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Manufacturing Matters: The Myth of the Post-Industrial Economy.

Manufacturing Matters: The Myth of the Post-Industrial Economy

THIS BOOK IS WELL worth reading for anyone interested in forecasting or planning for the future industrial structure of developed countries. Its thesis is that the trendy idea of "post-industrial society" is a misleading myth, in its connotation that a wealthy country can abandon manufacturing activity and move on to producing only services. The authors emphasize that what is called the service sector is very heterogeneous, and a large chunk of it consists of services to manufacturing, which could not long survive in a country without an indigenous manufacturing sector.

Professors Cohen and Zysman (who are associated with the International Economy program at the University of California, Berkeley) argue that most economists are not aware of the subtle tight linkages that generally bind services to hard goods industries. As an example, they evaluate the case of agriculture, which always is cited as an industry that the advanced economies (to their advantage) have now outgrown. Agricultural employment as a share of the total has been shrinking throughout this century, and is now below 3 percent of total employment. While agricultural employment as a share of the total has continued to decline, agriculture has over a long period of time continued to be the U.S. sector with the most rapid productivity growth, with very high rates of increase in output. Moreover, when employment in industries tightly linked to agriculture is added (including a number of business services to farmers, plus food processing which could not exist outside geographic proximity to agriculture), the share of total employment deriving from that industry actually remains at 6 to 8 percent of total U.S. employment.

Above all, they emphasize that agriculture was not "offshored." Agriculture became less important as a source of employment not because of displacement by imports, but because of technological improvements that led to productivity gains. They are worried that such improvements are not occurring in manufacturing, citing data about loss of market share to imports and the decline in U.S. relative efficiency.

Drawing on the analogy of agriculture, they make their most important argument: the high wage, high technology service industries for the most part have tight linkages to manufacturing, and could not exist in a country that does not have a strong manufacturing sector. Analysts who only look at aggregate data on services in the economy are coming up with a completely inappropriate categorization. The many components of what they call services are extremely diverse. A large proportion of it could be more correctly categorized as inputs to manufacturing but taking place outside the manufacturing company. They estimate that direct and indirect manufacturing (the latter meaning the tightly linked services) employment remains about half of total employment in the United States, rather than the 24 percent of total employment that is usually counted.

They go on to debunk the notion that an advanced country like the United States could remain prosperous by exporting large volumes of services to pay for the manufactured goods imported. Most of the United States' historical surplus in services trade has been in the form of income from U.S. foreign investments, which will necessarily be a diminishing quantity now that the U.S. is a debtor nation. In the export category of "other services," which includes engineering, accounting, banking, construction, etc., 1984 exports amounted to only $7 billion (and a surplus of $3 billion). The authors point out that Japan far outranks the United States in the strength of its banking sector, and that some developing countries like Korea are already beginning to make significant inroads into international engineering and construction. The other significant services export was $8 billion of proprietary rights (patents, etc.), which the authors consider to be substantially byproducts of U.S. manufacturing.

The authors are advocates of strong government sectoral intervention on the model of Japan's MITI, to guide the development of selected sectors and assist them in their technological advancement. While not advocating blanket protectionism, selected very strong protectionism (following the Japanese model again) would form part of this strategy. Their catch phrase is that the government can create and guide comparative advantage by its sectoral policies.

International trade theory always has predicted a long-run tendency toward world-wide income equalization. The fact that those countries presently with a lower level of per capita income (and therefore have more potential for improvement) are closing the gap should not necessarily be seen as a cause for concern, as it clearly is in this book. The mere fact that other countries are doing better does not ordinarily make the United States any worse off in an absolute sense.

Cohen and Zysman do not attempt to analyze how market forces would act on the situation. If, as they contend, the United States will not be able to rely on growing service exports, then exchange rate adjustments and domestic unemployment will inevitably lower U.S. real wages relative to foreign real wages until U.S. manufacturing is once again competitive. However, the market model does not say anything about how long (and how costly) the readjustment would be, nor at what level of real wages and productivity U.S. manufacturing competitiveness will be reestablished. If the decline in real wages to return to competitiveness starts from a point in time when a great deal of manufacturing expertise has already been lost, and when the capital stock has rusted out, then the new equilibrium will likely be reached at an appreciably lower level of real wages than otherwise.

However one views it, Cohen and Zysman have presented an important and plausible new evaluation of this important issue. The implication is that we cannot (and should not) expect a widespread replacement of manufacturing by services in the naive sense in which this is sometimes described. Manufacturing will become more automated, and therefore will account for a smaller portion of direct employment, but its volume of physical output is likely to continue to grow rapidly.
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Author:Spiro, Peter
Publication:Business Economics
Article Type:Book Review
Date:Apr 1, 1989
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