Can an Economy Succeed Without a Big Manufacturing Base?

D82-chang-lg0 Ha-Joon Chang debates Jagdish Bhagwati in the Economist. [H/t: Mona Ali.] Ha-Joon Chang:

There is truth in the argument that above a certain level of development, countries become “post-industrial”, or “deindustrialised”. But that is only in terms of employment—the falling proportion of the workforce in engaged in manufacturing. Even the richest economies have not really become post-industrial in terms of their production and consumption.

From expenditure data in current (rather than constant) prices, it may appear that people in rich countries are consuming ever more services, but that is mainly because services are becoming ever more expensive in relative terms, thanks to structurally faster productivity growth in manufacturing.

By their very nature, many service activities are inherently impervious to productivity increases. In some cases, the very increase in productivity will destroy the product itself. If a string quartet trots through a 27-minute piece in nine minutes, would you say that its productivity has trebled? For some other services, the apparently higher productivity may be due to the debasement of the product. A lot of the increases in retail service productivity in countries like America and Britain have been a result of lowering the quality of the retail service itself—fewer shop assistants, longer drives to the supermarket, lengthier waits for deliveries, etc.

D82-bhagwati-lg0 Bhagwati:

Bill Emmott, a former editor of The Economist, is reputed to have remarked wittily about the “manufactures fetish” that most people think that unless one makes things that can be dropped on one's foot, they are not worth making. He would have been wittier if he had changed it to dropping them on one's foe's foot.

As is often the case, this fetish has the highest pedigree: no less than Adam Smith himself. We know of course that Smith is often misunderstood, as when he is condemned by liberals (in the American, not the Manchester School, sense) as an unqualified proponent of laissez-faire, whereas he qualified his support for the division of labour by arguing that specialisation on the narrowest of tasks and endless repetition of them would turn workers into morons and that good governance supplying education to offset this was necessary.

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