The De-Industrialization of the US: A String of Enlightening Fallacies. Essay on International Economics, in Plain English

About ten days ago, I began I lively exchange with a stranger, G., on the Facebook of the President of the Independent Institute, of all places. The I.I. is my favorite think-tank. It’s located in Oakland California. It’s my favorite because it regularly performs intelligently and usefully the function of bringing libertarian thought, broadly defined, to all who are interested. It has been doing this for years and on a shoe-string budget. Full disclosure: I have had two co-authored articles [here and here] in The Independent Review, one of the journals associated with the Independent Institute.

You can easily Google the Independent Institute’s website.

My interchange with G. begun when I noticed one of the most common fallacies on one of his Facebook messages: He expressed himself in a way that led me to believe that he thought the US had been de-industrializing for years, chiefly to the benefit of China. We were both referring only to manufacturing industries.

G.’s impression is correct only in the most trivial way. It’s wrong on the whole, very wrong.

What is true is that American manufacturing employment has declined steadily for the past forty years. That’s true in an absolute sense. Fewer Americans work in manufacturing than used to.

This would have happened if there had not been any China, Red or otherwise. I gave G, the following historical precedent to which he did not respond:

Around 1860, about 60% of the American workforce was in agriculture. Today, it’s around 3%. (Note: Don’t go on a television game show with those figures. They are close enough for my purpose; that’s all.)

Nevertheless. American agriculture produces more than it ever has, in every sense of the word, whatever measure you want to use.

American agriculture used so much of the country’s labor power because it had low productivity then. (That’s value of production per worker.) As productivity improves, farmers can produce as much with fewer workers. What happened in the American case (and in Canada, and in Australia, and in Western Europe) is that farmers produced more with fewer workers. This virtuous trend has not stopped. It’s going on as I write. Some reforms may slow it or even reverse it; so-called “organic agriculture” may be one.

What happened early in agriculture happened later in manufacturing. Here are the simple, hard to believe, but nevertheless real facts:

Productivity in American manufacturing had never stopped growing, except for lags of a year or two. So has total American manufacturing production.

The simplest, most general rule-of-thumb is :

The year in which American manufacturing output was the largest in value, was last year, or the year before.

This is true although American manufacturing employment is declining and declining fast. Remember the 1860, 60% precedent.

I suspect G. did not get this point, in part because I did not explain it so well on Facebook. In part it’s because he appears transfixed by his own experience. G. is an experienced executive with manufacturing responsibilities. He says he is in China often. G. argued with me that the evidence of his own eyes was that a lot of manufacturing that used to take place in the US is now done in China.

I have no doubt that he is right, well, sort of right. Thirty years ago, when I bought an ordinary gardening tool, it was invariably made in the US. Nowadays, it’s invariably made in China, or at least, not in America.

My garden tool is also cheaper, much cheaper than it used to be. I mean in constant dollars, I mean relative to everything, including the minimum wage and including the median wage. It’s true practically any measure you want to use. My money goes a longer way. That’s what it means to be richer: Whatever money you have buys more. As a consumer, I have only gained by the fact that the production of garden tools is now very largely done in China.

That’s speaking as a consumer. If I had been employed in the American garden tool manufacturing industry say, twenty years ago, I might easily have lost my job. That would in fact have been a consequence of outsourcing.

This is not the whole story. The reality is more complicated. In brief, for every job lost to outsourcing, one or more are created by the after-effects of outsourcing. This is a factual but counter-intuitive observation I don’t want to discuss in this essay. Here is a brief way to deal with it: If you lost your job to outsourcing, nothing I will say will console you. I can only hope that the American economy is growing and flexible enough to provide another job soon. I hope it will be as a good as the one your lost. Looking at the past thirty years, there is a very good chance it will be a better job.

If the American economy does not offer an abundance of good new jobs, ask yourself why.

If you did not lose your job to outsourcing: see above; you are now richer than you were twenty or even ten years ago, the current crisis (2009) notwithstanding. If you want to know the net effect on American employment, a crude but legitimate approach is simply to look at evolving unemployment figures: In spite of massive outsourcing, American employment was very high until less than a year ago, (Note: Net effect= jobs added-jobs subtracted.) As long as unemployment is low or going down, it’s not likely that limiting outsourcing would do you any good.

Training exercise: The 57% of the work force who were in agriculture and who lost their jobs since 1860 evidently found something to do. The many manufacturing workers who lost their jobs in the past forty or fifty years ______ (Complete the sentence in your mind.)

G seems to refuse to consider any of this because he thinks his own experience an appropriate substitute for the kind of stuff I am writing now.

His experience is called, “anecdotal evidence.” It’s usually worse than no evidence at all to demonstrate anything. (It’s often useful to formulate hypotheses though.) Here is why it’s worse:

My wife beats me frequently. I deduce from this personal experience that wives originate much or most of conjugal violence. Furthermore, I know for a fact that my wife does not drink alcohol. So, I am pretty sure drunkenness does not play much of a role in domestic violence.  Ok. I am messing with your minds; my wife does not beat me, ever. She would like too though, and often.)

What happened with the transfer to China of American garden tool production is complex and factually well-supported, both. Fortunately, if you are busy, or impatient, or simply if you have a life, there are valid short-cuts to help you get a grip.

China, now India, and many other countries that could barely keep alive in the fifties are now producing. They are now finally contributing. This is good for me, for two reasons: One, the more goods there are worldwide, the cheaper they are, in real terms. Second, rich neighbors may sometimes be rivals politically, and even militarily, economically, they are all potential customers. The richer they are, the more I can sell them and, the richer I become.

As compared to 1955 today, the world produces all the garden tools it used to produce, many garden tools it did not produce then, more food than it did, more of everything than ever plus, it produces things that no one had ever heard of in 1955. That would include the low-end but amazingly sophisticated computer I am using to type and to disseminate this essay. Incidentally, there were television sets in 1955. Everything about them was awful and they were more expensive than the sets we have now. (That’s by any measure you want to use.)

Remains the genuinely important question of what industries are going to be in what countries. That’s an important issue because acts of production are not born equal: Making concrete, or steel, generates less in earnings, including wages, than producing software.

The short-cuts to this important issue are these:

  1. Government seldom does anything right economically;
  2. The issue of production allocation among countries is well explained by the Doctrine of Comparative advantage. It’s almost 150 years old. It’s well tested. It’s not unfashionable just because it’s old. Old explanations should only be buried when they have been demonstrated dead.

My correspondent, G., is obviously worried about America’s place in the world and he seems impressed by solar technology. In support, I suppose, of what he would like our government to do, he sends me an article about China’s policies in this respect. It’s at:

(http://www.facebook.com/l/;digg.com/u19LMi )

A sentence in the article caught my eye both because of its bad grammar and because it’s such a shining example of bad policy:

“China is telling their (sic) banks to invest in [solar energy industries].”

Two comments: 1 What reason is there to expect any national government, Chinese Communist, or otherwise, to make good choices regarding what industries should be developed? The Communist Chinese are the same gang responsible for keeping China an underdeveloped country for forty years. We now know it did not have to be that way. Yes, they are reformed but we don’t know how thoroughly nor for how long. Thoroughly democratic Western European governments have a long record of failures in deciding national industrial priorities.

“How about the Airbus?” Two responses: To this day, the invoice for this multinational government venture has never been presented in a transparent fashion. Airbus looks like an economically viable venture but we don’t know fore sure.  If you invest $10,000 to earn ten dollars ten times and you have to spend eleven dollars each time, your venture may sell a lot but it’s not successful.

Second: The Airbus project benefited by the Concord experience, an extraordinarily costly apprenticeship and a rank economic failure from its first to its last day.

To my knowledge, the only large instance of a commercially successful government-prompted industrial venture is the Internet. It was done strictly on a cost-plus basis, as a defense project(another story), with hands-off by the federal government. (I would appreciate being corrected if there are other instances. Details and verifiable sources required.)

Examples in the negative abound. I will refer to what I know best. French governments have been sticking their noses into nearly all sectors of French industry since 1945. They had wide latitude to do so, because there were no intellectual defense of real, free-market capitalism in France until about ten years ago.  French governments even intervene vigorously in the motion picture industry.  French governments however never reached much into several industries, because they were too fragmented, or because industrial actors opposed a spirited defense against government intervention. Notable among those are the food transformation industry and the wine and spirits industry. Guess which French industries are more than holding their own, on the national market and internationally? (To begin, think Danon and think Gray Goose Vodka.)

G. also calls Chinese solar industry policies in a Facebook message developing “comparative advantage.”

It’s not comparative advantage. Like most college graduates and most MBAs, (and deplorably, most university professors, I suspect), G. misunderstands the concept. His mistake is not small, it’s huge. I think you don’t understand the logic of international trade and investment if you don’t get comparative advantage. Let me try because my readers are, by definition, an elite group.

My comparative advantage is what I do best. Period. It’s not what I do better then the other guy. If I suck at everything I do, I still have a comparative advantage because I don’t do everything equally badly. That’s always true in the real world.

The doctrine of Comparative Advantage is the single most important rational underpinning of international trade, and indirectly of international investment.

It says clearly and absolutely that if every actor focuses his effort in what he does least badly, all the actors jointly produce more than would otherwise be the case. Period!

Logic test: Is there a difference between: “What I do least badly, “ and, “What I do best” ?

Instant reminder: Once you know what I do least badly, in itself does this tell you anything about what I do better, or worse, than my neighbor Tom? This is a “yes, “ no” question. Don’t wimp out!

Below is a different approach to the same concept of Comparative Advantage. Select the approach that suits best your particular genius and stick with it.

My buddy John is an excellent, Mercedes-trained car mechanic. He is also an indifferent floor sweeper. Every time I catch him broom in hands, sweeping his shop floor, I bitch at him, “Stop, man; every time you sweep, you are impoverishing me.”

I am right? I insist you already have all the information you need to answer this question. Again, don’t wimp out on me.

Facts matter but thinking things through slowly is also important.

There is a Muslim saying attributed to the Prophet Muhammad:

“Ignorance is a sin.”

10 thoughts on “The De-Industrialization of the US: A String of Enlightening Fallacies. Essay on International Economics, in Plain English”

  1. You make some good points. The belief that wealth will somehow ‘civilise’ the developing world is a wishful delusion. When dictatorships get rich they just build bigger guns.

  2. I like this article. I would have to say I am with G. though. I think the train would be just the incentive the uninvolved need to get involved in societial affairs, confidence in a system covered in darkness of litigaytion, no joke, its all the same. If their was even a false light for the people to see inside government it would be incentive, though not economic, but real emotional incentive to believe.

    But atleast G. is spreading the word, letting people have something important to think about on the virtual reality of games and nonsense called facebook. It is people like G. that change the world by any means. Terrible truth about it. I don’t know it is hard for me to succumb to the financial being others measure their lives by. Think about when the wrist watch was invented people structured their lives around time, when the printing press was invented people (more than your elite) gather around information, so when people tell me that we are selling more crops or garden tools I have to ask, “do we need more.” The food is an obvious, and people will always “move on to other jobs” but is it something they can take pride in. You’re a teacher and you get to touch more minds that pencils, that’s life right there, boi! I’ve never been a good student because I talk to everyone the same, respectful (looking for debate always) and I can’t put my finger on the power balance. Life in the ‘real’ world is now just a fallacy to uncover, everyone acting according never speaking out of turn, always polite for the sake of congeniality, disgusting.

    I respect your research, it looks very correct*, but (I think) with the decreasing amount of pride given out everyday its hard to find modivation. The train system would be a step in a different direction. It would be comparable but much less severe than America’s back lash against* the world from the Embargo Act of 1807, but it would be giving a modern beatnick a step up, but much safer than ‘On the Road” Jack Kerouac’s novel about a man’s wandering existance. This rich and lavish country needs to be milked dry before we can listen to Jack, who lived by the laws of compassion in a time that had only charity with strings attached. He is more of an effect than a cause.

    So maybe I have a soft spot for the misfortunate, uneducated, and underprivilaged. But I would never end a paper on economics with a spiritual thinkers quote, that seems a little backwards. Ghandi was eager to read as much as he could about the Prophet Mohammad and he is a spiritual hurder of sheep also so I will use him. It was Ghandi who called out the Japanses on their association with Italy and Germany during the 2nd world war, how they planned to use their partnership to gain world dominance, against the big bully of forever*, Britian, and it’s young aprentence, America, who would take the reigns after a stretigic move with perfect timing, “Bail Britian out !” make me laugh we used them to place ourselves at the top of the class with all the books so no one else could learn, except threw mimicing awe. Maybe your eyes have adjusted to the darkness of law but don’t hate G. because he’s looking in another room for enLIGHTenment. Gandhi doesn’t value material objects as a cheep commody, i’d imagine he would take the United States and unite them over the growing expenses (trust in Washington) [that are seperating threw subjigation and demonization- maybe a little extreame but I'm still young] that have been taking a tole on Americans ever sense we are growing out of the ‘Age of Arrogance’ That goes along with being the best. Industrialized only means we have an enigma that people think we know how the world works and what’s best for it, made with our fancy lights and other awe inspiring things, but what we lack is the moral fiber and code that these other countries have aquired over thousands of years of history repeating itself. I think that is the real false information here not G.’s short term expenses and long term plans to reward people with the fruits of technology in a technological eternity, but that you’re elite, no offense I don’t want to hurt your ego I know reading this still sound like someone is saying them in your head, probably worse because my grammer is ment to allow a tone to be decided only threw will and personal interpretation. So, I’ll end this one saying..

    “If you have a full glass… it’s not worth the water inside of it” quote Prophet Brad.

  3. So let’s look at the logic in this article. Sure there is the concept of comparative advantage, because China can produce goods cheaper than the U.S. can, which would (in academic theory) allow our people to focus on more productive things.
    But what is the result of allowing China to produce goods made in the U.S.? Well, the first result is trade imbalances. Because of our trade imbalance, we must run deficits in our country with China, and borrow to finance our consumption, at the peril of the dollar and our financial system.
    So if a widget costs 3 dollars to make in China and 4 dollars to make in the U.S., are we really saving money when you count the debt that results, and the interest that must be paid?

    What of our “productive citizens”, who have close to 16% real employment, while our nation borrows to buy products from China? If these citizens were employed, less government spending would result, and more tax revenues would go to our government (because individuals, and not corporations pay the most income tax). This would help balance our budget and further reduce borrowing from China and other countries.

    In other words, our government is effectively subsidizing the offshoring of American jobs through monetary policies that can only be achieved through borrowing.

    While I appreciate the Econ 2010 interpretation of economics in this article, it only works in theory. What we have in practice, you know, in the real world, is a country that cannot afford to pay its bills, that must finance its expenditures by borrowing from the same country that it consumes from.

    It’s easy to say that letting the Chinese produce inferior goods frees up our citizens to innovate, but in the real world, all that happens is a few people get richer, they don’t invest that money back into the American economy, and our suppliers are idle.

    1. John is the kind of guy who brings out the worst in me: He makes me pedantic, cutting, uncharacteristically ungracious, even nasty.

      His reply starts with a big mistake that makes any dialogue difficult for me. What he describes in his first paragraph as “comparative advantage” simply is not. Since I have spent a lot of energy explaining this central idea on this blog. I don’t want to do it again. Perhaps, the Editor of Notes…, who knows my archives better than I do, will kindly give directions.

      John’s last paragraph is a statement of untruths: With world trade in general, with China in a sturdy second place (SECOND) as a trading country, it’s not a “handful of people” who have become richer, it’s nearly everyone or actually everyone. If John is young, he should begin reading about the recent past of general human welfare. If John is an old geezer like me, or getting there, he should shake his head smartly and try to collect together his own memories about the bad old days.

      In general, John’s comment impels me soon to write an essay about what the word “theory” means:

      “I fell from that wall and broke my back because I thought gravity theory only worked in theory, not in practice.”

  4. Dr Jacques Delacroix is a sophist who tries to convince you that losing manufacturing jobs is good. Well, it’s not.
    Yes, when people lose a job, they *MUST* have another or perish, simple as that so if, say, 1000 jobs are lost, at least 900 “new” ones *will* be created, because public charity (unemployment help / Government subsidies, etc.) can’t help more than a few.
    The point is those new jobs are worse than the earlier ones, or pay less or are only part time or all of the above.
    Going from a Manufacturing based Economy to a Services based one , widely touted as an advance (and which may be so, in *some* cases), is not so if driven by desperation, because “you can find nothing else”.
    Working in Real Estate or answering phones or flipping a burger are all legitimate Jobs, which have a place in our Society, but as an example: a 6000 people town, which used to live basically off a nearby Industry, was happy with, say, 2 or 4 Real Estate agencies, and 5 or 6 Burger joints; but when said Factory closed, do you think that same town has breathing space for 60 Real Estate agents and 120 Burger joints, etc. ?
    Or 200 people selling Amway/Herbalife/etc. products?
    As of Government planning: China is going ahead like a lightning because their Government (Communist, Capitalist, Buddhist, is irrelevant, it’s CHINESE at heart and they take care of their National interests) did not want to be the World sweatshop forever, and they pushed ADVANCED Industrialization. They have plants to quickly make , at low cost and huge amounts, stuff that CAN NOT be made in USA, simple as that. Their Government subsidized automatic plants, robotics, high technology, etc.
    Plus they produce 6000 Engineers for every 1000 USA does.
    In the famous Steve Jobs/Obama interview Steve explained the real fact that a plant (to make crystal IPhone screens) which would have taken 6 months to plan and 1 year to start in the USA, was preproducing samples in 15 days and in full production in 30. Where? In China, of course !!! Advanced dyed in the wool American Corning Glass lost the bid.
    So I don’t see that “expanded American Productivity” Dr Delacroix mentions …. and doubt anybody else does, by the way.

    1. JM: If the jobs that have replaced lost manufacturing jobs were worse than manufacturing jobs, US GDP/capita would have declined. It has not; it has only increased in the long and middle-run. (It has not increased as much as I would liked but an increase is an increase.) Or, if the GDP had grown in spite of bad jobs replacing good manufacturing jobs, American median incomes would have declined; or, the income of the 25% percent Americans with the lowest incomes (or the 10%, pick your number). In fact, nothing has declined in synch with the loss of in manufacturing jobs

      Calling me a sophist or any other name changes neither the facts nor the relevant logic . The practice may blind you to the unpalatable but obvious.

      The burger flipper argument is an old one and as false now as when it was first produced.

      It’s true that when a factory closes, the job prospects of the fifty-year old worker who has been there all his life are dim. I deal with this problem else where in the same series of essays.

  5. There are a number of issues with this argument, the most serious of which is that it fails to grapple with the stalling of median income in the US.

    It is correct to say that creative destruction is inherent to economic growth – as we get more productive at certain tasks, we eliminate jobs, and sometimes whole industries. However we have historically been able to create new jobs to compensate for the ones lost, and have ended up richer as a result. Exploiting competitive advantage through trade is one way to increase productivity, although there are several others.

    The weak point in this argument is why we should always be able to come up with new jobs. It is an act of faith in both human ingenuity and the idea that new products and services will need lots of people to make them happen. Up until the late 70s it was fair to say that we had managed for almost 200 years, so it seemed fair to rely on this.

    However for the last 30 years, real male median wages have remain flat in the US. In the 30 years before that they tripled. Economic progress for the average American has stopped. This is a truly startling fact, and can only be explained if demand for labour is not scaling with economic growth. If we were finding productive uses for the human capital of the economy, this would not have happened; we are not.

    There are a number of ways to explain this. A labour shock due to the end of communism is one possibility, and the rise of feminism is another. Both introduced large amounts of labour and small amounts of capital into the global economy, leading to a long term imbalance which we are only now working through.

    However it is also reasonable to argue that technology is causing a more permanent shift. At its height GM employed millions of people. The leading companies of today such as Facebook and Google have tens’ of thousands of employees, mainly draw from a very specific pool of elite university graduates.

    With the money that is freed up by cheaper goods, we are buying things that only need a small number of people to produce them, or are produced abroad. If this is a permanent shift, then free markets will begin to loose appeal, and people will agitate for a more interventionist protectionist and redistributionist state that benefits the median, even if it retards average growth.

    While a moral libertarian will see this as an increase in coersion, and therefore wrong, no one is going to care that much. However that is a minority view. For the rest of us, if the system doesn’t work, is it wrong to want to change it?

    1. It’s only true in an irrelevant way that median wages have remained flat. I am familiar with that left-economist calculation. It fails to take into account improvements in what those flat dollars buy. Some or all of these improvements matter to some people or to most people (They all matter to me.)

      1 The same nominal objects are much better than they were in 1970, for example. Cars and television sets are flagrant cases in point.. It takes the same number of constant dollars to buy a car now as it did then but today, my car does not need its oil changed every 3,000 miles; it does not break down every time or nearly every time I take a trip. TV reception used to be so bad if I tried to show it to anyone under thirty, he would think it was a stupid joke.

      Others -in my town – would have to agree that a pound of organic apples is superior to the pound of the old un-organic apples . (I don’t think so but it’s their choice.)

      2 You can’t compare the ability of a median worker in 1970 with that of median worker in 2013 to buy a PC because there were not any. Many people think the addition of PCs to the panoply of life is a good thing. (Everything l else is a subjective judgment to which I readily assent. Also, before they added the new-fangled invention of printing, people were happier, had fewer problems.).

      On a smaller scale: a silk shirt used to be a luxury for the rich in 1970. (I think I had never even seen one then). Today, any high-school dropout can afford one.

      3 I argue elsewhere that the elimination of many manufacturing jobs corrresponds to a rise in US productivity. Much of our collective rise in productivity has been absorbed by increases in human longevity and (AND) by the attendant costs , medical and other. Whether this is good or not is also a subjective issue. (But I don’t see many protests against this, yet.) At any rate, it’s enough to belie the half-truth that the median wage has stagnated.

      I suspect although I can’t prove it that there is a great deal of confusion in the popular mind between the statement of “wage stagnation” (half-true or less than half-true) and the following statement:

      The share (the%) of GDP going to wages as opposed to other forms of income has been declining in recent years.

      This is probably a true statement overall.

      There is no connection between the two statements. One can be false while the other is true, and vice-versa.

Please keep it civil (unless it relates to Jacques)

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