Some ideas are, notoriously, ahead of their time. This book, written by Eamonn Fingleton, is a critique of the idea that we will ever get national prosperity from the information economy and a defense of the traditional path to it by way of industrial development. It came out in 1999 at the crest of the dot-com boom, when nobody felt the sense of crisis needed to make them listen. But our economy has cooled since then and will cool further as foreigners gradually turn off the supply of debt we have been living on. All the structural flaws of the American economy that have been covered by prosperity will be revealed and there will be an intense hunger for serious diagnoses of the problem. When the dollar finally melts and unemployment goes up, industrial policy questions like this book’s will come roaring back, just as they were in the air during the recession of the early 1980’s. Conservatives need to be ahead of this curve if our policy options are to be the ones chosen.
Industrial policy has a bad reputation among economic conservatives, and for good reason. We know that the free market can do a better job than government in shaping the economy. True, but this is only half the story.
The first problem with this is that government already interferes in the economy so much that we have a de facto industrial policy whether we like it or not. Government is itself 35 percent of GNP1, and regulates most of the rest in myriad ways. As the record of expanding government under every Republican president shows, there are no realistic prospects for doing more than chipping away at the edges of this, though anyone is welcome to try.
The collapse of socialism has barely scratched government control of the economy, whose real dynamic is now not socialist but, as I have written before, corporatist, or based not on state expropriation of the free market but on manipulating that market to deliver goods to political constituencies. The more government does to manipulate the economy, the more important it becomes us to make sure it is doing so beneficially.
The second problem is that it is historically false that America has been an undiluted laissez-faire economy. Ever since the famous Report on Manufactures by the father of American capitalism, Alexander Hamilton, lead to the establishment of a planned industrial community at Passaic, NJ, it has been understood in this country that there are worthwhile contributions for government to make to the vitality of industry. The government land grants made to further the development of railroads and the extractive industries are the best-known example but not the only one. Since WWII, huge government investment in science has been a key bulwark of American competitiveness. Our successful international competitors have done similar things for the similar reasons.
Within the framework of free-market economics, these investments in science and infrastructure make sense because they are so-called positive externalities: things that have an economic value that cannot be efficiently captured as property rights. How could anyone "own" the value of the basic scientific research that spawned Silicon Valley?
Since America is stuck with de facto industrial policy, we had better have a good one. Fingleton’s book is not an argument for an American equivalent to Japan’s famous Ministry of International Trade and Industry. It is not an argument for "picking winners" or subsidies. It is, crucially, not wholly an argument about government policy, as there are many other things that affect our economy. For example, as Fingleton points out, the ridiculous hype about the "new economy" in the press was largely responsible for driving billions of dollars of private funds into investments in dot-com flops.
So one of the keys to a solution of industrial policy that is in accord with American and conservative values is to grasp that it isn’t just the government’s business. It is the business of anyone who helps shape public attitudes toward the economy.
But won’t the free market just make these decisions correctly? Hopefully, no one just naively still believes this after the dot-com fiasco. The market is capable of being wrong if everyone in it, or almost everyone, is in the grips of a delusion about the economic future, and since there’s no hard way to predict the future, this can happen sometimes. If everyone mistakenly thinks dot-coms are going to be the next big thing, then they will bid up share prices to an irrational level. The level is irrational because it implies discounted cash flows that will not, in fact, flow when the model expects. Arbitrage these differences away? As Keynes warned, markets can remain irrational longer than you can remain solvent. Equilibrium is only restored after huge unproductive investments are written off.
So yes, Virginia, the market can be wrong, though of course government would be worse and there is no way any of this may rightly be construed as supporting socialism. If society has a warped understanding of its economic future, one twisted by a misplaced belief that information industries are our future and manufacturing industry part of our obsolete past, the free market will reflect this delusion and produce bad decisions.
Sorry if this offends any dogmatic free-market theorists. This is where the rubber hits the road in terms of separating people who believe in free markets as a good solution vindicated by empirical facts, but coveted by experience, and those for whom they are an abstract model, a substitute for religion, a beautiful mathematical construct, an intellectual fetish. Conservatism has never been about the latter. We all exaggerated the "market is always right" myth in order to defeat Marxism; it is time for this to end. It is worth reminding ourselves that back when America was in fact more capitalistic than today in terms of having a much smaller government sector and less regulation, our theoretical model of how perfect markets are was in fact less extreme than today’s orthodoxy, not more.
Fingleton’s indictment of our recent economic policy is this: we have become enamored of the idea that information industries will be the source of our future prosperity, when there are good reasons why it is very unlikely they will ever provide good incomes to the broad mass of Americans. What can do so, used to do so in America, and still does in nations, like Japan, Germany and Switzerland, that take it seriously, is advanced manufacturing.
That’s right: good old making things. Physical objects that can be put in a box and sold.
There are a number of reasons why the information economy will never provide enough high-paying jobs to enough people to serve as the basis of our national prosperity:
1. Those jobs in computer software and similar fields may be highly paid, but it almost always takes a college degree to get one. 74 percent of the US population lacks a college degree; 71 percent of college-age Americans are not going to get one2. Without thriving alternatives to the information economy, these people are doomed to a low standard of living for their entire lives.
By comparison, advanced manufacturing reliably creates a wide spectrum of jobs at all skill levels, and is particularly rich in the crucial category of the skilled blue-collar jobs that the average American in Peoria can actually hold down.
2. Those jobs in advertising, accounting, consulting, banking, law and the like – fields in which America leads the world – may be highly paid, but they have very limited export potential. American advertising agencies and accounting firms may have branches all over the world, but the need to handle local languages and other peculiarities guarantees that they mostly employ foreigners, most of the value-added takes place overseas, and only a relatively small trickle of profits and jobs come back to America.
This lack of export potential is key because in the long run, if we want to sustain the ability to pay for the cheap imports we are addicted to, we have to either export something in return or gradually sell off this country’s assets. Foreigners are not going to give us something for nothing forever. At best, the dollar will continue to sag, making those imports more expensive, which reduces our standard of living.
3. Jobs in the information economy are more vulnerable to foreign competition than people realize. For example, the current worldwide hegemony of Hollywood is vulnerable to growth in the sophistication of foreign studios. At one time, American game shows were exported to Brazil, but eventually the production values of indigenous Brazilian game shows caught up and this market disappeared. Furthermore, the Brazilian shows are of course made to appeal to the peculiarities of Brazilian culture, so they have a home-country competitive advantage that Hollywood cannot match. Advances in digital production technology, which have made it far easier to produce a high-quality media product in Latvia or Paraguay, enable all sorts of niche players to match Hollywood quality in a way they couldn’t only a few years ago.
Computer software jobs are also singularly vulnerable to foreign competition because computer code – unlike, say, an automobile engine – can be shipped around the world at a cost equal to virtually zero relative to its value. The Internet only makes this easier. And many societies whose overall economies are still primitive, like Russia and India, have developed elites of computer programmers whose salaries are a fraction of American levels.
4. The information economy is intrinsically limited in terms of how large a portion of our economy it can be, for the simple reason that information is only a limited part of the value chain that makes up any product. The value of a programmer who creates a website to sell DVD players is necessarily limited to some fraction of the value of retailing the product, which is only a small part of its overall value. This value is made up of researching, designing, manufacturing, distributing, marketing, wholesaling, retailing and servicing it. If we cede the manufacturing link of the value chain to foreigners, this means ceding a large piece of potential economic activity and the jobs and wealth that flow to whomever performs that activity.
So what’s the right alternative to the information industries mirage? In a nutshell: advanced manufacturing.
Contrary to what one would think from its public image, manufacturing is not a primitive part of the economy. The sophistication of the industrial processes that go into modern manufacturing are technically the equal of anything done in the software shops of Santa Clara County. Even industries which have a low-tech image, like steel making, are in fact extremely technology-intensive. Contemporary steel makers use highly automated plants to produce sophisticated alloy steels invented by Ph.D.’s in metallurgy.
Nevertheless, the media relentlessly pump out an image of the manufacturing economy being rusting old plants in unfashionable places like Flint, Michigan, and the information economy being slick, high-tech offices in attractive places like Northern California. This image has a relentless effect on countless decisions by individuals and governments. Even in the absence of government policy, it makes the best and the brightest shun manufacturing industry.
The dumbest idea the media has thrown up is the notion – promoted by futurists Alvin and Heidi Toffler and others – that manufacturing is the "past" of the economy, destined to be abandoned as an inevitable result of economic progress. This idea is made more popular by a fetishistic desire for endless "progress" that can’t stand the idea that something as boring as manufacturing might be a permanent part of human society. It is glossed with the general enthusiasm for dematerialization that riddles post-modern culture.
A faulty analogy is sometimes drawn to the Industrial Revolution, which made agriculture a relatively small employer and percentage of GNP. But the Industrial Revolution did not cause agricultural production to decline in absolute terms. In fact, it boomed: America grows much more and better food today than we did in 1890 when a third of the nation farmed. We remain an agricultural powerhouse and have not farmed out the production of our food to foreigners.
The key virtue of advanced manufacturing is very simple: it adds enough value that the manufacturer can afford to pay the workers involved well.
So what is advanced manufacturing? Try flat-panel displays. These, which you are looking at right now if you are reading these words on a laptop, have become ubiquitous. They are expensive relative to other electronic components because they are extremely hard to make, since a single bad pixel makes an entire display unsalable. They are not the sort of thing one can manufacture successfully with illiterate peasant labor in Guandong, China. The Japanese companies that make them do with highly-skilled and well-paid Japanese labor at home in Japan, and the Chinese only get to do relatively unskilled and thus badly paid tasks like stuffing them into laptop cases.
The Japanese are well-aware that this division of labor – $5 / day jobs for Chinese workers and $50,000-a-year jobs for theirs – favors them, and Japanese economic policy is centered around keeping it that way. The Japanese Ministry of Finance, for example, will choke off the supply of capital to any company that starts exporting good jobs. There is an emerging hierarchy in the world economy in which the best-paid jobs are clustered in certain nations. If America wants to be a sustainably rich nation with well-paid workers, we must explicitly compete for these jobs.
This cannot possibly be a matter of laissez-faire indifference in any sane society. The fundamental problem with laissez-faire is that it doesn’t care who wins.
And it is impossible to be too blunt about the fact that $5/hr. workers at McDonalds are not going to vote Republican. If we want a conservative society, we need to make sure we have the kind of economic base that will produce Republican voters. End of story.
Good jobs in advanced manufacturing require training, but they require the kind of training that one can get in a few specialized courses at community college, at a technical institute, or through an on-the-job apprenticeship program run by the company or the union. This is the kind of training most working-class Americans have a realistic chance of actually being able to find and afford. And unlike computer programming or other information-economy skills, it is within the intellectual reach of people whose minds have been dulled by America’s mediocre schools or who were of only average I.Q. to begin with.
Thus trained, workers in advanced manufacturing can realistically make $30/hr., including benefits. For a standard 40-hour work week with two weeks vacation, that is $60,000 per year. One can support a middle-class family on that in most of this country. This is the great unfashionable mass of Americans who shop at Wal-Mart. A certain contempt for Middle America on the part of our bi-coastal economic elite is clearly part of why manufacturing is so little respected.
And these jobs aren’t going anywhere. There is a curious myth afoot that all manufacturing is now unviable in high-wage economies and that it is all destined to move to China or some such place. This is not true. High-wage nations as Japan, Germany, and Switzerland, whatever their other economic problems, have been able to hold onto their advanced manufacturing jobs because they require skills and infrastructure simply not available in the developing world. This doesn’t mean these jobs can be taken for granted, but it does mean they can be relied upon if we do what it takes to keep them.
In part II of this review, I will discuss how America can nurture the industries we need.
1. Federal Reserve Bank Flow of Funds Statement
2. U.S. Census Bureau