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Challenging conventional wisdom, Eamonn Fingleton argues that manufacturing expertisenot the new information economyis crucial to jobs, exports, and growth. It is universally accepted that the future of the U.S. economy depends on its successful adaptation to a postindustrial, information-based global economy. The same conventional wisdom says that advanced economies should abandon manufacturing in favor of information-driven services such as finance, entertainment, and software. In this surprising and provocative book, the acclaimed financial journalist Eamonn Fingleton demonstrates that by every measure, including high-wage job creation, contribution to national income, and balance of trade, the manufacturing sector outperforms the "new economy." In Praise of Hard Industries argues with compelling logic that America's long-term economic success depends on its strategic advantage as a manufacturer of sophisticated equipment and producer goods.
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About the Author
A former editor for Forbes and the Financial Times, Eamonn Fingleton is an economics commentator who has lived in Tokyo since 1985. His most recent book, Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000, was praised by John Kenneth Galbraith, James Fallows, and Bill Clinton and was named one of the ten best business books of 1995 by Business Week.
Read an Excerpt
Three Strikes Against the New Economy
You can hardly pick up a newspaper these days without reading yet another glowing account of the golden prospects supposedly in store for the United States in the so-called postindustrial era. If media comment is any guide, almost everyone these days is convinced that new information-based businesses and other postindustrial activities have superseded manufacturing as the font of prosperity.
There is, it seems, a natural progression here. Just as in the early nineteenth century the United Kingdom exploited the bountiful possibilities of the manufacturing age to become the world's leading economy, a far-sighted United States is now poised to lead the world in a leap to a still more sophisticated level of economic endeavor in the postindustrial age.
This euphoric cast on America's so-called New Economy has been subjected to remarkably little reality checking. But the truth is that America's steady retreat from manufacturing cries out for close scrutiny. For there are major holes in the case for postindustrialism. Not only do those who advocate postindustrialism overestimate the prospects for postindustrial services, but they greatly underestimate the prospects for manufacturing. A major problem with the argument of postindustrialists is that they do not understand how sophisticated modern manufacturing truly is.
Before looking at the reality of modern manufacturing, however, let's first be clear about postindustrialism. The term covers a bewildering variety of businesses whose only obviousshared characteristic is what they are not: they are not manufacturing. Broadly defined, virtually all service industries might be considered part of the postindustrial economy. For the purposes of this book, however, we bend over backward to be fair to the postindustrialists and to judge their case on those advanced or sophisticated areas of the service economy whose prospects they regard as particularly promising. We therefore focus mainly on the information industry, which, as defined for statistical purposes recently by the U.S. government, consists of publishing, movies, broadcasting, telecommunications, and computer software. We also include within our definition of postindustrial services such other advanced areas of the service economy as financial services, database management, the Internet, consulting, accounting, advertising, and the law.
One confusing point that ought to be cleared up right away is that some statisticians have recently started classifying computer software as a manufacturing industry. This is obviously a perverse use of words, and one that is explicable only as an effort by embarrassed government officials to cover up the extent to which real manufacturing has declined in certain key Western nations. Throughout this book, we treat software for what it obviously is a postindustrial service.
Our task is to weigh the economic merits of postindustrial activities against those of what might be called hard industries. This term is intended to denote capital-intensive, technically sophisticated forms of manufacturing. Thus, it excludes most types of final assembly of consumer products, which is generally a labor-intensive and unsophisticated activity. This distinction needs to be emphasized because postindustrialists implicitly define manufacturing as merely labor-intensive work of the assembly type. In so doing, they set up a straw man, for there is no question that, in an increasingly integrated world economy, many kinds of consumer products can no longer be assembled economically in high-wage nations. What the postindustrialists overlook, however, is that assembly is only the final, and generally by far the least sophisticated, step in the making of modern consumer goods. Earlier steps such as the making of components and materials are typically highly sophisticated. And the making of components and materials is preceded by a still more sophisticated step the manufacture of the production machines that make the world's components and materials.
These higher levels of manufacturing used to be the backbone of American prosperity in the days of undisputed U.S. leadership of the world economy in the 1950s. Unfortunately for the United States, they have now migrated elsewhere and in particular to nations that have adopted carefully honed national strategies to boost their manufacturing prowess.
One nation that has been outstandingly successful in expanding its share of advanced manufacturing in recent decades is Japan. The history of the Japanese electronics industry in particular is an object lesson in how a nation can climb the ladder of manufacturing sophistication. Having started out in the 1950s as a lowly assembler of imported components, the Japanese electronics industry long ago phased out most of its assembly operations to make way for more sophisticated activities albeit activities that are almost entirely overlooked by consumers and even by business reporters and economic commentators. Among the most notable of such activities is the manufacture of high-tech electronic components. The Japanese electronics industry has also moved heavily into making the advanced materials and production machinery used throughout the world electronics industry. Among the other nations that have been similarly successful in advancing to ever more sophisticated levels of manufacturing are Germany, Switzerland, and Singapore. As we will see, these nations, like Japan, have generally outpaced the United States economically over the long run.
That said, we should make it clear that this book does not seek to disparage all postindustrial activities, let alone all service industries. Nor does it hold up all manufacturing activities as inherently superior. In fact, advanced nations clearly need a judicious balance of manufacturing and services, not least postindustrial services. Apart from anything else, many postindustrial services are necessary to support and enhance a nation's manufacturing base. The point, however, is that postindustrialism should not be embraced blindly just because it is fashionable. Nor should nations lightly allow their manufacturing prowess to drain away.
For as we will see, postindustrialism entails many hidden drawbacks. Of these the most important are
An unbalanced mix of jobs
Slow income growth
Poor export prospects
These drawbacks constitute in baseball terms three strikes against the New Economy.
Strike one against the New Economy: a bad job mix
The most obvious problem with the New Economy is that it creates an unbalanced mix of jobs. Whether we are talking about financial engineering, legal services, computer software, Web site building, health care, broadcasting, database management, consulting, scientific research, or telecommunications, most postindustrial jobs are for people of considerably higher than average intelligence typically people whose IQs rank in the top 20 percent on IQ tests, if not in the top 5 percent or even 1 percent. In this regard, postindustrialism contrasts sharply with manufacturing, which, of course, generally creates a well-balanced range of jobs.
Thus, for workers who lack the rarefied talents needed to succeed in postindustrial services, America's shift to the New Economy is little short of a disaster. In fact, the job prospects for such workers are so discouraging that even the postindustrialists don't bother to sugarcoat the pill. As estimated by the postindustrial economic commentator Michael Rothschild, up to 20 percent of the American workforce will be marginalized by the move to an information-based economy. That amounts to a shocking 25 million people or roughly four times the total number of jobless workers in the United States as of 1998!
Yet Rothschild and his cohorts see the sacrifice of so large a share of the workforce as not only inevitable but even acceptable because the collateral advantages of postindustrialism for the rest of the economy are supposedly so large. The postindustrialists imagine in particular that postindustrialism is a formula for generally fast growth in incomes. Would that it were so. For subpar income growth is the second strike against the New Economy.
Strike two against the New Economy: slow income growth
That the drift in the United States into postindustrialism results in weak income growth is one of the most serious, albeit one of the least recognized, drawbacks of the New Economy.
Yet the evidence is undeniable. Nearly two decades after the United States began its fateful drift into full-scale postindustrialism, international economic comparisons consistently show that Americans have lagged in income growth in the interim. The ultimate authority on this is OECD in Figures, a yearbook published by the Paris-based Organization for Economic Cooperation and Development. For those who believe in the superiority of the U.S. postindustrial strategy, the 1998 edition of this yearbook makes distinctly chastening reading. It shows that, with a per capita income at last count of just $27,821 a year, the United States trailed no fewer than eight other nations. These include Japan, Denmark, Sweden, Germany, and Austria, all of which devote a larger share of their labor force to manufacturing than the United States. Most telling of all is the performance of Switzerland, a manufacturing-oriented economy whose per capita income of $41,411 is the highest of any OECD nation. Although in the popular mind Swiss manufacturing is more or less synonymous with cuckoo clocks, Switzerland's real strength lies elsewhere. A world leader in machine tools and in sophisticated equipment for the textile, chemical, and electricity-generating industries, Switzerland is the very model of an advanced manufacturing economy.
That said, not all the world's high-income nations are noted for their large manufacturing sectors. In fact, the same OECD yearbook shows that the United States is surpassed in income by two countries with quite small manufacturing sectors, Norway and Luxembourg. But even in these cases, there is little to encourage the postindustrialists. Take Luxembourg. With 17.0 percent of its labor force in manufacturing compared with 17.3 percent in the United States, it is hardly more deindustrialized than the United States. Moreover, it owes its income edge to a unique factor that the United States clearly cannot hope to emulate: it is a major international tax haven whose receipts of foreign financial flows many from questionable sources are vast in relation to its tiny population of 418,000. Norway's nonmanufacturing prosperity is an equally special case. Why? Because with a population of just 4.4 million, Norway ranks as the world's second-largest oil exporter after Saudi Arabia!
In any case, the absolute levels of incomes we have been discussing so far are less important than the pace of income growth. And here the facts are even more clearly against the postindustrialists.
A particularly appropriate starting point for any analysis of income growth is 1980. This was the year when the merits of postindustrialism were first widely debated in the United States. The debate began after the social philosopher Amitai Etzioni published a gloomy analysis of U.S. deindustrialization. His concern about America's incipient drift out of manufacturing was widely challenged by many feel-good commentators, who proceeded to enunciate the now widely accepted doctrine that a shift to postindustrialism would boost U.S. income growth.
Yet with almost no exceptions, manufacturing-oriented economies have outpaced the United States in income growth in the interim. Take the sixteen-year period to 1996, the last year for which full OECD figures are available as this book goes to press. In that time, the United States boosted its per capita income at current prices that is, before adjustment for inflation by a total of 134 percent. Although at first sight this growth seems impressive, it was bested by no less than twelve other OECD nations. In order of income growth, these were South Korea, Japan, Portugal, Ireland, Luxembourg, Austria, Italy, Spain, Denmark, New Zealand, Germany, and Switzerland. And with the single exception of Luxembourg, all these nations boasted a greater commitment to manufacturing employment than the United States. In fact, many of them are renowned for their outsized manufacturing sectors most notably Germany, Japan, and South Korea. Less well known, but perhaps even more significant, is that Spain and Ireland have determinedly pursued national policies to build their manufacturing sectors in the last three decades, and they too have been rewarded with notably superior income growth.
If these manufacturing-oriented nations had outperformed only the United States, the evidence would be convincing enough. But in fact, they have also outperformed several other nations that have embraced postindustrialism almost as enthusiastically as the United States. Perhaps the most notable case in point is the United Kingdom, whose cumulative income growth, as measured in current dollars, in the sixteen-year period came to just 106 percent. This put it twenty-first in a field of twenty-six OECD nations. Canada, another rapidly deindustrializing nation, came in second to last (ahead only of perennially ill-starred Mexico), having mustered income growth of just 81 percent.
Given the strength of the statistical evidence to the contrary, why did the postindustrialists ever consider the information economy a superior formula for income growth in the first place? They have been blindsided by a subtle fallacy in economic reasoning. This fallacy is clearly apparent in the views of, for instance, John Naisbitt, the author of Megatrends and one of the earliest cheerleaders for postindustrialism. Noting correctly that the wages of America's postindustrial workers are generally much higher than the American average, Naisbitt jumps to the completely fallacious conclusion that a general shift by the United States into postindustrialism will result in a general boost to wages. The fallacy here is Naisbitt's assumption that postindustrial wages are high by dint of the innately superior economic virtues of postindustrial services. In reality, of course, the high wages paid in typical postindustrial businesses, such as software, merely reflect the fact that such businesses generally recruit exceptionally intelligent and capable workers, in essence workers who could expect to earn superior wages in almost any field they chose to enter. In particular, such workers could earn at least equally high wages in a manufacturing-based economy. Naisbitt utterly overlooks the plight of the rest of the workforce, especially the millions of ordinary workers left out in the cold by the shift to the New Economy. It is their plight, of course, that is behind the persistent underperformance of the United States in international comparisons of income growth.
Nevertheless, many postindustrialists cling doggedly to their faith in the New Economy's superior income performance. How do they explain away the contrary evidence? By raising various objections to the methodology underlying the OECD comparisons. They seize, for instance, on the fact that the period under consideration does not include 1997 and 1998, years in which such manufacturing-oriented economies as South Korea and Japan suffered well-publicized economic problems. But including these two years would make little difference to the outcome. And even if we eliminate South Korea and Japan from the discussion, we are left with many other manufacturing-oriented economies that have clearly been beating the United States in income growth and/or absolute income levels.
In any case, two bad years are not remotely enough to eliminate South Korea and Japan from the reckoning. Take South Korea. In the sixteen years to 1996, its cumulative income growth was a stunning 546 percent. By comparison with this performance, the subsequent strains suffered by that nation have been no more than speed bumps. In fact, it is likely that when all the figures are available, we will find that South Korea remains far and away the league leader in income growth for the entire period from 1980 to 1998.
Equally in the case of Japan, the strains suffered in 1997 and 1998 were nowhere near so serious as to wipe out the superiority of its record in the previous sixteen years. We have more to say about Japan later, but for now let's be clear about one thing: the impression that the Japanese economy "collapsed" in the 1990s is a myth. Of course, not everything in the Japanese economy has been going well. In particular, as the media have continually emphasized, Japan's stock market has been in the doldrums for years after crashing in the first years of the decade, and the Japanese banking system has been laid low by major troubles in the Tokyo real estate industry. But given that this present writer was one of the few Tokyo-based financial observers who in the late 1980s issued prescient and outspoken warnings of the coming crashes in banking and stocks, he can claim to have some insight into the true nature of the problems in Japanese finance. On his analysis, the significance of Japan's financial problems for the wider Japanese economy has been greatly exaggerated. And the result has been that American policymakers have been encouraged to overlook Japan's many hidden strengths in the 1990s.
A second objection the postindustrialists raise to the OECD comparisons concerns the exchange rates used for converting foreign nations' incomes into dollars. Although the OECD's figures are converted at market exchange rates (and it is hard to think of a more objective methodology than that), the postindustrialists believe this method is unfair to the United States. They maintain that the purchasing power of the dollar within the United States is greater than what one dollar can buy abroad if converted into local currency at market exchange rates. They therefore embrace a system of comparison in which "purchasing power parity" exchange rates are used to assign a lower-than-market valuation to wages earned by workers in Japan, Germany, Switzerland, Singapore, and other advanced foreign nations.
At first sight, this methodology seems to make sense. After all, an American family posted to, say, Singapore, will soon discover that replicating an American lifestyle there is much more expensive than in Peoria. To the postindustrialists, therefore, the fact that wage levels in Singapore are somewhat higher than those in the United States hardly proves that Singaporeans are better off than Americans. But the postindustrialists forget that, by the same token, citizens of Singapore who try to replicate their home-country standard of living in Peoria also face sticker shock. They may, for instance, need to maintain two or three cars just to get through the day, whereas, by contrast, in Singapore the supermodern public transport system is so comfortable and safe that even many well-off citizens see little need to own a car. The Singaporeans will also face sticker shock when it comes to educating their children. How much will they have to pay for private education to make sure their children get as good a start in life as they would in an ordinary Singaporean state school? And for that matter, is there any private school in Peoria, however expensive, as safe from the drug culture as an ordinary Singaporean school?
The postindustrialists' purchasing power parity method tends to throw up particularly anomalous results in the case of the principal U.S. economic competitor, Japan. On a purchasing power parity basis, the Japanese come out looking distinctly less affluent than Americans. This impression seems to be confirmed by the high prices the Japanese must pay for items such as housing, beef, and entertainment. But are the Japanese really so poor? Hardly. In fact, on many of the most important measures, the Japanese are clearly richer than Americans. Take the most important measure of them all, life expectancy. If the past is any guide, this highly objective measure is closely correlated with living standards. Remember that in the early years after World War II the world's highest life expectancies were found in Sweden and Norway, nations that by common consent at that time led the world in affluence. These days, however, the Japanese are the world's longest-lived people. In the space of just sixty years, their life expectancy has gone from about fifteen years shorter than that of Americans to nearly four years longer. The key factor driving this trend has clearly been rising living standards. It is obvious, therefore, that there is something wrong with a purchasing power parity methodology that portrays the Japanese today as significantly less affluent than Americans.
There are many hidden flaws in the purchasing power parity method. Although it may accurately capture the variation in the price of a McDonald's hamburger around the world, it is far from reliable in assessing less easily measured items such as infant care and preventive medicine, areas in which superior Japanese standards do much to explain Japan's world-beating longevity rates.
Much more could be said about the major blindspots in the purchasing power parity method. But all we need to note here is that purchasing power parity is an ethnocentric yardstick that should have no place in a scientific debate. What matters is the undeniable fact that, measured at market exchange rates, employers in many foreign countries pay wages that are considerably higher than American employers pay. Thus, it is a myth that manufacturing-oriented economies are ipso facto low-wage economies. And, of course, the postindustrialists' suggestion that manufacturing economies are destined to suffer slower income growth than postindustrial ones is clearly even more misguided.
The end result of postindustrialism is not only poorer income prospects for individual American workers but a general decline in U.S. economic strength. This decline is greatly compounded by the New Economy's tendency to weaken the nation's trade position. To that subject we now turn.
Strike three against the New Economy: a dearth of exports
The third big drawback of postindustrialism is that it weakens a nation's prowess in overseas trade. It is a problem that has received remarkably little attention from the postindustrialists. In fact, such leading advocates of postindustrialism as Daniel Bell, John Naisbitt, and Kevin Kelly make virtually no reference to exports in their writings. But there is no getting away from the fact that the export problem is not only obvious but extremely serious.
Virtually all postindustrial activities are handicapped in export markets by fundamental cultural differences. Take the much-hyped new American information businesses that have mushroomed with the rise of the Internet. Almost all their revenues come from within the United States because in overseas markets their sales are hindered by several cultural and regulatory factors, of which the most obvious is language. English may be a universal language, but most non-native speakers are hardly more likely to be comfortable reading English-language websites than, say, English-language magazines. Differing national tastes also limit the export potential for Internet-based information businesses: an American database of baseball scores, for instance, has little appeal in Britain, let alone in Germany or France.
Many kinds of information are inherently local in appeal and therefore generate minimal exports. Information on traffic conditions in Vermont, for instance, is likely to be of little value in Virginia, let alone in Vietnam. Similarly, a database on Nebraskan car insurance rates has limited value in North Carolina, let alone in the Netherlands or Nepal. The problems in exporting information are in fact endless. It is not surprising that, as noted by the Internet consultant Alfred Glossbrenner, American information providers' export sales are "negligible."
As we will see in chapter 2, similar cultural problems are also much in evidence in curtailing the American computer software industry's export prospects. These problems are perhaps most obvious in the case of personal computer programs, which must, of course, be comprehensively altered for other nations' writing systems and customs. The costs involved cut deeply into U.S. export revenues. In particular, the user interface the array of commands and menus by which the user operates the computer must be tailored to the user's culture. Much more is involved than merely writing the commands and menus in the user's national language. The interface for many application programs, such as accounting and factory-management systems, may require a total makeover to fit the customs and procedures of other nations. Sometimes the user interface may even have to be tailor-made to suit the needs of individual companies within a single country. Thus, for all the hype about the world-beating lead in software enjoyed by the United States, most American software businesses generate little if any revenue abroad and therefore do remarkably little for the chronically troubled U.S. balance of payments.
Culture is also a barrier to exports in many other highly paid information-based professions. The United Kingdom's famously strong advertising agencies provide a good example. Among the largest and most globalized agencies in the world, they shape the worldwide advertising activities of such globally active corporations as Ford, IBM, Philip Morris, Procter & Gamble, and Toyota. Nonetheless, their contribution to Britain's balance of payments is quite puny. The reason is obvious: few of the jobs involved in serving their global clients are British jobs. To create advertising for the American market, for instance, British advertising agencies rely heavily on thousands of American advertising professionals in New York and elsewhere in the United States. And of course, a fortiori in non-English-speaking markets, such as Japan or Germany, British advertising firms must rely almost entirely on locally recruited professionals to serve clients in those countries. Thus, most of their foreign revenues are eaten up by costs incurred abroad. At the end of the day, all the British economy receives is a trickle of dividends on the capital invested overseas.
The story is much the same in other information-based businesses. Take the American legal profession. It accounts for fully 2 percent of the U.S. gross domestic product, yet it contributes virtually nothing to the U.S. balance of payments. In truth, with the exception of some special clients such as foreign corporations operating within U.S. borders, foreigners have no need for American legal advice.
So much for cultural barriers to postindustrial exports. But these are far from the only impediments limiting overseas sales of U.S. postindustrial services. Another key impediment to trade in postindustrial services is regulation in foreign markets, which is generally a much bigger problem for exporters of services than for exporters of manufactured goods.
Regulation is a particularly serious problem in financial services, an industry that ranks second only to computer software in the hopes pinned on it by the postindustrialists. If we believe the postindustrialists, nations like the United States and the United Kingdom can look forward to rich pickings as other nations open their financial markets to overseas competition in the years ahead. Unfortunately, this prospect is largely fantasy. It ignores the fact that regulators in many overseas financial markets are not as "global" in their outlook as those in the United States, let alone those in that ultimate postindustrial pioneer, the United Kingdom. As we will see in chapter 3, regulators in many key nations believe it is crucial to maintain their grip on their nations' financial systems, even if they rarely acknowledge this publicly.
Another major problem for many would-be postindustrial exporters is inadequate protection of their intellectual property rights. In particular, piracy in foreign markets severely depletes the flow of foreign revenues to many important postindustrial businesses, most notably computer software, movies, and music. Perhaps the most worrying aspect of the problem is that illegal copying of copyrighted work is getting ever easier thanks to technological advances. Pirating is rife in the CD industry, for instance, in part because the investment needed to set up a CD replication operation is, in real terms, only a fraction of the cost of a record-pressing plant in the era of gramophone records. Now, of course, the rise of the Internet has made it even easier to profit from other people's work.
It is important to remember that piracy is a double whammy for American postindustrial exporters. First, of course, it deprives them of sales volume. The second effect, while less obvious, is perhaps even more serious: it puts them into head-to-head competition with cut-price versions of their own products with devastating implications for their pricing strategy.
As if America's poor prospects for exports were not bad enough, there is another problem with the trade side of postindustrialismrising imports. At first sight, the idea of the United States importing postindustrial services on a large scale is hard to reconcile with our observation that cross-border trade in postindustrial services is heavily curtailed by cultural and other barriers. But in fact, there is no contradiction here, because the barriers to trade in postindustrial services are often not totally insurmountable. Rather, they are expensive to surmount. Typically, the only real problem in exporting postindustrial services is that postindustrial products have to be adapted considerably for foreign markets. Although this adds to costs and thus is a major drawback for high-wage countries, it is hardly fatal for low-wage countries.
The full seriousness of the import threat becomes apparent only when one realizes that postindustrial services are highly labor-intensive typically more so even than such labor-intensive manufacturing activities as the final assembly of televisions and radios. By definition in a labor-intensive industry, the cost of labor is a decisive factor in export competitiveness. Thus, as global competition intensifies, the First World's postindustrial businesses can be expected to outsource more and more of their services from low-wage nations in the Second and Third Worlds.
Even such a sophisticated business as the American computer software industry is far from invulnerable to the threat of Third World competition. At first sight, this seems hard to credit. After all, computer software is generally regarded as the ultimate "knowledge industry," an industry that requires not only a great deal of sophisticated know-how but a special streak of creativity that only a few countries are supposed to have. How can Third World countries possibly aspire to go toe to toe with the United States in such an industry? Actually, very easily.
Let's address the creativity argument first. All conventional wisdom to the contrary, there is little evidence that simply by dint of their nationality Americans are more creative than other people and certainly there is no reason to hope, as the postindustrialists do, that a purported edge in creativity will render the United States invulnerable to foreign competition in the postindustrial era. In fact, the evidence the postindustrialists adduce for their belief in superior American creativity is remarkably flimsy. They make much, for instance, of the fact that Americans are disproportionately successful in winning Nobel Prizes for science and technology. But is this a reliable measure of creativity? Actually no. Why? Because Nobel Prizes for science are awarded mainly for breakthroughs in only one narrow field, fundamental science. And the success of a nation's scientists in fundamental science is a function far less of their inherent creativity than of how much government money is available for such science. Since the U.S. government is by far the world's biggest spender on fundamental science, American scientists not surprisingly win more than their share of the prizes. We have more to say about the creativity question later. But for now let's agree that creativity is a human attribute that is manifested in different forms in different cultures and is not notably absent among appropriately trained workers in even the poorest nations.
In any case, as we will see in chapter 2, the role that creativity plays in the software industry has been greatly exaggerated. Certainly the incontrovertible facts of the industry give the lie to the idea that Americans have a special lock on software-writing skills. Many other nations, including some of the world's poorest, have demonstrated that they have what it takes to compete in the industry. Moreover, the know-how to enter the software business is amazingly easy for the developing world to acquire. That opens up the possibility that American software workers will increasingly be undercut by low-wage workers abroad. In fact, as William Wolman and Anne Colamosca have pointed out in their book The Judas Economy, the threat of Third World imports is potentially far greater in software than in hardware. Thanks to breakthroughs in satellite communications, Third World software companies can now deliver their products instantaneously and cheaply to customers anywhere in the world. By contrast, the Third World is heavily handicapped in trying to export manufactured goods to the West because of abysmal local transportation systems, not to mention the high cost of shipping bulky goods to far-off overseas markets.
The conclusion, therefore, is that, from the point of view of the American balance of payments, the shift to postindustrialism is double trouble. First, it weakens the nation's export strength. Second, it exposes the United States to the prospect of rapidly increasing imports. That said, many Americans find it easy to overlook the fact that postindustrial businesses do not do much for the balance of payments. After all, the huge U.S. current account deficits do not directly affect the quality of life within the nation at least not in the short run. But in the long run, trade matters and matters fundamentally. A nation that allows its trade position to deteriorate too far for too long cannot expect to remain the world's leading economy indefinitely.
In truth, almost anywhere the postindustrialists' case is tested, it turns out to be more sizzle than steak. Having understood the New Economy's weaknesses, let's now consider the crucial and much-over-looked strengths of manufacturing.
In praise of hard industries
As we have already noted, the most obvious advantage of manufacturing is that it creates jobs for a wide range of people. In fact, even in the most sophisticated areas of manufacturing, jobs abound for the sort of blue-collar workers who are being increasingly marginalized in postindustrial economies. Take the most advanced areas of the steel industry. Many steel industry jobs have become simpler and easier to carry out as steelmakers have moved to ever higher levels of automation over the years. In many manufacturing industries these days so much knowledge can be built into the production machines that even a worker of less than average intelligence can operate them effectively.
As Bennett Harrison of New York's New School has pointed out, all conventional wisdom to the contrary, unskilled workers "barely off the farm" can be readily trained to operate computer-controlled presses and similarly sophisticated production machinery. In Harrison's terms, today's high-tech production machinery is not "skill-demanding" but "skill-enabling." Quoting a study by the economist David Howell, Harrison rebuts the widespread belief that a move to more advanced production techniques necessarily results in the marginalization of workers of average intelligence. Referring to the trend for low-paid workers to suffer declining real wages in the United States in recent years, he comments: "If wages of poorly educated workers are falling, we need to look for explanations other than technology. After all, the same technologies have penetrated factories and offices in Europe and Asia, yet nowhere outside of the United States have low-end wages fallen so far and so fast."
Of course, high-tech manufacturing is necessarily very capital-intensive. To the postindustrialists, this seems like a major disadvantage. But this view could hardly be more wrong. Remember that in general the more capital is invested in a factory, the higher its labor productivity is likely to be. And superior productivity is, of course, the royal road to high wages. Moreover, the fact that an industry is capital-intensive almost automatically elevates it beyond the reach of competitors in low-wage nations. The truth is that many manufacturing industries are becoming ever more capital-intensive all the time, thereby raising ever higher the barriers to entry for poorer nations.
Even quite mature manufacturing industries can be notably capital-intensive -- and particularly the more advanced sectors of such industries. Take the textile industry. Although the production of textiles is generally regarded as labor-intensive, many of the textile industry's subsectors are highly capital-intensive and therefore tend to be dominated by rich nations. Spinning is a good example. As recounted in the Wall Street Journal, the capital required in a state-of-the-art spinning mill these days can amount to as much as $300,000 per job. It is hardly surprising, therefore, that the world's most productive spinning mills are located in affluent northern Italy, not in dirt-poor India or Pakistan.
Perhaps the ultimate example of high capital intensity is the components side of the electronics industry. As we will see, the investment per job in some Japanese component factories can reach well over $1 million or more than one hundred times the rate of capital intensity in some parts of the world software industry.
It goes without saying that in capital-intensive businesses factory wages are likely to represent only a small proportion of total costs. They are dwarfed by depreciation, financing charges, royalties for intellectual property, research and development expenses, and other high overheads. Just how small the wage component of costs can be was startlingly illustrated in the case of a cellular phone factory built by Motorola a few years ago. After looking at many alternative sites around the world, Motorola decided to locate the factory in ultra-high-wage Germany. Germany's high wage costs mattered little because wages accounted for only 3 percent of the company's total expected costs. In truth, from the point of view of an advanced manufacturing company, the need to offer superhigh wages is a small price to pay for the many advantages of a German location. Whereas higher German wages add only slightly to total costs, Germany offers a world-beating manufacturing infrastructure complete with superb utilities, reliable delivery services, honest regulators, and a pleasant residential environment for expatriate executives. And of course, there is also the advantage of Germany's well-educated and disciplined workforce. As Norbert Quinkert, chairman of Motorola's German operations, points out, the advantage to the company of choosing a lower-wage location such as Britain was actually negligible in the larger scheme of things.
If capital intensity were the only advantage that manufacturing had over postindustrial services, the case for manufacturing would be strong enough. But manufacturing boasts another key advantage: it enables incumbents in an industry to build up a huge endowment of proprietary know-how that gives them a wide productivity edge over new entrants to the industry.
Some of this know-how is explicitly protected by patents, but often the most valuable know-how is unpatented proprietary production technology. Typically such know-how can be acquired only by dint of many years of learning by doing.
Just how formidable an advantage superior manufacturing know-how can be is best seen from the point of view of a new entrant to an industry. Lacking the benefit of the incumbents' know-how, a new entrant is condemned to achieve notably poor labor productivity rates. Thus, even if a new entrant operates from a developing nation and therefore enjoys a large advantage in lower wages, its unit costs will start out considerably higher than those of the incumbents, and it will probably have to continue to absorb losses for many years as it struggles to catch up in know-how. In practice, the struggle is an unequal one and unless the new entrant enjoys the full support of an extremely far-sighted, nationally organized effort, such as that mounted by the Japanese government over the last one hundred years, it will undoubtedly think twice about entering the field in the first place.
It is difficult to exaggerate what a great advantage incumbents typically enjoy in many areas of advanced manufacturing these days. Take a product like liquid-crystal displays. Most familiar as the flat screens used in notebook personal computers, these seem at first sight to pose no great manufacturing challenge. In one sense this is correct. Basically an adaptation of semiconductor technology, they are made using similar manufacturing equipment. In theory at least, many companies around the world could enter this extremely fast-growing business. But in practice, few have done so, with the result that the world market is utterly dominated by a handful of Japanese manufacturers. In fact, Osaka-based Sharp Corporation alone enjoys a world market share of close to 50 percent.
Why such market concentration? The key to the mystery is something called "yield" the percentage of flaw-free products in a given production batch. A liquid-crystal display is flaw-free only if all of the countless "dots" that constitute its screen are fully functional. The misbehavior of even a single dot is not only noticeable to the human eye but intolerably distracting. Since each dot is controlled by a separate tiny transistor; every single one of hundreds of thousands of transistors must function as advertised. Given that, among other things, the tiniest contamination, such as a microscopic speck of dust, can render such transistors dysfunctional, the quality-control challenge in producing these devices is enormous. A new entrant to the industry would be lucky to get a yield of good screens of as much as 10 percent. By contrast, the leading incumbents in the industry are believed routinely to achieve yields of 90 percent or more. Thus, differences in yield alone can give incumbents in this industry a nine-to-one productivity advantage over new entrants.
One obvious step a company can take to improve yield is to filter the factory air with extreme care. But this is easier said than done, and even when a liquid-crystal display company takes all obvious precautions, it can still end up with a notably poor yield.
Admittedly, not all manufacturing involves entry barriers as formidable as this. Bur even the manufacture of relatively simple materials often requires a great deal of valuable proprietary know-how that is difficult for would-be entrants to an industry to acquire. Take something as simple as adhesives. As an expert at the Shell/Royal Dutch oil group has pointed out, the exact chemical structure of an adhesive is often almost impossible for competitors to determine. A manufacturing company may literally need to have unrestricted access to its competitors' factories if it is to understand their production processes. In the nature of things, such access is generally denied; thus, in seeking to close the technology gap with more advanced competitors, manufacturing companies often resort to amazing and often highly controversial -- tactics. Take, for instance, some Japanese aerospace executives who wanted to acquire American aerospace know-how. As recounted by Larry Kahaner in Competitive Intelligence, these executives wore shoes with especially soft soles when touring American aerospace factories. Their objective was to pick up from the factory floor microscopic metal shavings, which were later analyzed for clues to the Americans' manufacturing secrets.
Of course, with reasonable luck, a security-conscious manufacturing company can keep most of its production know-how secret for years, if not decades. Even in mature manufacturing industries, proprietary know-how often provides incumbents with enduring protection against new competition. The photographic film industry provides a striking example. Because its product is based on nineteenth-century breakthroughs in silver chemistry, this industry might seem like an easy target for, say, the East Asian tiger economies. But in reality, it has remained all but impregnable to them. Even the Koreans are no more than a negligible force in the industry: although they make some film at home, they do little exporting and are highly dependent on inputs imported from Japan and the United States. A key problem for the Koreans, as for other would-be entrants, is that they cannot match the enormous endowment of know-how that the incumbents have built up over several decades of learning by doing.
The most recent major entrants to the business, Fuji Photo Film of Japan and Polaroid of the United States, got their start as long ago as the mid-1930s and their stories only serve to underline how high the entry barriers truly are. Fuji Photo would probably never have gotten off the ground but for the fact that Japan's then-military government deemed photographic film an essential war matériel; thus, Japan spared no expense in establishing an indigenous source of supply ahead of Pearl Harbor. Polaroid's rise was propelled by a similarly unique force: the enormous creativity of Edwin Land, one of the most brilliant inventors of the twentieth century. Yet even with the benefit of Land's technological innovations, Polaroid has remained no more than a niche player that continues to depend on competitors for certain key inputs.
The fact remains that, at the end of the twentieth century, the global photographic film market is still dominated by just three companies, Eastman Kodak, Fuji Photo Film, and Agfa-Gevaert. Based, respectively, in the United States, Japan, and the European Union (EU), these are all quintessential First World manufacturing employers. Admittedly, Eastman Kodak has been losing market share in recent years, but it is important to note that it is being challenged not by a low-wage competitor but by Fuji Photo, a Tokyo-based company whose wage rates are considerably higher than American levels.
The same pattern of large entry barriers is apparent right across the board in advanced manufacturing. It is obvious, therefore, that nations with a heavy orientation toward advanced manufacturing enjoy a fundamental edge in world economic competition hence, for instance, the pattern we have already noted whereby manufacturing-oriented economies have shown remarkably strong income growth in recent years. And the result is that both Japan and Germany have now decisively passed the United States in wage rates. As recorded in the 1998 edition of Japan: An International Comparison, a publication of the Japan Institute for Social and Economic Affairs, the average hourly wage was $21.01 in Japan, $14.79 in Germany, and just $12.37 in the United States.
Moreover, Japan, in common with such other advanced manufacturing economies as Austria, Switzerland, and Singapore, has generally enjoyed lower unemployment than the United States in the 1990s. Admittedly, one notable manufacturing-oriented economy has been doing less well in this regard. That country is Germany, whose unemployment rate was running at 11 percent as of 1998. Germany's problems, however, stem not from its manufacturing orientation per se, but rather from the fact that its economy has been suffering continuing dislocation following German reunification. (In 1998, nearly a decade after reunification, unemployment in the territories of the former East Germany was still running more than double that of the rest of the country.) An additional problem has been the increasing burden that Germany's leadership role in the European Union places on the German economy; in particular, Germany suffers disproportionately from the fact that EU nations have been exporting unemployment to one another for decades. Germany apart, unemployment rates in most other high-wage manufacturing economies have remained notably low in the 1990s. Take Japan. Although Japanese unemployment in 1999 slightly exceeded that of the United States, it has averaged less than 4 percent for the decade as a whole. American press commentators sometimes suggest that Japanese unemployment figures are understated, but as research by both the U.S. Department of Labor and the OECD has shown, this is a dogma-driven assertion unsupported by the facts. That there is no large hidden army of unemployed people in Japan is also confirmed by the experience of foreign employers, who consistently complain of shortages of many types of labor.
If manufacturing merely delivered high wages and low unemployment, its contribution would be impressive enough. But it also delivers another crucial economic blessing: a powerful trade performance. This reflects the fact that manufactured goods are generally much more universal in appeal than services a fact that is abundantly apparent in the consistently large current account surpluses that most of the successful manufacturing-based economies have achieved in recent years. It is a notable fact, for instance, that of the eleven manufacturing-oriented member nations of the OECD that have surpassed the United States in income growth in recent years, all but three were running current account surpluses at last count. Meanwhile, the two great postindustrial economies, the United States and the United Kingdom, have consistently been running large current account deficits for many years.
To sum up, whether judged by jobs, wages, or trade, manufacturing scores over postindustrial services.
Table of Contents
|I||Postindustrialism Versus Manufacturing|
|1. Three Strikes Against the New Economy||3|
|2. A Hard Look at Computer Software||37|
|3. Finance: A Cuckoo in the Economy's Nest||68|
|4. From Cyberspace to Tinseltown||87|
|5. A Showcase of Manufacturing Strengths||115|
|6. Golden Oldies: Ships, Textiles, Steel||143|
|7. The Future: An Expanding Universe||165|
|IV||Toward a Manufacturing Renaissance|
|8. Time to Take the Blinders Off||199|
|9. An Action Plan||227|