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Eamonn Fingleton's In Praise of Hard Industries, A Review Part III By: Robert Locke
FrontPageMagazine.com | Tuesday, February 18, 2003

Please read parts I & II of this review to catch up on Fingleton’s argument that the information and service industries will never be a sufficient basis for our national prosperity and that advanced manufacturing is the neglected key.


In answer to critics, let me reiterate that I do not advocate a net increase in state control of the American economy. I also point out to those who would rebut Fingleton’s assertion that other nations have surpassed us in advanced manufacturing by referring to the overall performance of these economies that overall performance is not the issue here: the performance of these nations’ advanced manufacturing sectors is.  I am well aware of Germany’s high unemployment rate, which derives from other factors, like the absorption of East Germany and other aspects of German economic policy that do not compare favorably with the U.S.   But it is illogical to ignore things that other nations do better simply because they do some things worse. 


So what is America doing wrong that is making us fall behind other nations in the race to develop advanced manufacturing industry?  We must first abandon the media-driven illusion, widely propagated in the 1990’s, that American manufacturing has made a comeback. This is false because:


1. People saw the economy boom and just assumed that manufacturing must be booming with it, despite lacking hard numbers on this sector. 


2. Limited pockets of revival in a few industries do not amount to a general revival in advanced manufacturing when much larger pockets are being driven into decline by foreign competition. Military vs. civilian flat-panel displays are a good example.


3. American manufacturers have become very skilled in hiding their own declines by putting their own brand names on products whose key internal components are now made overseas. 


4. Limited growth by American manufacturers does not constitute economic success when foreign competitors are growing three times as fast.  It’s a relative game.


5. Misleading statistics have been used.  For example, it was widely reported that the American steel industry became the world’s most efficient during the 1990’s.  But the figures in question are compromised by arbitrary assumptions that go into calculating them.   Similarly, American computer makers have sometimes counted as “American-made” computers which are made in the Far East, packaged in the US, and then shipped to Europe.


So what has caused America, which was within living memory the undisputed world leader in advanced manufacturing, to lose this position? 


1. Our low savings rate. 


This may seem to have nothing to do with advanced manufacturing per se, but this is wrong, as it is of the very essence of advanced manufacturing that it is highly capitalized.  It requires vast capital both for research and development and for plant and equipment.   This money has to come from somewhere, i.e. from somebody’s decision to invest part of their income.  One of the myths of globalism is that the world’s financial markets are now so interlinked that it doesn’t matter if America doesn’t generate enough investment capital because we can just import it. 


The first reason this is false is that key nations, desiring to build up their own industries, deliberately limit their export of capital.  Japan’s banks, for example, are linked in cross-shareholding alliances called keiretsu with the manufacturing companies they finance, so their capital goes to them by design.  And when it does go abroad, it goes to investments that complement Japanese industry, not that compete with it.  Theoretical arguments that this is “inefficient” because it prevents them from seeking a higher return elsewhere are irrelevant: this is what they do do.  And they are not changing any time soon: Japan’s Ministry of Finance has deliberately refused to meaningfully open Japan’s financial markets to the rest of the world so as to allow foreigners access to this huge pool of capital.  It cares less whether Japanese banks get the highest return on their investments than whether these investments take place in Japan and create jobs there.  The result is that Japanese manufacturing corporations enjoy a lower cost of capital than ours, a huge advantage. 


The numbers are huge.  As Fingleton writes,


“at last count Japan was producing $708 billion of new savings a year – or nearly 60% more than America’s total of $443 billion.  Not only has this enabled Japanese industry to invest nearly twice as much per worker as the United States in the 1990s, but it has meant that Japan has now decisively surpassed the United States as the world’s main source of capital.” (1)

The second problem with relying on foreign capital is that this means that even if the jobs are created in the U.S, the profits earned by this capital accrue to another nation’s wealth, not ours. 


2. Our poor education system. 


Advanced manufacturing industry tends to locate in high-income nations for a number of reasons, skilled workers being one of them. But if the workers available aren’t skilled, they have lost one of the principal advantages that enables them to compete with cheap foreign labor. 


One of the key problems in our education system from the point of view of advanced manufacturing is our tendency to assume that the only worthwhile educational track is the one that leads to college, and that any other path is merely a regrettable failure.  We tend to assume that only white-collar jobs are desirable and that all blue-collar jobs are undesirable.  But as I pointed out in part I of this review, advanced manufacturing produces highly-paid (up to $60,000/yr) blue-collar jobs, which are accessible, as many white-collar jobs are not, to persons of average I.Q.  It would be far better to have strong industrial-arts and apprenticeship programs, like Germany has, than to divide every high school into “college-bound” and “loser” tracks.  


Part of our problem is America’s myth of being a classless society, which causes us to be in denial about the fact that 30% of this country is working class and is going to have blue-collar jobs.   There is a white-collar bias in American culture that reminds me of nothing so much as the “gentlemen don’t dirty their hands” mentality that destroyed British industry.  There is a bias in favor of abstract and verbal ways of making money, like finance, software and law, on the part of the educated elite in this country that does not exist in Germany, where engineering is a prestige profession.  In theory, the market should correct this, but the ability of culture and fashion to push people in economically irrational directions is very strong.


3. Leakage of our advanced technologies.


It is well-known that many of the products in which we are now being beaten by our international competitors were originally invented in the United States.  The transistor and the laser, to take two well-known examples, were both invented by the old Bell Laboratories.


But the real problem is not the pure science itself, but the production technologies and proprietary know-how that American corporations are singularly promiscuous in selling and licensing to foreigners.  The Japanese, for example, know full well how to work the following game:


1. Make it difficult for an American company to export their widgets to Japan.


2. Tell them that they are, however, invited to set up a subsidiary to produce widgets in Japan.


3. Make it clear that the best way to do this is by going into business with a Japanese partner.


4. Make it clear that their Japanese subsidiary must develop Japanese suppliers.


5. Let the Japanese partner suck the Americans dry for their proprietary know-how.


6. Let the Japanese suppliers built up by the American company form the basis of a strong indigenous Japanese widget industry.


7. Let the American subsidiary die or be bought out by its Japanese partner.


8. Use the former subsidiary to export to the American market and drive the originating American company to the wall.


IBM and Xerox are paradigms of this case.  Frequently, all the American company gets out of it is a thin stream of patent and royalty revenue, or profits, while the major value of the business to society at large, the jobs it creates, go overseas.   It has been estimated (2) that in the last 25 years, American corporations have transferred technology worth $500 billion to Japan and been paid about $9 billion for it. 


4. The economic nationalism of foreign countries. 


Whatever the arguments in favor of free trade, the simple fact is that our key competitors like Japan do not practice it.  Whether this harms the consumers of these nations by depriving them of cheaper American goods is irrelevant; these nations do practice protectionism and they show no sign of making more than token changes to this policy.  


The result of this policy is that that an American manufacturer wishing to sell in both the US and Japan has a choice: put the plant in the U.S. and be shut out of the Japanese market, or put it in Japan and have access to both markets.  The decision two years ago of Corning Glass to lay off 12,000 American workers while doing no such thing in Japan is a good example of this.

Japan is the paradigmatic case, though other nations imitate her to varying degrees.  Her government has deliberately chosen to make building up national economic power a higher priority than maximizing short-term consumption.  Of course, economic power in the long run is the ability to produce, which enables one to consume, so this does generate consumer well-being eventually, as testified by Japan’s rising standard of living.


Japan sees Americans as greedy, short-sighted, and unpatriotic people who choose to consume cheap foreign goods today at the price of destroying the very industries that make America rich enough to afford those goods in the first place.  They see themselves as restraining their short-term consumption in order to build up their industries, which maximizes their long-term consumption.


Here concludes my review of Fingleton’s book.  I will address what America should do in a separate article.  The key solution is not for us to imitate Japan and her hangers-on, because these are very different societies with different values and different ways of governing themselves, even if they superficially seem to be capitalist liberal democracies like the U.S.  The solution is mostly for America to return to the policies we had back when we led the world in advanced manufacturing.


Note: Eamonn Fingleton has been an editor for Euromoney, Forbes, and the Financial Times, and has been published in the New York Times, the Atlantic, and The New Republic. His book Blindside: Why Japan is Still on Track to Overtake the U.S. by the Year 2000  was rated one of the ten best business books of 1995 by Business Week.  He is an Irishman by birth who has lived in Tokyo since 1985 and is married to a Japanese.

[1] Fingleton, Eamonn. In Praise of Hard Industries. p.215.

[2] Fingleton, Eamonn. Blindside. p. 271.

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