Why do rich nations need manufacturing?

Didn't we leave that behind in the 19th century?

Why is it so hard for professional class people in rich countries to believe that manufacturing is a necessary and good part of every prosperous nation’s economy—especially when the richest nations are among the most industrial in the world and manufacturing is one of the highest-value sectors of their economies? In this post, I’m going to propose a theory to explain that—and I’m going to try to clear up the confusion for my professional class brothers and sisters and show why we should be trying to grow, not shrink, our nations’ manufacturing sectors.

One piece of the New Consensus mission is to get America and other countries in economic decline excited about making things again and show them how to picture how nations can intentionally build a prosperous means of making a living with room for everyone to participate. In a post last week, I cheered President Biden for saying he wants to build back America's manufacturing base but explained that his policies on that front amount to little more than “thoughts and prayers.” In my next post, I will show how a president has the power to create new industries and make old ones competitive again—all as part of a sweeping conversion to a zero-emissions, high-wage economy. But some readers asked why manufacturing was needed in a modern country like the United States. Isn’t manufacturing something we appropriately started to leave behind in the 19th century? Isn’t it just for low-wage countries? I realized I needed to back up and explain why America, like every nation, requires a large, healthy manufacturing base.

There’s a simple reason why manufacturing is necessary for creating prosperity: Prosperity has a lot to do with having essential and nice things—like antibiotics, MRI machines, heaters, roofs, and roads—and those things are manufactured. If you don’t manufacture the things you need, then you need to make something equally valuable to trade for them. That sounds easy because we can think of many useful things that we make in America that are more valuable than mundane manufactured things like Hollywood movies and Microsoft Windows.

The problem is that we need such a vast amount of mundane manufactured things every day to live our prosperous lives. It turns out that, perhaps counterintuitively, the nations that make our stuff don’t want an equivalent amount of our movies and software. Once they’ve taken all the intangible goods we have to offer, we find that we still want more of their manufactured goods, but we’re sitting there with nothing left to trade.

That is why we have an unsustainable trade deficit every year. Strange global financial conditions allow us currently to run this deficit without too many immediate harmful consequences. The minute those conditions change, however, we will start to become “Venezuela” very quickly. And no, I don’t mean a socialist nation, just one that wants a lot of things from overseas but can’t afford to pay for them.

On top of that, intangible industries—social media, for example—don’t employ very many people relative to their importance and earnings. Facebook is one of the biggest, most profitable companies in the world, but it only employs about 50,000 people. Compare that to any major manufacturing company, such as Johnson Controls. Most people have never even heard of this company, but it has twice the number of employees as Facebook—all relatively highly-paid. Instagram became one of the most powerful companies in the world until it was acquired by Facebook—with only 13 employees.

The problem, though, is that manufacturing is low-wage work, right? Well, actually, no.: Manufacturing tends to be the highest-paying kind of work of all the sectors that have the capacity to employ large numbers of people. Here’s why: Factories, significantly advanced, high-tech ones, are places where workers operate expensive and vast systems of machines. Wages are usually a tiny portion of the costs that go into manufacturing things. Manufacturing workers create a considerable amount of value per hour worked compared to most other workers because of those machines they are operating. One way to think about it is that countless hours of labor are embodied in the machines. Every time a factory worker turns a crank or hits “start” on a sophisticated robot, they mobilize a vast quantity of past labor to do amazing and valuable things. That embodied past labor makes a factory worker’s labor valuable. This is something that any professional should understand because professionals believe they should be paid high wages thanks to all the past labor embodied in their training education.

I feel like I’ve given you some good explanations about why manufacturing is a necessary and high-value component of any prosperous economy. But your gut keeps telling you that all this is wrong, doesn’t it? Let me share my theory about why professional class people are so biased against manufacturing.

Suppose you’re a typical university-educated professional living just about anywhere in the world. You have life experiences and family history that associate industrial work with lower wages and professional work with high salaries and a more prosperous and interesting life. I’m a good example of this myself. My grandfather, his father, and his father’s father all worked on the railroad in Western Pennsylvania, bringing iron ore to the steel plants and taking away finished steel. His children all became professionals. My mother became a teacher and then a state education administrator. One of her brothers rose high up in management on the railroad. Another became a stockbroker. They all wound up doing much better financially than their working-class father, moved to big cities, and saw the world. Therefore, from my perspective, the equation looked simple enough: professional jobs make you wealthy, working-class jobs limit your horizons.

But that outlook is based on a kind of survivorship bias: The children of high-income professionals associate professional jobs with high incomes because they are the children of high-income professionals. They don’t see all the other professional careers that pay worse than manufacturing jobs. The truth is that working-class industrial jobs like my grandfather’s—whether on the railroad or in the steel mills—paid far more than most professional jobs and definitely more than “service” jobs (i.e., working-class jobs that are not part of a manufacturing production process).

Adjusted for inflation, my grandfather probably earned more per year than my mother or her sister ever did (both educators). He made more than most college professors, nurses, police, firefighters, pastors, bank and insurance workers, social workers, or office workers. Why? Because he and his coworkers were a necessary part of a production process that created vast quantities of capital. Powerful capitalists needed them to move ore and steel over long distances reliably, and in the 1870s and 1930s, they repeatedly stopped the trains in violent strikes demanding better wages and benefits. The people who owned the economy decided it was worth winning their permanent cooperation. The settlement was enough for a worker’s family to live a comfortable and secure life on a single salary. Not only did my grandfather make high wages, but he had a railroad pension that paid close to his full salary until both he and my grandmother passed away. Steelworkers had the same basic story. So the community my mother grew up in was the epitome of working-class prosperity. My mother and her siblings all went to college and became professionals because they had decent schools, paid for by a prosperous industrial community, and lived in a state that used some of that prosperity to make college tuition almost free.

To illustrate why my family’s story is not the norm, let me tell you a story from a different family—one much closer to the standard. I know a woman in Kansas City whose father and her father’s father had worked at the local Ford factory. In 1980, just out of high school, she got a coveted Ford job thanks to her connection. Her starting wage was close to $15 per hour.

“I left that job because I wanted to do better than my father, she told me when we first talked about this. “I didn’t want to work in a factory. I wanted to do brain work. I went to business college and have been working in offices ever since. But I have never gotten close to earning what my father did at Ford.”

She rarely even made $15/again. She had no idea how bad it actually was, though, because she wasn’t thinking about inflation. Using an inflation calculator, I revealed to her that $15/hour in 1980 was worth $40/hour in present-day dollars at that time, or $80,000 per year, not counting overtime. The look on her face made me realize I shouldn’t have told her.

This isn’t to say that all manufacturing jobs pay better than all professional jobs. Of course they don’t. But most manufacturing jobs tend, under normal circumstances, to pay more than most professional jobs—if you include all “professional” careers, not just the posh ones like doctors and lawyers.

But in the end, this all comes down to whether industrial workers have the ability to demand the wages they deserve. In the U.S., we’ve been pursuing policies that have deliberately hobbled industrial workers’ ability to negotiate for higher wages while taking every opportunity to encourage professional workers to do. This has further distorted our economy away from paying for actual value creation and toward paying “rents” to organized professionals, such as doctors who artificially raise their salaries by using a professional association to limit their numbers, or accountants and tax preparers who lobby for laws that force millions to use their services.

The distorted perspective of professional-class people regarding manufacturing is ruining economies all over the Western world. I once found myself at a table of Swiss activists who were fighting for a universal basic income. When I asked them about Switzerland’s success at investing in high-tech manufacturing industries, something I believed provided the underlying wealth that would make UBI possible, they looked at me like I was stupid.

“We don’t make things anymore,” they said, “We just make money. Our whole economy is just banks.”

You can see how their image of Switzerland “making money” led to their policy goals of taxing and distributing that money to citizens in the form of UBI. But actually, Swiss money is worth so much partly because of Switzerland’s solid manufacturing base—which is actually more than twice as large as the financial sector in terms of GDP and four times as large in terms of employment.

I pulled out my phone and showed them that 25.6% of Swiss GDP comes from manufacturing, employing 20% of Swiss workers—including the highest-earners among the working class. Then I asked them to guess how much GDP and employment the powerful Swiss financial sector provided. 50%? 80%? Nope, Swiss finance accounts for 11.6% of GDP and 5.6% of employment.

They couldn’t believe it.

What chance of survival does Swiss, or American, high-tech manufacturing have if the professional classes of our nations don’t even know it exists? We need to educate our professional classes about manufacturing value, and then we need to start rebuilding our high-tech manufacturing bases to restore sustainable prosperity.

Now that I’ve covered the “why,” in my post next week, I’ll get back to covering the “how,” with an article explaining how a U.S. president could build up a whole new, powerful, clean, high-value manufacturing base to create permanent prosperity for virtually every American. See you then!