Produced to price


For many people the role of manufacturing industry is an emotional issue rather than an economic one – meet the manufacturing fetishists.

In 1980 I wrote an article which explained why a contraction of manufacturing industry was an inevitable consequence of the growth of British North Seal oil production. This was my first encounter with manufacturing fetishists. The article proved to be very controversial. (It was, incidentally, right.) Few critics focused on any technical weaknesses in the argument. They claimed instead that what I was saying ought not to be true or, if it was true, ought not to be said.

I started to understand that for many people the role of manufacturing industry was an emotional issue rather than an economic one. “Surely you don’t think that an economy can survive on hairdressing and hamburger bars.” No, I didn’t; any more than I thought it could survive on steel and automobile production. But because I was not in favour of manufacturing industry, I must be against it. But it seems that it is impossible to be a disinterested observer of the share of manufacturing in national income. Any more than it is possible to be a disinterested observer of Eric Cantona, or to be a dispassionate spectator of a test match between England and Australia.

The origins of manufacturing fetishism might be better explored by a psychologist or an anthropologist than an economist, but let me have a go. Thousands of years ago, man hunted, fished and made primitive implements. If he was good at these things, his wife and children prospered; if not, they died. From these days, we have inherited the notion of a hierarchy of needs – food and shelter running ahead of chartered accountancy and cosmetic surgery. With it comes a notion of a hierarchy of importance for economic activities – agriculture, primary resources and basic manufacturing running ahead of hairdressing and television programming.

But all this ceased to have economic relevance once technology and knowledge advanced enough for it to be unnecessary to hunt and fish all day in order to get enough to eat – a state of affairs which was reached many years ago. Once primitive tribes achieved this, they started to add discretionary activities to the fulfilment of their basic needs.

The services that came into production then remain representative of the services we buy today. There was the priest, who warded off evil; the bureaucrat, who ruled over the tribe; the repair man, who sharpened the stones and the knives; and eventually the insurance agent, who organised a scheme of mutual support for unlucky villagers whose cow died or whose house burnt down. With the rise of a market economy came Adam Smith’s division of labour. Specialist tasks were assigned to those best qualified to fulfil them.

As Smith noted, the division of labour was limited by the extent of the market, and the growth in the geographical scope of markets has steadily increased the division of labour. But even in the early stages of discretionary expenditure, rewards became divorced from the place activities enjoyed in the hierarchy of needs. You only got paid for producing goods that people wanted, but it soon became apparent that insurance and priestly services were among the things they did want. Given that what you produced was wanted, earnings reflected the availability or scarcity of the talents needed to produce them, and your position in the power structure of the tribe. The first explains why the insurance and repair men did well, and the second accounted for the prosperity of the bureaucrat and the priest.

Those who are lucky enough to have that power or these rare talents have often felt embarrassed by earning more than those who work to satisfy more basic elements in the hierarchy of needs. Often, they also enjoy occupations that are less arduous and more fun. The embarrassment is rarely very great, and does seem to have diminished recently, but emphasising the importance we attach to these other supposedly more necessary, but less well-remunerated activities, is a means of assuaging it.

Whatever the truth of all this, none of it should provide a basis for economic policy or industrial strategy. There is a slightly more persuasive version of the intellectual confusion that tends to the view that manufacturing is special. This suggests that manufacturing output is more important than services because manufacturing, unlike services, is sold to foreigners. Of course, many services are sold to foreigners and many manufactures are not, but there is some truth in the stereotype.

But the real weakness in this argument points the way to the correct answer to the valuation of different activities. If what matters is the tradeability of output, then why draw the line around the nation state? Why not draw it more broadly, or more narrowly? After all, neither the City of London, nor a steel works, could survive on its own; you cannot drink derivatives or eat steel. They survive and are valuable because, and only because, they can persuade people outside their boundaries to value their output. The output is valuable, not because it can be sold to foreigners, but because it can be sold.

So the economic significance of an activity is not measured by its place in some objective of hierarchy of needs; it is measured by what someone, other than the producer, thinks it is worth. That explains why almost all the lobbying which is done on behalf of allegedly important but neglected activities comes from producers who have failed to persuade other people to value what they do. The makers of high-cost manufactured goods which are already in excess supply, like steel and textiles. The producers of the kind of films that people want to make but which audiences do not want to go and see. Farmers who grow foodstuffs at twice the cost of obtaining them from more favoured parts of the world. People who have advanced technological solutions to problems that do not exist.

Whatever industrial policy we are going to have, beware of any that is predicated on a consensus on which economic activities are more important than others. That is one judgement that is always better left to the market.

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