The Manufacturing Fallacy

The semi-conductor chips versus potato chips debate also underlined a different point. Many proponents of semiconductor chips also presumed that what you worked at determined whether, in your outlook, you would be a dunce (producing potato chips) or a with-it modernist (producing semiconductor chips).

I have called this presumption a quasi-Marxist fallacy. Marx emphasized the critical role of the means of production. I have argued, on the other hand, that you could produce semiconductor chips, trade them for potato chips, and then munch them while watching TV and becoming a moron. On the other hand, you could produce potato chips, trade them for semiconductor chips that you put into your PC, and become a computer wizard! In short, it is what you consume, not what you produce, that influences what sort of person you will be and how that affects your economy and your society.

Ignorant of the extensive deindustrialization debate in 1960’s Great Britain, two Berkeley academics, Stephen Cohen and John Zysman, started a similar debate in the US in 1987 with their book Manufacturing Matters, which claimed that, without manufactures, a viable service sector is untenable. But this argument is specious: one can have a vigorous transportation industry, with trucks, rail, and air cargo moving agricultural produce within and across nations, as countries such as pre-Peronist Argentina, Australia, New Zealand, and modern Chile have done very successfully.

Cohen and Zysman argued that manufactures were related to services like the crop duster to the cotton fields, the ketchup maker to the tomato patch, and that if you [o]ffshore the tomato farm…you close or offshore the ketchup plant….No two ways about it. My reaction was: [A]s I read the profound assertion about the tomato farm and the ketchup plant, I was eating my favorite Crabtree & Evelyn vintage marmalade. It surely had not occurred to me that England grew its own oranges.

While these episodes reflected academic obsession with manufactures and therefore died early deaths, the same cannot be said for the latest revival of the manufactures fetish in the US and Great Britain. The latest flirtation with supporting manufactures has come from the current crisis, especially in the financial sector, and is therefore likely to have greater prospects for survival. The fetish is particularly rampant in the US, where the Democrats in Congress have gone so far as to ally themselves with lobbyists for manufactures to pass legislation that would provide protection and subsidies to increase the share of manufactures in GDP.

Because of the financial crisis, many politicians have accepted the argument, in a virtual throwback to Adam Smith, that financial services are unproductive – even counterproductive – and need to be scaled back by governmental intervention. It is then inferred that this means that manufactures must be expanded. But this does not follow. Even if you wanted to curtail financial services, you could still focus on the multitude of non-financial services.

Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing, and teaching are available. The case for a shift to manufacturing remains unproven, because it cannot be proved.

Jagdish Bhagwati is Professor of Economics and Law at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations.

Copyright: Project Syndicate, 2010.www.project-syndicate.orgFor a podcast of this commentary in English, please use this link:

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