industry really the best way to redistribute income. If that's the objective, why not just redistribute income. Subsidizing industries to achieve redistribution doesn't srike me as a particularly efficient (or effective) policy.

[Bob Smith]

"I suspect manufacturing drives the advancement of knowledge across a broader front, moreso than other sectors, but I'd like to see someone find a way to study this empirically."

Well, I don't have empirical evidence one or the other either, but certainly I can think of plenty of counter-examples. Think of the quintessential technology of the industrial revolution - the steam engine. It was developed for use in the mining industry to pump water out of mine shafts, and only later adopted to become the mainstay technology of 19th century manufacturing and transportation. Similarly, for 300+ years living standards have been driven upwards by technological innovation in the agricultural sector (think of the 18th century agricultural revolution in Britain, the development of new wheat varieties which opened up the Canadian prairies to agriculture in the late 19th and early 20th century, the "green" revolution of the 1960's and 70s, or the curent genomics revolution. It's easy to forget the significance of those technological developments.

Also, to some extent the distinction between "manufacturing", "agriculture", "resources" or "services" is a semantic one that arises only as a result of arbitrary line-drawing. The farmer uses inputs (land, fertilizer, sun, water) and "manufactures" wheat or cattle. He just uses a "natural" technology. The guy at McDonald's "manufactures" (and I think that's a fairer word than "cooks") hamburgers. Hollywood "manufactures" movies.

[Bob Smith]

Kevin,

I think "booming" is a fair description of the US manufacturing sector (at least compared to the rest of the US economy). As Andrew Jackson notes in today's Globe, since 2002, US manufacturing output is up 23% (compared to an 11% decline in Canada). That's hardly a "dead cat bounce.

There's a now phenomenon of "on-shoring" as American companies start bringing plants back to the US. Apple is only one of the more prominent public companies to shift production of its products back to the US.

Peter,

It's an odd argument to say that we should be subsidizing manufacturing because it's better at capturing "surplus" - if that were true, why does that sector need subsidies?

In any event, I think that argument is highly contestable. There's nothing inherent about manufacturing, per se, that makes it better at capturing "surplus" (and, query, as consumers, why we should think that capturing "surplus" is a good thing?). I think it is true that, historically, some manufacturing sectors (automobiles, for example) had sufficiently large economies of scale (relative to market size) to limit entry and to allow incumbants (and their workers) to colect economic rents. But that has never been true in all areas of manufacturing (think of the textiles industry, which is (and always has been) highly competitive, and in which wages are low and margins are razor thin) and, in a globalized world, query whether it is even true in industries like the automobile sector (where a global market means increase competition and reduced market power - the collapse of the Big 3 is not unrelated to the arrival of the Honda, Toyota and Hyundai's of the world).

Similarly, it isn't obvious that the skill used in manufacturing are inherently harder to acquire than in other industries. No one denies that, say, a machinest, has a difficult skill set to acquire, but thay would be equally true of, say, a transfer pricing specialist (who typically have PHDs in economics) in the services sector. Hard to say, catagorically, that the skills sets in one sector are materially more diffcult to acquire than in any other.

As for the distributional implications, I have two comments. First, it isn't clear that manufacturing inherently result in a more egalitarian distribution (Marx, after all, didn't write Das Kapital in response to the falling inequality resulting from the industrial revolution). Second, even if true, is subsidizing a particular industry really the best way to redistribute income? If that's the objective, why not just redistribute income? Subsidizing industries to achieve redistribution doesn't srike me as a particularly efficient (or effective) policy (the anology, I think, is feeding the birds through the horse - think about it).

[Bob Smith]

Out of curiousity, is the spam filter eating posts again? I had one that didn't go through.

[Glen]

I have to agree with Peter T. Manufacturing is a knowledge based sector. I would argue that is more so than Economics, which is looking like more of an art than science.

If anyone is interested in a well articulated look at the issue, I would urge them to read Ralph Gomory's work. In particular his piece, "The Innovation Delusion".

http://www.huffingtonpost.com/ralph-gomory/the-innovation-delusion_b_480794.html

[Livio Di Matteo]

Hi Bob:
Fished your comment out of spam. Livio.

[Livio Di Matteo]

@Glen:
Manufacturing is indeed a knowledge based sector. Indeed, so is modern mining, forestry and agriculture. As for economics, it has always been an art as well as a science. Indeed, it is not so much that economics is a science but rather that it tries to use the methodology of science in approaching issues - that is, it has a body of theory and then tries to answer the question empirically. Getting that answer and then interpreting it well is an art. Thanks for the link. I will take a look. Livio.

[Glen]

I would also like to point out that while many find it very easy to see the type of subsidies that manufacturing receives, many ignore the fact that most professional's receive a subsidy by way of being insulated from global competition. Government policy ensures that professionals do not face competition. As Dean Baker put it:

" . For example, it is government policy that makes it easy to import cars and clothes, thereby putting auto workers and apparel workers in direct competition with low-paid workers in the developing world. This trade policy makes manufacturing workers losers.

On the other hand, government policy also makes it difficult for foreign doctors and lawyers to work in the United States, unlike foreign dishwashers and custodians. Since the government protects doctors and lawyers and other highly paid professionals from foreign competition, it ensures that these people will be among the winners in the global economy."

[Bob Smith]

Thanks Livio - the other possibility, given the usual quality of my comments, was that you'd installed a stupidity filter!

Glen:

"I would also like to point out that while many find it very easy to see the type of subsidies that manufacturing receives, many ignore the fact that most professional's receive a subsidy by way of being insulated from global competition."

Well, it's certainly true that many professionals are protected from foreign competition by professional regulation (i.e., you have to be called to the bar to be a lawyer in Ontario). On the other hand, its not clear to what extent that insulates domestic industries from competition. After all, given modern technology, you often don't need to practice in a particular jurisdiction to be able to provide legal services to person in that jurisdition - you might be surprised how often my US clients doing business in Canada have their US lawyers draft their legal documents, and there's an increased practice of outsourcing certain legal services to lawyers in India (say, document review). Similarly, the same laws of physics apply to engineers the world over.

More to the point, the real barrier to international competition in the legal sector isn't domestic regulation, it's having different laws in different jurisdictions. My American clients often have their US lawyers draft agreements for them, sure, but then we have to fix them, because the US lawyers aren't familiar with the intricacies of Canadian law (such that it's often more expensive than just having us do it right the first time). That puts international lawyers at a real disadvantage vis-a-vis Canadian lawyers in terms of providing Canadian legal services (it also puts foreign trained lawyers working in Canada at a real disadvantage - some foreign trained lawyers can't get called to the bar for a reason).

Mind you, that example probably doesn't hold for doctors or engineers (human anatomy and physics being more or less the same the world over). Still, the regulation of professions like doctors/lawyers/engineers is, in part, justified as being neccesary to ensure quality, given the information assymetries associated with the provision of medical/legal/engineering advice. That's no different from the imposition of common regulatory/safety/pollution standards on the sale of manufactured goods in Canada (which, for example, keep Indian and Indonesian car manufacturers out of the Canadian car market, and impose costs on foreign manufacturers who have to adopt to our market). Whether the various regulatory bodies really impose the "least restrictive" means of achieving those standards is open to question )I doubt it, but only because I have little faith in their competence), but certainy some form of regulation can be justified on that basis.

[Wonks Anonymous]

Dani Rodrik is probably the most respected economist apologist for industrial policy. His argument is that tradeables are significantly different from non-tradeables (like the modern services lauded above). Tradeables face more competition, and as a result more innovation. A country that focuses on tradeables will innovate more than a country focused on non-tradeables. That's not a point against resource extraction, because those are quite tradeable. However, some resources are non-renewable (not all, agriculture and forestry can be maintained long term) so it can be understandable why one might not want their country focused on those.

[Matias Vernengo]

Well not sure if a "1930s Soviet-style view of economic development" is really what is behind that. Kaldor's second 'law' suggests that labor productivity follows from productivity in manufacturing. And Baumol's disease suggests that most of the increase in productivity in servives also come from manufacturing. I wrote something for the Indian case, which has followed a service-led development strategy, which might be of interest (link here http://www.bu.edu/pardee/files/2012/07/2012_06-1.pdf; final version published in Challenge Magazine). There might be reasons associated to increasing returns in manufacturing, in other words.

[Determinant]

Similarly, the same laws of physics apply to engineers the world over.

Different building and electrical codes though.

[Kaleberg]

Manufacturing is central to the structure of the modern state. If you can't manufacture, you will lose the ability to design, and at some point you will be reliant on foreigners and foreign exchange for your physical infrastructure.

Manufacturing also produces exportable goods that create jobs here, unlike services which create jobs there.

The government does subsidize forestry and the paper goods industries to some extent by funding research and providing access to the national forests at low cost. Forestry, and the paper industry in particular, are bad examples as we are finally starting to use fewer paper products as the paperless office takes over. (Another product of government intervention in the economy.)

[Ken Schulz]

Bob Smith,

I did not of course claim that non-manufacturing sectors never innovate. Secondly, the basis of my conjecture was the need for manufacture to work physical materials into desired products. Same is true for agriculture, silviculture and extraction industries, they just usually deal with a narrower range of material inputs (and generally produce intermediate products, not end products). So in fact, your 'counter-examples' illustrate the same principles - the drive to create better materials, and more efficient ways of working them.
It is interesting that these sectors remain important drivers of innovation, even though the fraction of the working population engaged in them is much smaller than for manufacturing, in most advanced economies. I would expect that manufacturing will continue to contribute disproportionately to innovation, even as productivity improvements eventually reduce the fraction of the population it employs. Innovation comes about because more types of materials and more steps of working them to finished form mean more need and opportunity for improvement.

[Peter T]

Livio

1. Because if you don't have a sector that can capture the surplus, your surplus will be captured (you end up the farmer - unstable returns, always being eroded). So better if everyone has a bit rather than one place captures most of it.

2. A PhD in financial trading needs a desk, a computer and experience. A machinist needs $1 million plus worth of tools and experience. No tools, no factory, no machinist.

3. On distribution - the industrial revolution was preceded by the dismantling of a lot of social regulation (guilds, local restrictions on trade and commerce, municipal independence). The resulting social unrest led to the reinstatement of much of this regulation but at the national rather than local level. The pressures that led to reinstatement were pushed first and hardest by the skilled trades - who had the most independence vis-a-vis employers. In other words, if you don't want to be a nation of serfs, don't let most of the jobs be serf jobs.

If what you say is true, explain the history.

[Livio Di Matteo]

Hello Peter:
Your points can all really apply to other sectors too. 1) All sectors can generate a degree of surplus or value added that can be captured by your domestic economy. 2) Manufacturing is capital intensive but again other sectors are also capital intensive and without machinery and equipment will not function 3)I'm not sure everything outside of manufacturing should be characterized as a "serf" job. Some manufacturing employment is certainly not the skilled, high tech, high wage utopia it is made out to be. Ever worked stuffing baskets in a candy factory? How about a textile factory? Not sure I understand your last question about explaining history if what I say is true. However, as a concluding point, I think when it comes right down to it, all sectors of the economy are capable of producing some "good" jobs, a demand for skilled and knowledge-intensive inputs, and value-added that adds to economic development. I do not think manufacturing today has a monopoly on the "best"jobs or the most contribution to economic activity and development, and neither does resource extraction, farming, financial services or university education for that matter.

[Bob Smith]

Ken,

It's hard to argue that innovation is unique to sectors that make "things" - been to a doctor lately, do they still practice the way they did a century ago? It might be true that a lot of innovation is qualitative, rather than quantitative, so may not be accurately reflected in GDP figures (since it's hard to catch qualitative improvements in inflation/price statistics). But those improvements are very real.

[rsj]

I think the point here is that increasing return industries are preferably to decreasing return industries, and historically governments that care about national well being have tried to cultivate the increasing return industries. Marshall discusses this, as does A. Serra.

I'm surprised that some economists don't see why an increasing return industry is to be preferred -- is this amnesia?

But perhaps the point is that there are other increasing return industries available: entertainment, software development, biotech, etc. Basically any field in which the big investment is in fixed costs and the costs of making a marginal unit are insignificant, whether those are the costs of making an additional copy of a song or of a piece of software or pill. You want to make sure that sufficient investment is made in the fixed costs and that you have a large enough market into which to sell your copies. Anything to expand the market for the additional copies will be highly profitable and will feed back virtuously expanding the fixed investment, whether that means building more factories or hiring more software developers or drug researchers.

[Peter T]

Perhaps rsj puts it in econospeak. Re Livio' reply - I don't agree that all sectors can generate the same degree of surplus or are in the same position when it comes to reliably capturing the surplus. I was not characterising all jobs outside manufacturing as serf jobs, but a serf economy has a predominance of sectors characterised by a small number of high-paying jobs and a large number of low-paying jobs, with not much middle and no paths between (plantation agriculture is a good example). Sure all sectors can produce some good jobs, but not all sectors can produce both a lot of middling jobs, clear paths upwards and a corresponding social structure that diminishes social tensions. Inequality makes it more difficult, not less, to redistribute (the rich have more power to resist, the poor less power to insist, the state less leverage against the rich and so on), so saying the rich can compensate the poor is a non-starter.

This looks at the overall job structure more as an ecology - some sectors support a richer variety of positions than others. It's worth trying to keep those sectors.

[Determinant]

I really like thinking about the structure of the economy as an ecology. Diversity matters. You also want a system that integrates new entrants easily; Canadian business has fallen down flat in this regard.

Stephen Gordon has been flat wrong about youth unemployment and underemployment. It is a huge problem. Business of all stripes systematically fails to realize that company-specific training matters. You can't hire a specialist of your dreams off the street and if you can't claim there is a shortage. Take responsibility for the costs of your own business model, but that is lost on modern business. It isn't a sustainable model.

If business fails to integrate new entrants and tosses them on the scrap heap without a second though then what you will wind up with is a generation that just doesn't believe in capitalism. Keynes et al. in the 1930's realized that capitalism had duties that it had to do to retain confidence and support. That lesson has been lost.

[greg]

Imagine an economy where nothing of substance is produced... Hmmm.

Maybe manufacturing is special. What would all those post-industrialists think about, or with, in the absence of a substantive economy?

The fact is the rest of the economy lives off, feeds off, the manufacturing (and extractive) economies. The rest of the economy is a burden on these sectors. These sectors carry the rest of the economy. If that burden is too great, then in a market economy, these sectors cannot operate at a profit, and in the absence of intervention, would collapse. So then, in order to sustain these sectors, they must then be subsidized.

But this 'subsidy' is a fiction. This is because all of the real, substantive, resources involved in the subsidy already come from the manufacturing and extractive sectors. If you take too much from the manufacturing, or extractive, sector, however, you must give some back, if you want to maintain that sector. But these resources cannot come from, say, Finance. Finance produces nothing of substance. But when Finance is too powerful, it extracts too much from manufacturing, and this must be compensated for by government action.

The necessity for government intervention, then, in the form of 'subsidy,' is a sign of institutional imbalance, not a sign of the undesirability or disposability of manufacturing.

[Mandos]

More fundamentally, is this

Sure, we can say that the decision was really based on politics and there are more votes in southern Ontario auto production than rural resource mill towns but again that is not an economic argument.

not an enormous, glaring, deep, fundamental flaw in the very concept of "economic argument"?

[Mandos]

Re Livio' reply - I don't agree that all sectors can generate the same degree of surplus or are in the same position when it comes to reliably capturing the surplus. I was not characterising all jobs outside manufacturing as serf jobs, but a serf economy has a predominance of sectors characterised by a small number of high-paying jobs and a large number of low-paying jobs, with not much middle and no paths between (plantation agriculture is a good example). Sure all sectors can produce some good jobs, but not all sectors can produce both a lot of middling jobs, clear paths upwards and a corresponding social structure that diminishes social tensions. Inequality makes it more difficult, not less, to redistribute (the rich have more power to resist, the poor less power to insist, the state less leverage against the rich and so on), so saying the rich can compensate the poor is a non-starter.

Bingo! In a single sentence: different ways of creating wealth imply different social structures. Different social and political structures produce different distributions of wealth. Different distributions of wealth bias society in different ways towards particular ways of creating wealth...

[Bob Smith]

"Maybe manufacturing is special. What would all those post-industrialists think about, or with, in the absence of a substantive economy?

The fact is the rest of the economy lives off, feeds off, the manufacturing (and extractive) economies. The rest of the economy is a burden on these sectors. These sectors carry the rest of the economy. If that burden is too great, then in a market economy, these sectors cannot operate at a profit, and in the absence of intervention, would collapse. So then, in order to sustain these sectors, they must then be subsidized."

What a strange way of thinking about the world. First, it's not accurate. The service sector is not "parasitic" to the "substance" sector, they work togeter to create wealth (after all, what good does the ability to manufacture products do anyone, if no one can transport them to the market?). Second, no one is arguing that we can have an economy without "substance", just as we can't have an economy without food. The question is, why do we have to make the "substance" (with the help of subsidies) if others can do it cheaper? Similarly, why do we worry about the "decline" of manufacturing if it arises from increasing productivity which allows us to make more with less. The analogy with food was intentional - a century ago, roughly 50% of Canadians (and Americans) worked in the agricultural sector (so much for the claim that our wealth arose from manufacturing), now that number is probably less than 3%. We haven't starved.

[greg]

Does an advanced country need manufacturing? Since 90% of trade is in goods, and only about 10% in services, it would seem, in order to balance its trade, an advanced economy must produce goods. In fact, if we consider the trade in services to be roughly balanced, it must produce about as much in goods for export as it does for import. Thus in total, on the balance, a modern economy, in quantity, must manufacture, itself, goods in value equal to everything it consumes. With a higher proportion of extractive industry, maybe a country like Canada can get by with a little less proportion of manufacturing, but not much.

So like food, a modern country can’t live without manufacturing. The exceptions are those that have the resources and are able to depend on an extractive economy, as long as those resources last.

With increases in manufacturing productivity, can that proportion of the economy devoted to manufacturing decrease, even as agriculture did during the 20th century? Of course, but the process can be carried too far. Competition and policy can drive producers to under-capitalize, to their eventual unprofitability. And where a nation is subject to the mercantile policies of foreign nations, this can affect an entire industry. And from above, a modern economy must maintain a certain amount of industry, and with out alternative, can ill afford to allow the destruction of one of its major ones.

[Bob Smith]

"Since 90% of trade is in goods, and only about 10% in services, it would seem, in order to balance its trade, an advanced economy must produce goods."

What is the basis for that assertion? In 2008, for example, total US exports were $1.8 trillion, of which services accounted for $551 billion - I'm no math wiz, but that strikes me as being a heck of a lot more than 10%. (http://www.trade.gov/press/press_releases/2009/export-factsheet_021109.pdf)

"if we consider the trade in services to be roughly balanced, it must produce about as much in goods for export as it does for import."

Yes, but only if your assumption that trade in services is roughly balanced. But it isn't, as the US example makes clear, and there's no reason why it should be. The US has a rather hefty surplus in the trade in services (which somewhat offsets its overall trade deficit). I believe the same is true of the UK. It helps to ground these discussions on the basis of facts rather than on convenient (and incorrect) assertions.

"Competition and policy can drive producers to under-capitalize, to their eventual unprofitability."

That seems to be a problem that resolves itself, doesn't it. Unsuccessful manufacturers go under, and the survivors return to profitability. Subsidizing the losers only aggravates the situation.

[Mandos]

The question is, why do we have to make the "substance" (with the help of subsidies) if others can do it cheaper?

Then the cheaper people have their revolution, and you are up the creek without a paddle.

[greg]

All right. Teach me to trust my memory!

BEA
Table 1. U.S. International Transactions
2008 2009 2010 2011

72 Balance on goods (lines 3 and 20) -830,109 -505,758 -645,124 -738,413
73 Balance on services (lines 4 and 21) 131,770 126,603 150,387 178,533

So in the balance (2011) services make up about 25% of the deficit in goods. Not good enough.
Especially when you propose to allow the destruction of even more domestic industry, thus a worsening in the balance of trade in goods.

Bob Smith:"That seems to be a problem that resolves itself, doesn't it. Unsuccessful manufacturers go under, and the survivors return to profitability. "

Yes, but the survivors where? China? Where they will be subsidized until more of our manufactures are destroyed by unfair competition?

My argument is that our manufacturers, (and agriculture and mining, etc.) support us in the style to which we have been accustomed, and this is reflected in the costs they bear, and thus on their international competitiveness. Our manufacturers are less competitive because we live so well. Sure, we can cut our manufacturers' costs back, and make them more competitive, but to compete with the Chinese, most of us would have to live like Chinese peasants. I claim that much of the economic malaise we have been experiencing is because of the trade deficit, globalization and international competition leading to the 'equalization of factor prices,' which for an average individual is econo-speak for equalization of standards of living.

Indeed, with tradeable services disconnected from the domestic economy, and there would be no reason for them to remain connected in the absence of a domestic manufacturing base, in the absence of manufacturing, most of us would be destitute, much worse off than a Chinese peasant.

[Bubbles and Busts: The End of Favoritism Towards Manufacturing?]

[...] Matteo raises more questions than he answers in this post, but all are extremely pertinent to public policy today and moving forward. Previous posts on this blog have highlighted the ongoing bailouts and subsidies provided by the U.S. government to auto manufacturers (see here and here). In contrast to my views and seemingly those of Matteo, the mainstream media frequently depicts declining employment within the manufacturing sector (seen below) as a major concern. [...]