This week’s news that Toyota would quit making cars in Australia by 2017 sparked a big debate in the office. The subject? Can you have a middle class without a manufacturing sector?
On the surface, Australia’s economy is already dominated by services, with 75% of jobs being in service related industries. The era of lifelong employment in skilled manufacturing has been over for many years.
But will that lead to lower standards of living for Australians? Or will the country be better off moving into lower-volume but higher-knowledge manufacturing jobs?
How you answer this question may come down to whether you believe countries have, or should have, such a thing as ‘national interest’ these days. From a consumer perspective, it certainly doesn’t matter if cars are made here. People can get what they want from just about anywhere.
But the current global system – a diversified global supply chain, ‘just in time’ logistics, cheap energy and large shipping containers – is still fairly new, and perhaps not all that robust when disagreements between countries escalate.
Put another way, do you want to be dependent for key technologies or items on open and free markets? After all, very few governments really believe in or practice free trade. Everyone protects their own, whether it’s for employment reasons or because they view key technologies as something that should not be trusted to foreigners.
Once Toyota goes, Australia will be the only G-20 country without a domestic auto making sector. But so what? In the 21st century, do you need an industrial base to have a healthy economy? Maybe not.
However, history shows that the manufacturing sector played a big role in getting a lot of people into the middle class. It was skilled labour that employed millions of people in Britain and the United States.
Per capita incomes grew. GDP grew. Wages grew in real terms. The tax base grew too. That was the golden age and the peak for the US in the 1950s and 1960s, when General Motors ruled the world.
The shift to a ‘service based’ economy is widely touted as both inevitable and beneficial. But is it? If you don’t have the accumulated knowledge and capital to manufacture things – and how can you make them competitively, in mass quantities, with globalised labour? – then there’s no doubt it changes the nature of your domestic job market.
In the US, the withering of manufacturing has meant more part time work, at lower real wages, for more people. And arguably, it’s also meant less satisfying work for people, less meaningful work they could be proud of and raise a family on.
After all, no one ever grew up wanting to stock women’s underwear at Walmart. You’ve also seen a structural decline in the labour force participation rate, with fewer people looking for work and more people dropping out of the workplace altogether and going on the dole.
With fake free trade, prices are lower for manufactured goods, but wages have to go down too. What do you think that means for quality of life? You have access to credit to buy cheaper goods and services. But your real wages decline and so too does the satisfaction you take from the work you do. Does that sound like a good deal? A fair trade?
Smaller city states (like Singapore) and nation states (like Switzerland) are in a much better position to de-industrialise or specialise in what they make (desalination technology in Singapore, watches in Switzerland, for example). But it doesn’t always work out for the best.
Look at how finance and the City dominates the economy of the UK. The middle class gets wiped out. Property prices in the big cities soar. You have very, very rich people…and then pretty much everyone else.
The same thing is going on in America, although it’s been somewhat tempered by the shale gas boom, where cheap energy has lured some kinds of manufacturing back to American shores. But as the economy shifts to services for the masses and finance for the elites, how many people can become bond traders and real estate agents in a country of 300 million people?
And what kind of economy is it when everyone makes money selling houses to each other that they purchase with increasingly large amounts of borrowed money?
This is why the micro-manufacturing or ‘makers’ revolution in 3D printing that Sam and Kris have researched is such an important idea. It’s a massive change in scale for the economy, from large and centralised to individual and decentralised.
Yet it’s still based on the idea that you have to produce something that someone else values to generate an income (whether it matters to you is only half the battle…if you can’t exchange it, there’s no transaction).
In the 20th century, mass-market manufacturing went hand-in-hand with the creation of a healthy middle class.
In the Western world, the middle class is under pressure from lower labour costs in the emerging markets and financial repression from Wall Street and Washington elites. The technology revolution can’t come soon enough because the war is already here…and it’s on you.
for The Daily Reckoning Australia