The Death of the Postindustrial Dream

Remember postindustrialism? Not long ago, this catchphrase was supposed to define America’s future: no more grubby hard industries, just a clean bright world of services and high technology. Its most succinct formulation is as follows:

Manufacturing is old hat and America is moving on to better things.

This idea played a large role during the 1980s and 1990s in getting Americans to accept deindustrialization. It was promoted by writers as varied as futurist Alvin Toffler, capitalist romantic George Gilder, techno-libertarian Virginia Postrel, futurist John Naisbitt, and globalist Thomas Friedman. Newt Gingrich seized upon it as the supposed economic basis of his Republican Revolution of 1994.

Unfortunately, postindustrialism is now a blatantly dead letter, as the U.S. economy has ceased generating any net new jobs in internationally traded sectors of any kind: manufacturing or services, industrial or postindustrial.

The comforting myth still lingers that America is shifting from low-tech to high-tech employment, but we are not. We are losing jobs in both and shifting to non-tradable services, which are mostly low value-added, and thus ill-paid, jobs. According to the Commerce Department, all our net new jobs are in categories such as security guards, waitresses, and the like. The vaunted New Economy has not contributed a single net new job to America in this century.

Nevertheless, postindustrialism remains popular in some very important circles. In the 2006 words of the prestigious quasi-official Council on Competitiveness, a group of American business, labor, academic and government leaders:

Services are where the high value is today, not in manufacturing. Manufacturing stuff per se is relatively low value. That is why it is being done in China or Thailand. It’s the service functions of manufacturing that are where the high value is today, and that is what America can excel in.

But the above paragraph is simply not true: manufacturing, which is vital to America’s recovery, is not an obsolescent sector of the economy. Let’s burrow into the details a bit to understand why.

“Screwdriver plant” final-assembly manufacturing can indeed increasingly be done anywhere in the world. This lays it open to labor arbitrage and thus low wages. But this doesn’t mean that this one stage of the long supply chain from raw materials to the consumer has become unimportant. Every link in the chain still matters, albeit in different ways. Manufacturing involves continuous feedback loops where every stage – from the initial idea to the R&D to the prototype to full-scale production to marketing of the final product – is related to every other. Losing control of any one stage can easily lead to the loss of the whole industry, including skill sets needed for moving to the next product or level of industrial sophistication. As Stephen Cohen and John Zysman explain in their book Manufacturing Matters:

America must control the production of those high-tech products it invents and designs – and it must do so in a direct and hands-on way…First, production is where the lion’s share of the value added is realized…This is where the returns needed to finance the next round of research and development are generated. Second and most important, unless [research and development] is tightly tied to manufacturing of the product…R&D will fall behind the cutting edge of incremental innovation…High tech gravitates to the state-of-the-art producers.

A small American company named Ampex in Redwood City, California, encapsulates everything that is wrong with postindustrialism. This leading audio tape firm invented the video cassette recorder in 1970 but bungled the transition to mass production and ended up licensing the technology to the Japanese. It collected millions in royalties all through the 1980s and 1990s and employed a few hundred people. Its licensee companies collected tens of billions in sales and employed hundreds of thousands of people. Thus an entire vast industry never existed in the U.S. All the jobs – and the industrial base and the profits to finance the next generation of products, like DVDs – ended up in the Far East.

That some individual companies like Apple Computer make a success out of keeping design functions at home and offshoring the manufacturing does not make this a viable strategy for the economy as a whole. Apple is a unique company; that is why it succeeds. And even fabled Apple is not quite the success story one might hope for, from a trade point-of-view. Due to its foreign components and assembly, every $300 iPod sold in the U.S. adds another $140 to our deficit with China. If sophisticated American design must be embodied in imported goods in order to be sold, it will not help our trade balance.

About the only thing postindustrialism gets right is that selling a product with a high value per embodied man-hour almost always means selling embodied know-how. But know-how must usually be embodied in a physical package before reaching the consumer, and manufactured goods are actually a rather good package for embodying it in. Exporting disembodied know-how like design services is definitely an inferior proposition, as indicated by the fact that since 2004, America’s deficit in high-technology goods has exceeded our surplus in intellectual property, royalties, licenses, and fees.

So when someone like self-described “radical free trader” Thomas Friedman writes that, “there may be a limit to the number of good factory jobs in the world, but there is no limit to the number of good idea-generated jobs in the world,” this is simply false. There is nothing about the fact that ideas are abstract and the products of factories concrete that causes there to be an infinite demand for ideas. The limit on the number of idea-generated jobs is set by the amount of money people are willing to pay for ideas (either in their pure form or embodied in goods) because this ultimately pays the salaries of idea-generated jobs.

The final killer of the postindustrial dream is, of course, offshoring, as this means that even if capturing primarily service industry jobs were a desirable strategy, America can’t reliably capture and hold these jobs anyway. The complexity of the jobs being offshored, which started with jobs such as call centers, is relentlessly rising. According to a 2007 study by Duke University’s Fuqua School of Business and the consulting firm Booz Allen Hamilton:

Relocating core business functions such as product design, engineering and R&D represents a new and growing trend. Although labor arbitrage strategies continue to be key drivers of offshoring, sourcing and accessing talent is the primary driver of next-generation offshoring…Until recently, offshoring was almost entirely associated with locating and setting up IT services, call centers and other business processes in lower-cost countries. But IT outsourcing is reaching maturity and now the growth is centered around product and process innovation.

Among complex business functions, product development, including software development, is now the second-largest corporate function being offshored. Offshoring of sophisticated white-collar tasks such as finance, accounting, sales, and personnel management is growing at 35 percent per year. Meanwhile, despite a few individual companies bringing offshored call centers back home, offshoring of call centers and help desks continues to grow at a double-digit pace.

Thankfully, some of America’s corporate elite are now starting to question postindustrialism, about which they were utterly gung-ho only a few years ago. In the 2009 words of General Electric’s CEO, Jeffrey Immelt:

I believe that a popular, 30-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering.

Immelt has since argued that the U.S. should aim for manufacturing jobs to comprise at least 20 percent of all jobs, roughly double their current percentage. Only a few years ago, this idea would have been dismissed as an ignorant and reactionary piece of central planning, especially if it had not been proposed by a respected Fortune 500 CEO. But despite his welcome public statements, Immelt is still closing US plants and offshoring jobs, a sign that the free market well may not solve this problem on its own.

Can deindustrialization be fought? The evidence suggests it can. Some high-wage foreign nations, the best examples being Germany and Japan, are already doing a much better job at defending manufacturing industry than we are. (GM went bankrupt; Toyota and BMW somehow didn’t.) As a result, these nations now have higher factory wages than we do – a stunning reversal of America’s 250-year status as the best country for ordinary workers. They are doing it by hanging tough in manufacturing and by having serious national industrial strategies. They are export powerhouses. They lack our naiveté about free trade and do not really embrace it, preferring various local varieties of mercantilism.

Manufacturing is essential to America’s economy recovery. Unfortunately, the longer we dally about getting back to real industries as the basis of real wealth, the more our industries get hollowed out, so the harder it gets. There is probably still enough time to turn things around, but not much.