Reader Mail: Manufacturing is Not a Dirty Word

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Some reader mail on…yes…capital!

Dear Dan

Love to read the Daily Reckoning. But you need to explain to me why a factory is the ultimate capital asset . Why not an office that produces services…income for other workers, profits for shareholders and taxes for governments? You seem to suggest that the US needs its factories back. But surely it has a comparative advantage in providing services?

Regards

Bob. M.

Bob makes an interesting argument, one for which we do not have a full rebuttal. Services can increase productivity, greater output per person. This is one way economies grow without causing inflation. But we’d suggest that an entire economy that trades in services is not possible…or definitely not beneficial for average wages and incomes.

As Wal-Mart replaced General Motors as the largest employer in America, the average wage for Americans took a historic turn lower. To some extent, this is just a product of the globalisation of labour. Adding China and India to the mix has driven wages down everywhere.

Our main point, though is that service jobs don’t contribute as much to actually providing the goods that satisfy people’s material wants now and in the future. If you don’t make things people want and trade them for a profit, then someday in the future, what’s on your shelves here in Australia (or America) is going to be determined by the buying preferences of Chinese consumers.

Obviously there are some global brands which have a great appeal to consumers all over the world. Apple will probably sell a lot of iPhones in China, for example. But where will the profits go? Apple’s profits will go its shareholders and its employees. But you can’t have an economy full of company’s that rely on brand image, styling, and intellectual capital.

Perhaps, as the British vacuum magnate James Dyson has suggested, the key is better engineering in the things we make. This is the one competitive advantage Western nations might retain over lower-cost producers elsewhere. Dyson gave a lecture that should be compulsory reading for anyone who wants to know what made British and American capitalism so successful in the last 200 years. You can read the whole thing here if you’d like.

His point is that manufacturing is not a dirty word. It’s a wealthy word. It creates jobs, incomes, profits, and most importantly, better products for people’s lives. We live in an age where we think we can become rich trading services with each other. The evidence seems to contradict that-especially if we’re using borrowed money to buy our Chinese clothes and our fast food. There’s also this question: how does an economy based on consumption and services lead to an increase in a nation’s capital stockthe very key to long-term prosperity? Our guess? It doesn’t.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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3 Comments on "Reader Mail: Manufacturing is Not a Dirty Word"

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Dr Richard Weeks
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Morning to all, The answer to the question in my view is quite simple – it is not an either or but an and – by that I mean industry manufacturing and the services economy are in effect two sides of the same coin – most products have a services element attached (think of marketing, after sales services and maintenance). The manufacturing and services component are two strands of a rope that are inter-twined, the other being the support services provided by IT, technology and the human factor – intellectual capital. The problem is one of skills – integrating the… Read more »
John
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To the reader (Bob M): You can’t build an economy on service alone because most needs are material based: food, houses, cars, TVs, etc… If as a country you want all those material things and all you do is service, you have to export your service in exchange for the material things. The problem with this strategy is that most services are geographically restricted and thus cannot be exported. Think about all the service jobs off the top of your head: laywers, doctors, waiters, taxi drivers, etc… How many of those services can you export to people in another country?… Read more »
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