January 2000

Viewpoint: The Unmaking of Americans

The stock market loves the New Economy. But does our retreat from manufacturing in favor of e-commerce spell economic disaster?

By Eamonn Fingleton

In recent decades it has become increasingly fashionable for American opinion leaders to belittle the economic importance of manufacturing. If we are to believe such prophets of the New Economy as commentator Michael Rothschild and Megatrends author John Naisbitt, manufacturing is now a distinctly second-rate activity that should take a backseat to post-industrial businesses like software writing and moviemaking. Their opinions are increasingly endorsed by pundits in everything from the Wall Street Journal to Wired.

It is time this view was challenged. The truth is, it is a highly dangerous myth that is rapidly weakening the United States' ability to lead the world economy. Not only do those who advocate post-industrialism-let's call them post-industrialists-overestimate the prospects for information-based products and services, they greatly underestimate the prospects for manufacturing.

When the post-industrialists talk about manufacturing, it is clear they are referring mainly to such unsophisticated activities as the snap-together assembly work carried out in the television-set factories of the developing world. By implicitly defining manufacturing in such disparaging terms, they set up a straw man-for there is no question that, in an increasingly integrated world economy, most types of assembly work are so labor-intensive that they can no longer be conducted profitably in high-wage nations like the United States. Overlooked by the post-industrialists, however, is the fact that assembly is only the final stage in the production of modern consumer goods. Earlier stages are typically much more sophisticated-the making of advanced components such as laser diodes, liquid crystal displays, lithium-ion batteries and flash memories, for example. Then there is the production of the high-tech materials that go into such components. Semiconductor-grade silicon manufacturing, for instance, is concentrated mainly in such high-wage nations as Japan and Germany. And still more sophisticated than the fabrication of such components and materials is the manufacture of the production machinery used in the process. Perhaps the iconic example of such machinery is the stepper-the highly precise lithographic device that prints circuit lines on silicon chips.

Manufacturing components, materials and production machinery is generally both know-how-intensive and capital-intensive. As such it can be conducted effectively only in the world's richest and most advanced economies-and workers engaged in such work are thereby shielded from low-wage competition from developing nations. The United States once dominated this type of production, but these days, as is abundantly clear from the nation's mounting trade deficits with Japan and Germany, it is at best an also-ran. In steppers, for instance, GCA, the once world-beating American player, closed its doors in 1993, leaving the field almost entirely to Japan's Nikon and Canon and Europe's ASM. In high-tech materials, the United States is now similarly dependent on imports. And in crucial new components such as laser diodes and liquid crystal displays, the country was never a contender in the first place.

Why does all this matter? Because, conventional wisdom to the contrary, advanced manufacturing offers fundamental advantages over post-industrial services in building a rich and powerful economy.

Manufacturing's most obvious advantage is that it creates an excellent range of jobs. Whereas post-industrial businesses like software and financial services tend to recruit mainly from the cream of the intellectual crop, manufacturing harnesses the skills of everyone from ordinary factory hands to the most brilliant scientists and the most capable managers. In fact, as Bennett Harrison of New York's New School (and a longtime TR columnist) pointed out in his book Lean and Mean in 1997, unskilled workers "barely off the farm" can readily be trained to operate computer-controlled presses and similarly sophisticated production machinery. In Harrison's terms, today's high-tech production machinery is not "skill-demanding" but "skill-enabling."

Manufacturers also score over information businesses in their export prowess. That's because, for one thing, manufacturers usually avoid the piracy problems that so drastically reduce American information businesses' receipts from abroad. Moreover, manufactured goods are generally universal in application and, as such, contrast sharply with information-based products, which are in most cases quite culture-specific. Whereas a typical information product may have to be adapted for different languages and customs in different markets around the world, a typical manufactured product requires little if any adaptation. In many cases, information businesses don't find it worthwhile to adapt their products for foreign markets, and even where they do, they tend to have the adaptation done abroad, thus generating costs that cut deeply into the net revenues remitted to the United States.

A third key advantage of advanced manufacturing-the most important of all-is that it delivers higher incomes. Not only does the large amount of capital required for the enterprise offer workers protection against competition from cheap labor, it can also powerfully boost worker productivity. A good example is the contribution that expensive robots make in enabling Japanese auto workers to achieve the world's highest productivity levels. Higher productivity in turn is, of course, the royal road to higher wages.