Prof. Bhagwati criticizes the “fascination with manufacturing”, asserting that services could take the place of industrial employment. The German experience shows the contrary.
The support , of words and money , given by the US Government to manufacturing industry has displeased the financial environment. Prof. Bhagwati ,a well know economist has chosen to articulate in a short piece his opinion which risks to coincide with the positions of the financial establishment. (see FT 9-8-2010). Bhagwati does not accept the “fascination with manufacturing”. What about the financial services? He seems to accept that they “must be curbed “ but warns that “ it doesn’t follow that manufacturing should be developed.” Financial services are also innovative , and manufacturing absorbs a great amount of public money , “in tax holidays , free land and other subsidies” and for the bailout of the car industry.
Bhagwati believes that “non tradeables services” like personal services nursing etc., could take the place of industrial employement...and manufacturing is not the only innovative sector, agriculture, for example has developed the hybrid corn ...and services have transformed the retail and communication sector”. Developing manufacturing is not a way for the US to get out of the present crisis.
The discussion opened by a famous expert in one of the oracles of modern capitalism on the primacy of industry or finance in to day economy sounds like kids asking father whether a tiger is stronger that a shark .
Not only the two animals never meet, but their strength depend on different characters , and are at their best in different environments. Finance and industry, of course, meet , and each of them is useful to the other, having different qualities and functions . This strange discussion is being reopened today because one of the two areas grew up in an extraordinary way , well beyond the needs of a well organised economy.
Financial sector, useful to supply capital for investment and production , has recently become a wonder machine to multiply debt , a machine that soon went roaring into the abyss , as depicted by every cartoonist alive . The economy, any economy, lives and grows on the so called “value added”, the fact that raw materials are transformed into useful objects , and that agriculture obtains products from the Earth. This is the back bone of any economy. No other creation of value happens anywhere else, and when modern heads of enterprises talk of “creating value”, they mean the dividends that Companies have to pay to the shareholders in order not to be swallowed by a bigger fish, or to avoid being broken up like an old car on the scrap heap.
Services do facilitate expenditure , and encourage it, but do not create the value that is the blood of the economy.
However, it is perfectly possible to understand why financial people try to talk down industry. The productive entrepreneur needs his workers: he might try to squeeze them, but he needs them, and they try to avoid the squeeze by joining up in Trade Unions , and becoming a significant countervailing power.
Financers do not need them. All they need is some money , a computer or two (to which the great technological advances of the manufacturing industry has given unheard power and speed) and a reputation (which may well be false, or exaggerated) in order to give way to an apparent “ value creation” , without the need to pay people , and so many of them, to obtain a marketable product. So, why bother with the workers? Who needs them!
Problem is that manufacturing technology progresses very quickly, and product per worker increases very fast; on the other side , unemployment is the worst possible waste of human capital . However, the competitive manufacturing industry exports, and the size of the US trade deficit would justify a much bigger interest of everybody, public and private, to its development. Conversely, there is no surprise that the European country which felt less the downturn of the economy , Germany, is one of the largest manufacturing economy in the world, notwithstanding its limited territory and population.
In the US, the bankers who keep telling everybody that they are not the only ones to obtain money from the State simply forget that the bailouts were basically made necessary by the chaos the financial boom created in every possible nook and cranny of the whole country .
Comparing US and Germany
On this subject it is worth to mention a recent comment of David Brooks in the IHT (August 28- 29 2010). He uses the good news about German economy to conclude that the Germans got it right, while the Americans have not. The first did not spend a lot to stimulate the economy , but instead tried to balance the budget and to restore confidence. “If you instil good value and create a secure climate, then through a mysterious process you will never understand, things will probably end well” recites the article, and concludes that Barack Obama got it wrong, by trying to stimulate the growth, and adding to the budget deficit. The “mystery” evocated by the author lays in his explanation. It seems to me that the article does not actually represent how the German economy works. The fact is that the German economy is based on industry, and especially on the manufacturing one, which has a high level of technical innovation, and workers with high specialization and industrial culture.
This means that in that country certain priorities are carefully observed : for example , that of not losing the work force , which is well trained and difficult to substitute, given the high level of the daily operations. At the bottom of the crisis the German industrial companies have tried all possible ways of maintaining their work force, and the trade unions have openly cooperated with them. Also, the financial crisis, and the flattening out of the Euro , has played fully in the hands of one of the largest exporters in the word. In the US, instead, the companies have lost a great numbers of workers, and the right wing papers laud them as “those that will survive the crisis.”
So, on one side, se can see a famous American economist maintaining that the interest of the American Government in the manufacturing industry is really excessive , and that financial services should be considered as important as manufacturing. On the side, David Brooks recognises that “ We American have borrowed from our kids, spent some of that money on German machinery, and ended up by employing German workers”.
Apparently, something does not work in the “post-industrial” economic culture. And, may be, this is one of the main reasons of the different present situation of the German and US economies. Clearly, what is considered a German success does not reside in the choice of containing public debt instead than supporting demand.