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Manufacturing and the Limits of Comparative Advantage
The concept of comparative advantage is used with great effect by economists as a sheep/goat separator. Those who understand it are the sheep, almost exclusively economists. The sheep sometimes use comparative advantage to justify things that seem to the goats, the non-understanders, to be counter to common sense. But the poor goats are helpless, silenced by their own ignorance and the confidence of the knowledge-wielding sheep.
Unfortunately, among the sheep are some who tell us that it doesn't matter if we lose one industry after another to our rapidly developing trading partners. We will just do something else that is in accord with comparative advantage in the new economic situation.
I have suffered through too many discussions of this sort to view this with anything approaching equanimity. One of these I remember particularly vividly came at an economics meeting during a panel discussion on trade. An audience member asked a university professor on the panel how he would feel if most of the professor's courses were delivered from India by someone else and at a lower price. His reply, delivered with perfect confidence, was that it would not matter; he and his peers would rather just teach graduate students anyway.
In a similar vein but on a far grander scale, the Financial Times recently lectured the nation of Japan on its attempts to retain manufacturing in Japan (using robots) in the face of low-wage competition from other parts of Asia. The Financial Times, calling on the wisdom that the recent economic successes of the financial sector had apparently made self-evident, told the Japanese to give up manufacturing and concentrate on research and on telling other nations what to manufacture. The FT article had as its title "The malady of manufacturing."
Ignored in all these discussions is the obvious fact that when you don't make for yourself the things you need, you will have to trade for them. If you have to import cars and all sorts of manufactured goods, you will be importing on a large scale; to trade for them you will need to create additional goods or services that you can export on an equally large scale.
How does the FT's prescription for Japan stack up if we look at it that way? It looks like nonsense. Research is a small-scale activity; in most companies only a few percentage points of revenue. There is no way that the output of this small activity can be traded against a nation's need for manufactured goods. Similarly, you simply cannot pay for large-scale imported education by teaching smaller numbers of graduate students, even if they were all visiting foreigners so that all the teaching you did counted as export.
If you give up large things and specialize in exporting small-scale things for which the demand is limited, you will not be able to buy many of the things that are needed on a large scale. If the things you are going to export don't add up to something big, you will be neither making nor importing what you need. You will simply not have them. You will be a poor nation.
These are facts that are not easily overlooked and there is no reason to think that David
Ricardo, usually regarded as the father of comparative advantage, overlooked them. In his 1817 book, Principles of Political Economy and Taxation, Ricardo discussed the wine and cloth trade between England and Portugal. He assumed that Portugal was more productive than England in both of the traded goods, cloth and wine, and that Portugal had a greater productivity advantage in wine.
Ricardo's remarkable observation was this: even though Portugal makes cloth more productively than England, it still benefits her to move some people from cloth-making to winemaking and then send the wine they produce to England to exchange for cloth. Similarly, it benefits England to move people from winemaking to cloth-making to make more cloth for export. A shift of this sort works out well for both countries because Portugal's advantage in wine production is larger than its advantage in cloth. Both countries come out ahead. In the modern terminology, they were exploiting the fact that Portugal has a comparative advantage in wine.
Some of Ricardo's successors, however, have elevated comparative advantage into a principle all its own, with such rules as "countries should specialize in the things in which they have a greater comparative advantage." What is often taught nowadays about the England-Portugal example is that England should make only cloth (specialize in cloth) and Portugal should specialize in wine.
However Ricardo suggested a shift, he did not suggest that Portugal should abandon making cloth, and he was right not to. In fact, in Ricardo's example, whether the specialization prescription is right or wrong depends, as it should, on the scale of the demand for the goods being traded.
Suppose that the demand for wine is small compared to the demand for cloth. And also assume the two countries specialize: England in cloth, Portugal in wine. Portugal, while supplying all the wine that England consumes, will get for it only a small amount; the small amount that England is willing to spend on wine. This small value received for wine exports will buy only a small value of cloth imports. This leaves Portugal without its own production of cloth, for which there is a large demand, and only a small quantity of imports. The Portuguese will be ill clothed; they will be a poor nation.
With these demands, a far better solution with Ricardo's actual numbers is for Portugal to make all the wine for both countries while continuing its own cloth production to supply its cloth needs beyond what its wine buys from England.
Yet the first solution, specializing in the good with the comparative advantage and giving up the other without any regard for the scale of demand, is what is being advocated for Japan by the Financial Times, and often is pushed in the United States as well. It too will leave us a nation that is poor indeed.
An alternative available in Ricardo's day was to ship gold to England to buy the needed cloth. This was not a long-term solution then, nor is the equivalent solution now. Each year we make up for the year's huge trade deficit, not by shipping gold, but by shipping IOU's: treasury bills which are essentially promises to pay later. As Warren Buffet puts it, "we are selling the nation out from under us." When we come to pay this enormous accumulation later we will then be poor indeed.
Yet that is the direction many in the United States would have us take when they say that the country doesn't need manufacturing. What do they say will replace manufacturing? One gets only vague responses to this question.
Let us by all means do the things in which we have the greatest advantage. But let us make sure the new things we do, together with the things we continue to do, add up to enough to make us a rich nation. Vague talk about future innovations, about a post-industrial society, or of an enormous explosion of services exports to where they can balance the manufacturing trade deficit is not the stuff on which to bet the prosperity of a nation. This vagueness disguises our real situation and the need to rethink both our fundamental economic goals and how they can be attained.
Manufacturing should not be given up but rather rebuilt, as G.E. CEO Jeffrey Immelt has recently advocated. We cannot afford to get out of manufacturing unless and until there are new things that we are good at and that add up to the same scale. But today that condition is nowhere near being met.
Manufacturing is both high-wage and R&D intensive, and comparative advantage in manufacturing is not a gift of nature but something that is mainly man-made. All of this strongly suggests that we should be aiming at building a strong manufacturing sector rather than wishing it away.
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This Country will ascend once again, when the large corporations realize that the economic advantage they receive from outsourcing our manufacturing, is offset from the wealth removed from the middle class. I would think that it isn't really in the shareholders best interest to diminish the prosperity of this great country for short term gains. Much is owed to the United States for the warm incubator given to the business elite and some long term vision is greatly needed. I care not if a corporation is American or not. I care deeply if they employ and benefit Americans.
Couln't agree more. Even if interpreted correctly, the theory of Comparative Advantage is not an argument for relinquishing manufacture. Manufacture is not an auxiliary to an advanced economy, it is the kernel.
A "service" or "consumer" economy presumes a manufacturing economy. If the economy is partitioned the service sector must serve the demands of the manufacturing sector. Some economists seem to perceive this the other way about; they believe manufacturers are supplicants to their consumer overlords, after all, there must be a market for produce. True to a point, but the situation changes quickly when a manufacturing nation starts developing superior infrastructure for its indigenous market. That is when it starts being able to achieve things other nations can't, when it achieves absolute advantage.
Whatever happened to corporate citizenship ? Nobody forces corporations to move jobs offshore, they do it because they are greedy.
Corporations dont do anything. People running corporations do.
Great article, Ralph!
thank you Ralp!... NAFTA killed manufacturing in the U.S. Maunfacturing jobs were mostly higher middle class wage paying jobs for the highly skilled, machinists, toolmakers... and they were what held the middle class together. The same middle class that bought most of the new chevys and fords and even the occasional toyota and datsun. When the jobs left, the wages left, cars, washing machines, televisions... furniture... those sales declined and everyone wondered why .. blamed it on the union workers.. blamed it on the entitlement - i hate that word - programs that gave basic benefits to the poor, and social security... the most obvious reason, the lack of liquid income that was no longer there...was ignored.
Without a strong manufacturing base the United States will continue to slide into third world obscurity..
Obama = GOP : - "The mission of the U.S. in this world is to compete with China."
The most important new post for this administration is SECRETARY OF INDUSTRIAL POLICY, like in every other advanced country. I have not heard a word from Obama about this. Zero.
How does he expect the U.S. to make a living in the future if there is no manufacturing ?
I guess the Obama administration expects a future of paper shuffling, under the rule of Goldman Sachs.
2012 : new political parties !
Yes, we need industrial policy, we need obama to live up to his promises to either revise or get out of trade deals that are unfair and crack down on currency manipulation
we then need to aggressivley reinvest in our productive, wealth creations, prosperity sharing and innovation creating mfg engine - anyone esle noice how aggressively china and india are investing in theirs? and how their impressive growth has come from it? coincidence?
Obama will not enjoy the support of the midwest and labor that he had in 08 if he continues to ignore the mfg segment and heap piles of no strings money on wall street
in fact recent polling in states like OH and MI is showing obamas approval ratings dipping below 50% he can not win an election without OH and/or MI
I agree. The dismantling of our manufacturing base has got to be the worst thing that has happened to us in the US.
Actually, industrial production hit all time highs as recently as spring-2008. The US has just focused more on high value add industries, while ridding itself of low margin low value add businesses. Unfortunately, however, the low value add businesses are labor intensive, so millions of manufacturing jobs and potential manufacturing jobs have been lost in the process. Workers have simply had to find work in other industries, which they had been able to do successfully until the recession hit.
what industries,still in your dream world Dugan
DuganSi,
Baa aa Baa. That's the noise of sheep. The sheep that Ralph talks about in his article. Appears that you are one of them.
The problem with this assertions ddugan is that the mfg that has largely stayed behing is the manual assembly type jobs
the higher value ones because they require higher cost labor and high overhead automated equipemnt is precisely the sort that is the main focus of outsourcing these jobs get outsourced because of labor arbitrage - its still less costly to assemble manually in the third world than to assemble automatically with robots cnc machines etc domestically
what you will fing are US factories - particualry in appliances, computers and even to some extent autos are simply the fianl assembly point for foreign made componentry
same with personal care, cosmetics, some foodstuffs and medical - the US becomes a repackaging point for foreign made products
this has been a hollowing out of the US base
Manufacturing - software and services?
Moved to India.
Exactly right! I am sick and tired of dogmatic economists using their simple minded prescriptions to make the patients sicker!
Gomory is on target. When economists try to fit facts to theories rather than starting with perceivable facts, be careful. Especially when something is "counterintuitive". U.S. economists have been a danger to our national prosperity for more than a generation. Not to mention the "free trade" crowd whose beliefs are more religion than science.
In other countries, economists are not plagued by the same level of muddled thinking as those in the U.S. Or policy makers have more common sense and trot them out as needed rather than actually listening to them.
Comparative advantage is created. Japan, for instance, targeted industries and protected its market while importing and improving on foreign technology. The Ministry of Industry had a large role in this. As an example of successful industrial policy, I refer you to Law No. 61 of 1995, the "Business Reform Law". MITI established "Specially Designated Business Categories" with a decrease or a threat of decrease in employment and then supported product development, marketing, and on and on. Most of this was in the auto industry and its food chain. Note the time frame.
Quite intelligent.
What the U.S. really heeds from foreign firms is their tech. We should be making things here. We have to eliminate the trade deficit or become poor.
The struggle is for limited room at the top. Our competition has no fuzzy belief that something will replace what is there now. They simply do market research. Not all that hard.
Japan failed for the most part in pushing government agendas onto its industries. It lost on steel to South Korea and China. It never captured the electronics market except for the low margin consumer market. Technological innovation still resides in the US in that sector. It didn't do much for its car companies, yet those are the prime example of Japanese success. Japan is basically in economic survival mode for almost two decades. Do we really want to imitate that?
OTOH the US has clearly financed its aerospace industry to leadership with trillions of defense dollars. What's questionable there is the return on investment which seems to be close to nil.
Please, someone show me a success story for isolationism that does not fall on its ugly face once we peel back the lacquer.
Defense contracts are different from direct subisidy
if you want to see direct subisdy look at what Japan did with its auto and steel industries
or Europe and Airbus
steel was lost and still is being effected by foreign dumping,which is illegal by the way,the Japanese have a lower unemployment rate
if industrial subsidy has been such a failure for Japan how come they keep doing it?
And of course without those generous subsidies there would be no such thing as your Prius
The US has been losing our edge in aerospace for some time most commercial planes ar ebuilt in Europe, Brazil and Canada, Boeing has outsourced 40% of the content of the new dreamliner and are paying the price for it in delays and quality issues
You are totally off the mark. Japan's auto industry is the first example. For starters, I would refer you to Law # 61 of 1995. This "Business Reform Law" was to promote and support product innovation and development, manufacturing efficiency (new production methods and equipment), develop new demand or sales methods, lower costs, use new materials, etc. It was aimed at "Specially Designated" indusutries which had had a decrease in employment or were threatened with a decrease. That sort of started with steel and went on through autos and aerospace. Separate laws for small and medium businesses, which can be pretty big and fill out the auto pyramid.
Never heard of it?
Try looking at our trade defict with Japan and their auto factories here, subsidized, of course by states.
I am always amazed when people manage to say industrial policy doesn't work and point to Japan. Perfect, no. Pretty good record. It sure has.
Several comments. Japanese industrial policy is not government pushing its agenda on industry. The main thrust is working together (against outsiders) in a close relationship.
Japan lost steel to Korea/China? Japan still makes a lot of steel and meets most domestic needs. It imports some specialty items and also some Korean and Chinese steel these days. But controlled. Korea/China both adapted Japanese industrial policy. Our open market is a sucker's game.
Japan has done well in electronics and often has access to U.S. developments while there is little/no reverse tech flow.
On autos, it is not only how much money the government gives to Toyota, etc., but that there is a comprehensive policy of support beginning with steel and running through the supplier network. It is cumulative. Plus the huge advantage of a sanctuary market. Import penetration is low by design.
Japan on economic survival for two decades? It is strapped now due to export dependence. For 5 years before our crash, U.S. average annual GDP growth was 2.9% compared to Japan's 2.1%. However, the real gauge is GDP per capita - Japan 2.1% and America 1.9%. U.S. population was growing. Japan's was shrinking from 2005.
And Japan doesn't have a deficit in trade. The trade balance is +4.7% of GDP. Ours is -4.7%.
We spend a lot on defense. It largely shows lack of good policy. Japan and others have hollowed out Boeing's civil aircraft operation.
Agreed, there is the presumption that there is some kind of Moore's Law operating in the economy, that every second is merely passage to something bigger and better.
GE will promise to rebuild industry in the US while importing windmills from India.
Importing Electric Panels from Mexico etc etc.
"I wish I could put an air conditioner factory on a barge and float it to the port with cheapest labor"
GE CEO
Many people have reported windmill farms being installed all Canadian steel and windmills and labor.
Canada is dumping bridge steel here in NH.
While I applaud Immelt's statement about reinvesting mfg, GE clearly has not practiced what they preach
Welch and his protege Immelt were the very ones that oversaw the transformation of GE from a manufacturing giant to a finacial services company
Immelt has been under fire from his board and stakeholders for moving too far away from mfg and I am sure that is what motivated his speech
Excellent points.
There is no way America should sacrafice its auto industry based on unproven theories of creative destruction or comparative advantage.
It's like the current call of employed economists telling the unemployed we should wait and monitor the economy before deciding whether or not a second stimulus is needed. Just what are some of these people smoking?
http://www.escapethenewgreatdepression.com
Sacrifice any industry for that matter
Creative destruction is one of biggest and most bogus theories of them all, and the one that drvives the MBA types - that you if you destroy an industry a new one will pop up out of the ahes, except that it doesn't really ever happen - its just justification for profiting from taking down a business
There used to be a textile industry in Chicagoland back between 1900 and 1930. What did they do after every single one of those jobs went away? Used to be big slaughterhouses in downtown Chicago and Manhatten to? How did those cities fare after those jobs were gone. Remember when most textiles were made in New England? Now there are none. And how has New England done in the last 40 years without the textile industry? ... etc. etc.
I believe the US automobile industry has sacrificed itself by delivering inefficient vehicles of poor quality for decades. And it tried to make up for the fact that it couldn't even sell those at cost with endless financing schemes that pretended that the car loan product that came with the car was far more important than the car itself. That's not creative destruction but destructive management failures.
Try again.
we heard it all form you about that ,try again
Except that US automakers equal and Ford in particular beat the imports on quality
US automakers still have over 50% of the market
GM has the highest productivity plants
Ford has the number one selling vehicle in the world
Ford has sold more vehicles than Toyota the last 3 months straight
The US auto industry went down by taking on the healthcare costs and too-high benefits for its retired workers.
Let's talk about how that concept came about after WW2 and the unions' role in the whole mess.
The comparative advantage never includes the long term disruptive cost to society of shutting down the applicable industry.
I've argued this until i'm blue in the face and yet, in spite of direct evidence in the way of high unemployment , low wages, and increased personal and business debt the "free trade = productivity gains with no negative consequencies" mantra continues.
It's been 32 years since I first stated this. My how wrong i've been.
yes very well put
KTM and Dugan here are prime examples of this blind ideological faith
don't forget the trade deficit as well
The trade deficit is oil and cheap Walmart crap. Jimmy Carter tried to fix the oil problem for you... and you booted him out of office. And we all know who shops at Walmart... (let's just say it's not me...).
The US has pursued a policy of free trade since WW2 and the economy has remained near full employment during the vast majority of that time. Real disposable incomes have also risen dramatically the entire time. It is true, however, that the lowest income Americans have seen stagnant real wages during much of this period. Middle income Americans have benefitted from additional family members working (higher real median household income per family member) , higher asset prices, and a progressively larger amount of fringe benefits, which make up a larger percentage of total compensation than ever before (and which makes nominal wages look lower than they really are). This is all in additional to an unprecedented amount of goods and services which are available and very affordable to the average American today. That wasn't true before WW2, or in the 50s, 60s, or 70s.
And yet ... here we are.
The push for free trade and the consequent moving of industry overseas began to occur in the 70's. I remember far east groups touring manufacturing plants and taking pictures of assembly processes in electronic factories. I remember tours of people taking pictures in our steel mills and they were prevalent enough that there were newspaper articles written about it.
All you say about the availability of goods, higher asset prices, progressively larger amount of fringe benefits may be true. But in the face of what was lost it represents a bubble of short term gain and a future of long term loss.
People now can only afford those cheap goods with the result that even if they wanted they could not be independent of their situation. Remember it all looked good when cheap goods coexisted with more expensive but american made goods because the manufacturing jobs allowed a choice of either.
So what has happened now. Where has this model taken us. As you look around I hope you at least recognize belatedly that this is not the america you would have wanted. It is not the america any of us would have wanted.
The promise of brighter days is not enough. We have to weed out those who talk a good story ... yet are consistently wrong.
there you go again with the increased benefits as income arugment
except that people pay higher premiums, deductibles and co pays for insurance that covers less
and what nonsense about additional gfamily memebrs working - its because they HAVE to it takes two incomes now to do what one used to do for middle income people
agaoin goods that generally arent as good a value because they cost the same but are not as durable
how many tiumes do we have to go over the same old stuff dugan - you are not convincing anyone!
Actually be the mid-80s middle class America was faced with stagnant incomes when adjusted for inflation, espcially massively rising medical costs and vanishing benefits, while the nation moved from a net exporter to being a net importer. And by the way, 6% of GDP as net imports is not negligible and no less a person than Warren Buffet has been warning that we are selling the US out from underneath ourselves with our trade deficit - and somehow I believe I'll trust the Oracle of Omaha over yourself any day. And if you want to see somer eal numbers regarding the US economy, follow the bouncing link - http://www.shadowstats.com/alternate_data.
Ah "fringe benefits." That's what is crippling US companies.
Also, definition of "full employment" please. Would be 6% unemployed or 8% unemployed?
We are not shutting down "applicable" industries but only non-competitive ones. So you are right in your conclusion... but your premise is wrong. That's called gigo.
"free trade = productivity gains with no negative consequencies"
It's not so much a mantra as a simple fact that free trade exists and it makes things better. It's not a choice. Countries that used to protect their industries were called USSR and DDR. They don't exist anymore... nobody wanted to buy the products that came out of production facilities that never had to compete against world standards.
Only Johnny Doovers need protectionism.
:-)
free trade ideology is very much like a religion or cult - it cites anecdotal and fleeting "positives" and totally ignores the realities and social costs
but of course if you had read the article you would understand it
BTW Japan,china, Korea and Europe ALL practice some forms of protectioism - VATS, industry subusdies, iundustrial policy, export rebates so on
oppoenents of fair and sustainable trade, and those with disdain for US workers like to throw around words like protectionism and isolationism in an effort to make them bad words - lmuch ike they did with the word liberal
Another form of the "buggy whip" argument which is not only wrong but offensive to anyone who works in industry
You drive a car? not obsolete, you use electronics, mot obsolete, use medical devices not obsolete, computers? not obsolete, appliances not obsolete
these are viable products that are used every day yet are also being outsourced
Yes ... well things are good for you then.
Unemployment highest ever ... in debt up to our ears to other countries ... things are good. We deluded ourselves in shaping this future ... let us not delude ourselves in doing the post mortem.
United States is very much close to folding up like USSR and DDR. China could walk away from propping us up in a minute. We enjoy the debtors success ... we owe too much to let fail.
As far as protectionism it is a word made epithet by those who wish to take the right answer off the table. Were united states a company it would be protected from others taking it's trade secrets research and developement and setting up shop next door. In essence this is what corporation are doing when they move overseas. They are stealing multigenerational intellectual property.
They shed those workers who over the years have legitimately earned through refinement of product and process a fair share in the profits made on those products and replace them with workers who have no hand in product developement.
Profits are made ... on the backs of those not included as owners of the intellectual property covered by patent law ... on the refusal of the promised retirement ... on the relocation of jobs from their progeny overseas. Tariffs use to protect these people.
It is not competition that workers are afraid of ... it's being sold out by elected officials and people in the
In my own family my wife lost her job of just under a decade with a software outfit as they exported the job to India, my sister-in-law lost here 20 year career at IBM as the job was exported to India. And what have they managed to replace them with? My wife re-trained into respiratory therapy and now makes 50% of former wages with much lower benefits. My sister-in-law after searching for a while gave up and now lives simply off the income provided by her husband. And both of the people mentioned have master's degrees in science related subjects. My job is in the process of... being exported to India. Just as I'm trying to put two children through university, so where the Hades go I get the money to put myself back through college to retrain for something else, hmm? High tech was supposed to be one of those bright new fields we were going to be able to live on, but I guess not. I'm telling my children, who have been taught mandarin as a second language, to not count on staying in this country - and for my part in two years I plan on being back in Blighty - where there is an actual shortage of IT people rather than a faked one. And according to the latest stats France has a higher per capita income than America. But then they still manufacture things and discourage exporting jobs.
If you think free trade exists, you are simply deluded. The U.S. is, and has long been, much more open than our major trading partners. Japan, Korea, and China want our technology but not our products. And, among other things, there are limits on FDI in all of these countries - either formal or informal informal. And there is a question of the time frame which the U.S. continually ignores. The effect of protection is cumulative. Japan, for instance, used exchange controls followed by a rolling system of barriers while it strove for competitive advantage. Are barriers still there? Yes. Are they lower? Depends on the sector and the need. They are peeled away as they become less necessary. But Japan's market is never really open relative to ours.
The false comparative advantage is what has cost not only developed countries their economies, but poor ones as well.
One of the reasons that Africa and other poor countries are in a mess is because the corporate economists convinced them to switch from food production to a small number of specialty items, like minerals or other items depending on the country. This led to a heavier importation of food from the American agribusinesses.
Now that the cost of food has gone up, and some of the prices of the specialty items have crashed, these countries are no longer able to feed their people. The result is that their comparative advantage is no advantage at all, it is an all or nothing trap. These countries now have no investment money left to diversify their economy because it was spent on a small number of specialty products that have collapsed in the declining market.
It sure hasn't helped Mexico
the near complete collapse of its agriculture, and the horrid living conditions in the shanty towns around the maquiladoras has contributed to the increase in illegal immigration
What about the job growth in manufacturing and the energy sector? What about the strong GDP growth this decade?
There will be no recovery until the US gets it productive weatlh creating, prosperity sharing, and innovation creating mfg sector on its feet
we need industrial policy, revise or get out of unfair trade deals, crack down on currency manipulators, intellectual property thieves, tariffs, export rebates, R&D subsisides so forth
the mfg sector even in its much diminished state employs more than the finacial sector - helping mfg could be done so at a far less cost than wall street and have a much greater effect on main street
Manufacturing has been declining as a percentage of the economy since the mid-50s. Things like export rebates make goods more affordable to US consumers, which frees up money for them to buy other things or invest in other things. Manufacturing is not the only area of the economy that creates wealth. That is a myth.
It is not a myth - mfg creates wealth in a much greater proportion than any other activity
why else are the emerging economies investing so heavily in their mfg sectors
Finance is now the biggest sector of the US GDP, and it creates nothing. In fact, the financial industry has brought the world to the edge of disaster. Finance should support the productive efforts of an industrialized society, not the other way around.
The MBAs are collectively killing us.
Now even Japan sees their dominance slipping, though. Apple, a relatively small US company has completely outflanked them in the portable media player market AND in the sales channel for music. One can only imagine what the board of Sony thinks about that... if I knew some dirty words in Japanese I might just use them here...
This is just a small example of how dynamic a process industrial manufacturing is. One can not rely on being on top for even one product cycle because the competition can take that advantage away in a heartbeat. That the government has to provide the best possible support by delivering the best and brightest of engineers and industrial scientists and designers is a given. And that the US government is failing on that level is one, too.
Apple does not manufacture here
the benefits of a technology are not as widely shared if it is not only developed but produced domestically
the whole and correct point of the article
If Apple produced it's components in the US, then the iphone would be too expensive for the vast majority of consumers to buy and Apple would be less profitable, meaning less investment, less innovation, and slower growth.
Sony does not manufacture their cheap stuff in Japan, either. So your point is?
"the benefits of a technology are not as widely shared if it is not only developed but produced domestically"
If Apple had to produce their stuff in the US, it would be so expensive that they could only sell it as a luxury product. Nobody would be helped by that.
It seems that you are wholly focused on tech; and I agree with the writer below that you have missed the whole point of the article. A nation consumes far more than just tech. For instance: did you know that there are absolutely no bath towels made in the U.S. anymore? Have you recently tried to buy a complete outfit of clothes, including shoes, that was manufactured domestically? What happens when all of the domestic steel mills have been dismantled and we are suddenly isolated by some international incident or global catastrophe?
there is no comparative advantage by americans in manfacturing towels or widgets.
We should be manufacturing high tech products, using labor that has advanced education and high labor productivity.
Tech is what makes money. Weaving straw mats does not, unless you are happy with $3/day income.
" A nation consumes far more than just tech."
I got news for you: the US spent on the order of $500 billion on oil imports last year. The total US farming income was $380 billion.
http://www.ers.usda.gov/Features/FarmIncome/
See where that is going?
"did you know that there are absolutely no bath towels made in the U.S. anymore? "
And how much do you think can you make on weaving a bath towel? How many bath towels did you buy last year? How many are you using on average in your life? How does that compare to your expense on cable tv, high speed internet and fast food?
"Have you recently tried to buy a complete outfit of clothes, including shoes, that was manufactured domestically?"
Why would I? I would look really silly in a $3000 custom tailored suit at work where people wear khakis and short sleeved shirts, wouldn't I? Not to mention that $1500 leather shoes look really bad after flux cleaner drops on them...
:-)
"What happens when all of the domestic steel mills have been dismantled and we are suddenly isolated by some international incident or global catastrophe?"
For one thing we have plenty of steel mills left in the US. For another, what international incident would that be? Are we going to declare war on the rest of the world? Do we want to? Our dependence on steel is relatively low compare to e.g. China. Our dependence on steel prices, not so much. But that wouldn't be helped by more domestic steel mills. If the price of steel is high in China, it's high in the US, too. It's just that the local steel mill is making a killing when it is, and it is laying off people when the demand and price of steel are low...
Sony, as well as many, many others made huge mistakes on the entire audio on demand strategy, including some of their "executive" hires frankly. Apple saw the opening and took it. This specific issue has more to do with lack of vision, corporate politics than a national strategy really. Gomory is referring to economies of scale, and how critical domestic manufacturing is to a 1st world economy. One needs to manufacture for a variety of reasons, one cannot look at say, just cheap labor as a reason for a nation to lose their manufacuring base. There is advanced technical know how, national security, utilizing domestic raw materials, trade deficits, huge growth sectors, long term strategy, economic diversification... As far as I know the FT article is wrong in terms of blasting Japan's manufacturing strategy, exports and trying to claim they had little exposure to the financial crisis. Japan still lingers with it's own financial crisis and global recession implies yeah, global trade crashes and burns....but trying to state that magically a 1st world economy with highly educated people and a strong currency should plain abandon manufacturing...well, that's actually not too wise, which is Gomory's point (I think, as I read it).
Exactly right Robert
the fact is that 70% of innovation comes from the improvement and evolution of existing technology according to a recent industry week article.
R&D and technology go hand in hand with productive capacity. you really can't have a vital one without the other.
without the means to produce a technology you really have a diminished reason to have the creative sector that feeds it
As the developing world makes its own productive capacity it also develops its own creative sector and no longer needs the first world for this capacity
short sightedness, greed, bad economic and trade policy will leave us not only without a productive capacity but als a creative and innovative capacity
"This specific issue has more to do with lack of vision, corporate politics than a national strategy really. "
My point is that you need both but there are no guarantees. Japan had a national strategy and failed to take over the US electronics industry because the vision was here, with us, and still is. Sony, Panasonic etc. took over the tv and consumer audio space because the vision was theirs. Now Apple has the vision and Sony is on the crapper...
You can't prescribe success in the capitol with laws. You can make sure, though, that successful companies have many highly educated employees to pick from.
We manufacture plenty of stuff... it's just not consumer devices. We design a lot of them, though, and we collect the majority of the income. The people who make them in China etc. usually only get a fraction of the sales price.
"There is advanced technical know how, national security,"
We are absolute world leaders in that arena. All you have to do is to take a look at our declassified military systems and our space program... but none of that stuff generates considerable amounts of revenue. Intel's 45nm and soon 32nm process, however, do. And that's something that only Intel can do right now...
The point is that we are not abandoning manufacturing, at all. We are merely not in a position to fight the tide. That's not what one does. Instead you look for the NEXT big wave and you surf it, then you paddle out again, and you take the next one. Every dude with a surfboard knows how to do that, how comes so many educated people struggle with the fact that life, like ocean waves, is cyclical and requires constant paddling to catch its waves?
And how many people in the US actually earn a living off the products Apple sells? A vanishingly small number. The primary working class beneficiaries of Apple's innovation are in China. A handful of executives and designers make a good living at Apple, but not enough to really make a difference.
The same is true of Nike. The vast majority of the dollars which go into Nike support a small US white collar staff, and handful of highly paid endorsers, and an army of Chinese sneaker makers.
the best way to share the benefits of technology is not only to develop and market it but to produce it as well this maximise the amount of hands that benefit
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