December 02, 2003

We're All About Comparative Advantage

DEAN ESMAY has posted a thoughtful essay oriented around economics and the recent upswing in manufacturing activity.

Mr Esmay writes:

I was rather shocked to learn that the manufacturing sector of the economy is on an upswing. I'm perplexed. We've been transitioning away from an industrial-based to an information-based economy for at least the last 25 years. People who decry this always strike me as a little odd ...

What I don't quite understand is why manufacturing jobs would be increasing in the U.S. at this time. Apparently I'm not the only one surprised by this, though.

As we've always found such things interesting here at The Rant, we would like to throw our hat into the ring on this issue.

The reason America has lost manufacturing jobs over the past few decades is because we've mostly lost our comparative advantage in manufacturing. That's pretty much all there is to it.

It is true that one could argue that productivity increases have also accounted for lost jobs, although that doesn't carry as much water as one might expect. When it comes to manufacturing, productivity increases come either through speedups -- that is, squeezing more work out of the employees -- or through innovation. In the former case, there's a limit to how much you can wring out before you have to add folks onto the payroll. In the latter case, that innovation may cost jobs in the short run, but will usually create many more jobs in the long run. Remember how things turned out with the telephone operators.

But back to the comparative advantage issue. Now that America must compete on a global playing field, we find that we're losing rather a lot of unskilled and skilled positions to overseas firms. The reason, of course, is cost. When a worker in China costs a firm $1,000 per year and an American worker costs $28,000, the firm is going to go with China. There is little that can be done about this.

Now, the Chinese can make textiles and silicon chips and automobiles very well -- they have both an educated and cheap workforce, which is a very tough combination to beat. Other nations also bring a lot to the table.

But they won't be able to do everything. That's why U.S. manufacturing will never die. It may be reduced in scope, but it will never die.

U.S. firms, with their just-in-time delivery systems and built-in pressure to keep inventories low, will simply need a level of manufacturing work done here. That's to say nothing of the political reasons for having such work here -- the big Government contractors and other large industrial firms will do what they can to keep costs down, but they will keep an eye to not ticking off the folks who make the ultimate buying decisions. Soon there could even be tax incentives for keeping work here, and those would most certainly play a part in firms' decisions about where to produce their goods.

But the real reason manufacturing will never die is because of American innovation. It is one thing for the Chinese to make clothes and silicon chips; but as our knowledge base grows ever wider, we will develop new processes, new equipment, new devices. These will naturally be made in America, the operations' nerve center. We would be quite surprised if it such things could be outsourced quickly to overseas operations.

In short, while we may have lost our comparative advantage in many subsectors of the manufacturing field, we will regain it over and over again as our firms come up with new and better products.

Of course, that is a long-term view. In the short-term, we're probably seeing more manufacturing activity primarily because inventories are low, and firms now need to again produce things. If jobs come along with that, it will be because there's a limit to how much a firm can wring out of its people before it has to add folks onto the payroll.

Posted by Benjamin Kepple at December 2, 2003 10:41 PM | TrackBack