By Eamonn Fingleton
America’s shuttered factories and the false hope of post-industrialism. (This article first appeared in the November-December 2022 issue of The American Conservative.)
In the wake of the Japanese attack on Pearl Harbor in 1941, the American nation responded instantly and sure-footedly. In the shipbuilding industry alone, the resulting surge in production was monumental. Thus, as recorded by the Naval History and Heritage Command, the U.S. Navy doubled its fleet within a year and quadrupled it before the end of the war. It was a similar story in the merchant marine: by 1943 U.S. shipyards were turning out three merchant ships a day! They ended up building a total of nearly 3,300 before the end of the war.
America’s shuttered factories and the false hope of post-industrialism. (This article first appeared in the November -December 2022 issue The American Conservative.)
Given that shipbuilding was then one of the world’s most advanced industries, there could hardly have been a more impressive demonstration of America’s global economic leadership.
Fast forward to today, however, and we discover that America’s now much hollowed out manufacturing sector is having a hard enough time arming Ukraine (and can do so only with the help of copious imports of advanced electronic components and other crucial inputs from various trade partners, not least China).
How come the U.S. manufacturing base has become so hollowed out? Let’s focus here on one key, if little understood, aspect of the story: the pernicious role played by so-called post-industrialism. The term comes from The Coming of Post-Industrial Society, a book by the Harvard sociologist Daniel Bell. Writing in 1973, Bell predicted a growing trend for the United States to retreat from manufacturing and to switch instead to new “post-industrial” services, of which computer software seemed to be this favorite. Jobs in post-industrial businesses would not only be cleaner and more advanced but better paid. And the great thing was that the United States seemed to enjoy some special – if not exactly spelled out – aptitude for post-industrial activities and would therefore benefit disproportionately.
As we will see, this analysis was badly misguided but that did not stop it playing a decisive role in the decline of American manufacturing. In particular, it greatly weakened efforts in Washington and elsewhere to forge a national consensus in fighting foreign protectionism. If American manufacturers were not long for this world anyway, why, it was asked, should Washington expend vital diplomatic capital on their behalf? After all, nations like Japan, Germany, and Korea were evidently so intransigently committed to mercantilism that Washington risked touching off a full-scale trade war if it pressed fully seriously for a fair deal for American manufacturers abroad.
From this point onwards, American manufacturing was visibly on the skids. The longer America’s trade diplomats dithered, the larger and more formidable became the East Asian and European manufacturing challenge. For the challengers, size brought large economies of scale and fast-expanding research and development departments.
It also meant the ability to fund ever more sophisticated lobbying initiatives abroad, not least in the United States. Japanese and European corporate lobbyists fanned out across Washington and were soon pressing home their advantage.
One tactic was to blame the victim. They alleged that American manufacturers were underinvesting. Few observers seemed to notice that this got the causality exactly reversed. The fact was that because world markets were heavily rigged against them, American manufacturers suffered chronically poor returns on investment. They therefore lacked the large retained profits needed to invest in the most efficient new manufacturing technologies.
All this is the more surprising for the fact that anyone who glanced at Bell’s book found it shed remarkably little light on the issues. About the only thing it contributed was a little news: manufacturing’s share of total U.S. economic output was declining, he reported, and the share accounted for by services was rising. He was right on both counts but this hardly meant manufacturing was finished as a principal source of First World wealth and economic leadership. The trends Bell noticed were relative (itals) ones. Looking at the world as a whole, there was no evidence that manufacturing was losing its position as a principal driver of prosperity.
Nor did Bell offer any fundamental reason for believing that, going forward, post-industrial services would prove more effective in increasing wealth than traditional manufacturing. In the event as we can now see clearly in retrospect, post-industrialism has proven no panacea. Of course, some post-industrial businesses have proved spectacularly successful – companies like Google and Amazon come to mind. But even with Silicon Valley’s massive growth of the last half century, post-industrialism has fallen far short of creating enough new American jobs to make up for the loss of manufacturing.
This is where we get right to the point: jobs are one of three vital economic criteria on which manufacturing’s contribution is a strongly positive one. The other two are wages and exports.
The jobs point hardly needs elaboration: factory work generally creates plenty of productive jobs for ordinary workers. By contrast, jobs in many of the most successful post-industrial businesses are reserved disproportionately for workers of above-average ability.
Of course, there are some exceptions. Thus Uber and DoorDash are examples of so-called “gig economy” employers who create plenty of work for workers of average ability. The problem is that such work compares quite unfavorably with the sort of jobs manufacturing used to create in better times. For the most part, gig economy work pays little more than minimum wages and falls down also in terms of job security and benefits.
Contrast that with how things were in manufacturing in the 1950s through the early 1970s, when well-paid, secure, pensionable jobs were becoming the norm even for assembly-line workers. ck
Why do some employers pay more than others? This question is central yet Bell never attempted to address it. In reality many factors go into determining wage levels but a crucial one is whether a business is capital-intensive or labor-intensive. Generally, if other things are equal, capital-intensive employers pay better – and in many cases a lot better.
Bell never explicitly considered the distinction. He seems, however, to have assumed – without really realizing he was making an assumption – that factory work in the United States was either already generally labor-intensive or was headed that way. Thus American factory jobs were destined soon to fall victim to competition from cheap-labor foreign locations.
But the truth was then, and still is today, that factory work is a mixed bag. Yes, some factory work is labor-intensive and therefore low-wage nations enjoy a clear competitive advantage. But leading-edge manufacturers are generally avowedly capital-intensive. By definition this means that wage costs account for a relatively small proportion of their total costs. The term “capital-intensive” is necessarily jargonistic but is easy to understand if you think of each worker having his or her output powerfully boosted by an array of advanced production machinery.
In practice locating factories in high-wage nations incurs little or no net cost disadvantage. The point is that the disadvantage of higher wage costs is more than offset by the several advantages of operating in a First World location. Just the most obvious of these is that it is generally easier to get key technical staff to work in, say, Texas than in Fujian.
Another consideration is trade secrets. These are often critically important in capital-intensive businesses and the battle to thwart industrial espionage is constant. In general such secrets are probably easier to protect if they are kept at home.
Seen from the point of view of the overall national interest, another key consideration is trade. Manufactured products tend to be fundamentally more exportable. This reflects in part the fact that they tend to be less culture-specific. A car made in Japan or Germany, for instance, can be sold around the world with remarkably few adjustments for different cultures and different markets.
So-called producers’ goods are particularly free from cultural ties. Such goods are rarely mentioned in the press yet they are vital to the world economy. The category includes super-miniaturized electronic components, highly refined materials, and ultra-precise machine tools. Often for any given item only one or two manufacturers exist worldwide. And the processes involved in making such goods are generally highly capital-intensive and thus they provide plenty of headroom to pay above-average wages.
Take, for instance, precision lenses. Known to the consumer mainly for their use in cameras, lenses are actually mission-critical components in countless medical, dental, scientific, and industrial applications. They are vital too in countless defense applications. The United States long ago dropped out of contention in lenses and these days depends mainly on Japan and Germany for state-of-the-art supplies.
As a general rule, manufacturers who dominate a significant sector in producers’ goods can expect not only to enjoy strong export sales but strong export pricing. By contrast post-industrial businesses are generally poor exporters – at best they sell little abroad and their pricing power is generally weak. This contrasts with the remarkable strength American manufacturers enjoyed around the world in the days of American leadership.
Many post-industrial companies don’t export at all and in the case of even the strongest and most advanced of them, the ability to expand abroad is generally constrained by linguistic and cultural impediments. Such difficulties may in some cases be surmounted but at a cost and usually a considerable one. Thus Google, for instance, has had to build a serious bricks-and-mortar presence in countless foreign markets. So elaborate are Google’s overseas operations that Google buildings are local landmarks in places as far afield as Tokyo, Wroclaw, Amsterdam, TelAviv, Haifa, Kuala Lumpur, London, and Dublin.
Even an internet retailer as tech-savvy as Amazon performs quite disappointingly in key overseas markets such as China and Japan. Indeed at last count, Amazon’s sales in the United States and Canada accounted for nearly two-thirds of its total.
The take-home message here is that the shift to post-industrialism has greatly compounded America’s huge pre-existing trade problems.
The result is that the United States has consistently been running huge trade deficits since the 1970s. In recent years these have settled down to average 3 to 4 ck percent of gross domestic product – a performance that implies that the U.S. dollar is greatly overvalued against the currencies of several big exporting nations, most notably China, Japan, and Germany.
As a matter of basic arithmetic, trade deficits have to be financed. This means that successive generations at the U.S. Treasury have had to have had huge resort to foreign creditors, most notably the banks and institutional investors of Japan, China, and South Korea. These institutions have evidently decided for now to continue to play their allotted role in a drama directed by the U.S. Treasury. For a few years longer they will continue to finance American ocer-consumption. Little understood in Washington, however, the Asians probably don’t plan to be taken for granted forever. America’s foreign borrowing will have to be repaid and in the process Americans will have to accept more and more back-seating from foreign creditors.
How do we sum up on Bell? He was not only an exceptionally poor thinker but a poor writer, and the book he produced was almost unreadably bad. He was a sociologist innocent of even the most basic and illuminating economic concepts. He rarely cited any facts – at least not relevant facts – but larded his text instead with references to people like Leonardo Da Vinci and Einstein. The only purpose of such asides seems to have been to advertise his general knowledge.
All this is the more surprising for the fact that the field does not lack for serious thinkers and serious books. One of the earliest and most persuasive books was Manufacturing Matters: The Myth of the Post-Industrial Economy, by Stephen S. Cohen and John Zysman. This was first published in good time to catch the policy debate in the mid-1980s. Another author who was also commendably early (mid-1990s) and prescient in his analysis was Louis Uchitelle, author of The Downsizing of America. Others who have done serious work in and around the field have included Pat Choate, James Fallows, Alan Tonelson, Peter Navarro, and Clyde Prestowicz.
There is a mystery here: how come a book as bad as Bell’s – it might most charitably be described as a historical curiosity – could have achieved such seeming influence?
The answer seems to be that his message suited various powerful if shadowy vested interests. Had he not already existed, the trade lobby would have had to to invent him.
Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Boston: Houghton Mifflin, 1999).